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Chapter 4

The Impact of the WTO on Developing Countries

The WTO agreements have had significant effects on and implications for developing countries.  Many are facing serious problems arising from the implementation of the Uruguay Round agreements, while not obtaining the expected trade benefits.  Meanwhile, proposals to expand the WTO by introducing new issues and areas into its remit have raised several concerns, as has the lack of transparency and limited participation of developing countries in the WTO.  This chapter discusses these issues as follows:

* Continued lack of benefits to developing countries;

* Problems for developing countries resulting from implementation of obligations under the WTO agreements;

* Trade, environment and sustainable development;

* The proposed expansion of the WTO into new areas;

* Transparency and participation in WTO processes.

LACK OF ANTICIPATED BENEFITS FOR DEVELOPING COUNTRIES

At the conclusion of the Uruguay Round, developing countries fully expected that in return for agreeing to expand the mandate of the GATT system to areas such as intellectual property rights and services (in which they were expected to make obligations without getting reciprocal gains) they would benefit significantly from increased access to developed countries' markets, especially in agriculture, textiles and clothing.  However, since the WTO came into being, these benefits have mostly  not been forthcoming, while traditional problems such as low commodity prices and declining terms of trade continue to plague developing countries' trade performance. Developing countries also complain that developed countries still apply non-tariff barriers to their products, such as anti-dumping measures. This lack of benefit from the trade system has led to a growing disillusionment among policy-makers and the wider public in many developing countries.

Continued Protection in Sectors of Most Interest to Developing Countries

One of the most disappointing aspects of the trading system is that developed countries have continued to keep their markets protected in sectors that are of most interest to many developing countries. The post-Second World War history of the trading system reviewed in Chapter 2 showed that the interests of developing countries have never been adequately taken into account, while Chapter 3 elaborated on how the agriculture and textiles and clothing sectors, in which developing countries have comparative advantage, have largely not been liberalized.  Even after the Uruguay Round, which presumably made provisions for liberalization, access to the developed countries' markets in these two sectors has in effect not significantly improved.

As B.L. Das points out (2000a: 2): 

In agriculture and textiles and clothing...it is clear developing countries have received little or no benefit, but have had to take on iniquitous obligations.  In fact in agriculture, as in textiles and clothing, a fraud has been perpetrated on developing countries in terms of liberalization of trade and improving market access to their exports. Under the Agreement on Textiles and Clothing (ATC), the promise of liberalization of the trade and its progressive integration into GATT (by removal of discriminatory quotas) has been implemented by grouping all the products, the overwhelming majority [of which are] not under restraint, in the same category ... and technically liberalizing the unrestrained products, without any meaningful liberalization of trade.   In the agriculture sector, the major developed countries have technically fulfilled their obligation of reducing domestic subsidies when in reality, by a very clever use of the provisions of the Agreement on Agriculture, which thus shows up the faults in the drafting of the rules, they in fact have increased the quantum of subsidy. It shows that the pronouncements of the industrialized countries in the WTO about liberalization and reduction of subsidies in agriculture are not backed by political will.

Textiles and Clothing

The frustrations of developing countries are most keenly felt in the case of textiles.  The 10-year phase-out of this special treatment under the Agreement on Textiles and Clothing was supposed to be the Uruguay Round's greatest benefit to the South.  However, after seven years of the implementation period, liberalization on a proportionally phased or progressive basis has not really occurred, due to the developed countries' choice to 'endload' implementation.  Most products chosen for 'liberalization' so far were not actually restrained in the past. 

The agreement requires the developed countries to liberalize 16 per cent, 33 per cent and 51 per cent of their imports by volume (of 1990), respectively on 1 January 1995, 1 January 1998 and 1 January 2002. The major developed countries have technically fulfilled their obligation until 1 January 1998, whilst in actual fact removing the import restrictions only to a negligible extent.  In the first stage, starting on 1 January 1995, while Canada liberalized only 0.27 per cent of restricted products, the United States and the EC liberalized none of them. In the second stage, starting on 1 January 1998, liberalization of the restricted products by the United States, the EC and Canada was only 1.30 per cent, 3.15 per cent and 0.70 per cent, respectively.  (Das 2001b).

As stated by the Chairman of the International Textiles and Clothing Bureau (ITCB) (comprising 24 countries) to the WTO, the situation in June 2000 was as follows:  although 33 per cent of trade in the sector had been 'integrated' by the restraining countries in a narrow technical sense, this comprised mainly imports of products which were not under restriction. In the second stage of integration (which covers the period January 1998 to December 2001), quota restrictions have been removed on only 13 out of 750 U.S. products; 14 out of 219 EC products; and 29 out of 295 Canadian products, leaving the great bulk of restrictions still in place. Thus, developing countries have not received meaningful increases in their access possibilities  (Hong Kong, China 2000: 2). The notifications of the proposed liberalization in the third stage (covering the period January 2002 to December 2004) by the United States and the EC indicate that liberalization will cover only 55 and 52 products. Based on this data, the ITCB executive director has commented:  'Looking at the situation differently, we have calculated that, in value terms, merely 15 per cent of trade that was under quota restrictions in the US shall have been freed of quotas by the end of ten years.  In the case of the EU, the figure will be a little over 20 per cent.  It is easy to see that the great bulk of restrained trade will still be under restriction until the very last of the ten year period.' (Ahmad 2000: 4).

Agriculture

Another major disappointment is that developed countries have made little progress in reducing protection and subsidies in the agriculture sector, which is an area of high potential export growth for many developing countries. Several years after the Uruguay Round agreement came into force, however, the reality is that:

* High tariffs on selected items of potential interest to the South have had to be reduced only slightly.

In the first year of the agreement, there were tariff peaks at very high rates in the United States (sugar 244%, peanuts 174%); the EC (beef 213%, wheat 168%); Japan (wheat 353%), and Canada (butter 360%, eggs 236%) (Das 1998a: 59). According to the agreement, developed countries had to reduce their tariffs by only 36 per cent on average by the end of 2000, and thus the rates for some products remain prohibitively high (Das 1998a).

* Domestic support has increased rather than decreased.

Although the agreement was supposed to result in decreases in domestic support in agriculture, in fact, the overall value of such support has increased.  The agreement obliged developed countries to reduce the Aggregate Measurement of Support (AMS), which is a measure of domestic support, by 20 per cent during 1995-2000 from the average annual level of the base period of 1986-88.  However, two categories of subsidies are exempted, and while the major developed countries did reduce their AMS, they also increased their exempted subsidies significantly, thereby offsetting the AMS reduction, which resulted in an increase in total domestic support.  According to OECD data, the Producer Subsidy Equivalent (PSE) for all developed countries rose from US$247 billion in the base period (1986-88) to US$274 billion in 1998.  Over the same period, it rose in the EC from US$99.6 billion to US$129.8 billion, and in the United States from US$41.4 billion to US$46.9 billion.  (Das 2000a: 2-3). A more comprehensive coverage of domestic support in agriculture calculated by the OECD is the Total Support Estimate (TSE), which for the 24 OECD countries rose from US$276 billion (annual average for base period 1986-88) to US$326 billion in 1999  (OECD 2000).

As explained in Chapter 3, what is even more ironic is that most developing countries, by contrast, had previously little or no domestic or export subsidies. They are now barred by the Agriculture Agreement from having them or raising them in the future (Das 1998a: 62). There is clearly a major imbalance in a situation in which developed countries with very high domestic support are able to maintain a large part of their subsidies (and, due to loopholes in the agreement, to raise their level) while developing countries with low or no subsidies are prohibited from raising their level beyond the de minimis amounts.

* Export subsidies are still high.

Regarding export subsidies, the agreement also committed developed countries to reduce the budget outlay by 36 per cent and the total quantity of exports covered by the subsidies by 21 per cent. The base level was the average annual level for 1986-90 and the reduction was to be done over the period 1995-2000. Thus, even in the year 2000 the level of export subsidies was allowed to be as high as 64 per cent of the base level (Das 2000a: 3).

Industrial Tariffs

In the case of industrial tariffs, the developed countries reduced their trade-weighted average tariff for industrial products from 6.3 to 3.8 per cent as a result of the Uruguay Round.   However, they have continued to maintain tariff peaks and tariff escalation in some industrial products that are of export interest to developing countries.  This has also been a barrier to the developing countries' efforts to export industrial products and to produce and export  processed raw materials or to climb up the value-added chain for their basic commodities.  

A study for UNCTAD (Supper 2000) found significant numbers of tariff peaks among the Quad countries (Canada, EC, Japan and United States) in the industrial sector, especially for food industry products; textiles and clothing; footwear, leather and travel goods; automotive products; and consumer electronics and watches. Tariff escalation is particularly pronounced precisely in those sectors that offer a realistic chance for developing countries to enter into industrial exports (e.g., food, textiles, clothing and shoe industries, wood industry products).  Among the items subject to tariff peaks are orange juice (31%), peanut butter (132%) and certain tobacco products (350%) in the United States.  For footwear, post-Uruguay Round MFN rates will reach about 160 per cent in Japan (for leather shoes valued at US$25); 37.5 to 58 per cent for certain rubber, plastic and textile shoes in the United States; and 18 per cent for shoes in Canada (ibid: 89-103).

Use of Non-tariff Barriers

Even as a meaningful increase in market access has not materialized, developed countries have continued their use of some non-tariff protectionist measures to block products of developing countries. A significant part of these have been applied to textile and clothing products.  Among the measures reported by the ITCB are:  (i) a large number of unjustified safeguard actions for new restrictions; (ii) changes in rules of origin; (iii) unduly cumbersome customs and administrative procedures; and (iv) anti-dumping actions, particularly targeting products that were already under quota restrictions (Hong Kong, China 2000: 2).

An UNCTAD study on the impact of anti-dumping and countervailing duty actions found that these are now the most frequently used trade remedies.  Developed countries are the main users of anti-dumping measures, while developing countries have also increased their use.  In the first five years of operation of the WTO agreements (1995-99) there were 1,229 anti-dumping initiations of which 651 (or 53%) were initiated by developed countries and 578 (or 47%) by developing countries and economies in transition.  However, developing countries continued to be the main targets of anti-dumping measures, accounting for 818 (66.6%) of the 1,229 cases. 'This has the effect of creating instability and uncertainty for their exports, which has resulted in reductions in trade volumes and market shares for their goods'  (UNCTAD 2000b: 1). As they can be invoked relatively easily, anti-dumping actions are now the most frequently used trade measure, and have become a mechanism under which governments can cede to strong sectoral protectionist pressures. In the United States, as of August 1999, 110 (or 37%) anti-dumping orders were related to steel, which had a major impact on exporters. After an anti-dumping order was issued, Argentine exports of carbon steel wire rod to the United States declined 96 per cent from 68,335 net tons in 1983 to 2,756 net tons in 1997, a year after the duty was imposed. Mexican exports of the same product also fell by 94 per cent from 2,882 tons in the year preceding the duty imposition to 112 tons the year after.  Imports sharply declined or ceased in many other cases, such as steel wire rope from the Republic of Korea and Japan (UNCTAD 2000b: 7).

Meanwhile, nearly 20 per cent of the EC's anti-dumping measures in the first five years of the WTO's operation were related to textiles, aimed primarily at exports from developing countries. These exports had already been subject to quota restrictions.  There was repeated recourse to anti-dumping action against several products from a number of developing countries. For example, the EC repeatedly initiated investigations from 1994 to 1997 over grey cotton fabrics originating from six countries (China, Egypt, India, Indonesia, Turkey and Pakistan), causing concern to textile-exporting countries.  According to the International Clothing and Textiles Bureau (ITCB), EC import volume of cotton fabrics from the six targetted countries fell from 121,891 tons in 1994 to 88,306 tons in 1997 and their market share fell from 59 per cent in 1993 to 41 per cent in 1997.  The case was ultimately dropped with no anti-dumping duties imposed  (UNCTAD 2000b: 8).  Anti-dumping measures that are used against developing countries can have immediate impact on trade flows and prompt importers to seek alternative sources of supply.  Even if duties are not imposed finally, the initiation of investigations itself creates a huge burden for developing countries, which feel they have been 'harassed'.

Continued Lack of Supply Capacity in Most Developing Countries

A major reason why developing countries are unable to benefit from trade is their lack of capacity to produce and market.  Thus, even if there is market access for these countries, especially the LDCs, this 'supply constraint' prevents them from being able to take advantage of the access.  The supply and marketing constraints to trade span the range of stages, including formulating appropriate export strategies (including choice of products and markets), providing incentives, training, credit and technology assistance to enterprises, product design and production techniques, and marketing, as well as the government's role in providing general health, housing and education facilities to citizens so that there would be skilled labour. The supply capacity problem has not been a significant area of concern in the WTO, and it may be more appropriate for other international institutions to deal with it.  It must however be recognized that dealing with this basic issue is a vital task of the global trading system.

Ongoing Decline in Commodity Prices and Terms of Trade for Most Developing Countries

A longstanding problem for developing countries has been the instability of demand for and declining prices for their export commodities. In recent years the decline in commodity prices in relation to manufactures has worsened. For a majority of developing countries, problems related to commodities remain their single most important international trade concern, making it highly regrettable that international cooperation in this area has not succeeded.  The commodities and terms-of-trade issue has also not been a concern at the WTO.

The effects of falling commodity prices have been devastating for many countries.  According to UN data, the terms of trade of non-fuel commodities vis á vis manufactures fell by 52 per cent from 147 in 1980 to 71 in 1992, with catastrophic effects.  For sub-Saharan Africa, a 28 per cent fall in the terms of trade between 1980 and 1989 led to an income loss of $l6 billion in 1989 alone. In the four years 1986-89, sub-Saharan Africa suffered a $56 billion income loss, or 15-l6 per cent of GDP in 1987-89. For 15 middle-income highly indebted countries, there was a combined terms-of-trade decline of 28 per cent between 1980 and 1989, causing an average of $45 billion loss per year in the 1986-89 period, or 5-6  per cent of GDP (Khor 1993).

In the 1990s, the general level of commodity prices fell even more in relation to manufactures, and many commodity-dependent developing countries have continued to suffer deteriorating terms of trade. According to UNCTAD's Trade and Development Report, 1999, oil and non-oil primary commodity prices fell by 16.4 and 33.8 per cent respectively from the end of 1996 to February 1999, resulting in a cumulative terms-of-trade loss of more than 4.5 per cent of income during 1997-98 for developing countries. 'Income losses were greater in the 1990s than in the 1980s not only because of larger terms-of-trade losses, but also because of the increased share of trade in GDP' (UNCTAD 1999c: 85). Moreover, prices of some key manufactured products exported by developing countries have also declined. For example, the Republic of Korea experienced a 25 per cent fall in the terms of trade of its manufactured exports between 1995 and 1997 due to a glut in the world market (ibid.: 87).

A major reason why the world trading system has not been working beneficially for many developing countries is because their main way of participating in the system has been to export commodities, whose prices have been declining, and thus their terms of trade have been deteriorating.  Thus the problem for these countries is not that they are not participating in the trade system, but that their participation in terms of their particular place in world trade (i.e., in exporting commodities) has been on an unequal basis, at least in relation to their terms of trade.

PROBLEMS FOR DEVELOPING COUNTRIES IN IMPLEMENTING THEIR WTO OBLIGATIONS

The most important set of problems facing developing countries in general since the establishment of the WTO arises from implementing their obligations in the WTO agreements.  Many of these countries did not fully understand the implications when they signed on to the many Uruguay Round agreements. Now that the obligations have to be implemented, the possible and real negative effects are becoming more evident.

A major problem is that while the previous GATT rules dealt with policies 'at the border' (tariffs and other trade barriers), the mandate of the trading system expanded enormously through the Uruguay Round to go beyond simply trade or 'border' issues, and the WTO framework includes obligations on members that impact on domestic issues, including economic and social policies and structures. For example, while many developing countries had been providing subsidies to their domestic industrial or agriculture sectors as a method of facilitating their growth, many subsidies are now forbidden or severely curbed under the WTO rules. Developing countries had also attempted to boost local sectors and obtain domestic economic spin-offs from industrialization through investment measures such as requiring that a minimum amount of components used in specific industries or projects be obtained from local sources. Measures such as these that discriminate against imports are now prohibited under the TRIMs Agreement.

Also, the TRIPS Agreement obliges developing countries to establish domestic IPR laws with high standards equivalent to those of developed countries. This will hinder technology transfer as local firms will be prevented from practising reverse engineering and other measures for imitative innovation. TRIPS will also raise the cost for developing countries of buying or paying for technology, and increase the prices of protected products, such as patented medicines.

Moreover, the services agreement includes obligations to liberalize not only trade but also foreign investment in the services sectors in developing countries. Thus, for the first time, the trading system is applying pressure on developing countries to liberalize not only trade but also investment.  This has effects on the domestic structure and policies in the services sector.

WTO obligations can threaten the viability and position of some domestic enterprises and farms in many developing countries. The loss of competitiveness of the local sectors can arise from reductions in tariffs, rules prohibiting or constraining government subsidies or other measures that support local firms and farms, and the liberalization of foreign investment in services. Those local firms and farms that are unable to withstand the competition may lose their market shares or even close down, thus adding to unemployment.  Since export capacity and opportunities are limited for many developing countries, they may be unable to relocate the retrenched workers or farmers to new production facilities, and thus there would be a net increase in unemployment or a net loss of  livelihoods in these countries.

In the preparations for the WTO's third Ministerial Conference in Seattle in 1999, many developing countries submitted papers to the WTO pointing out problems they face in implementing various agreements, and put forward proposals to redress these problems.  A summary of these proposals was placed in a draft Ministerial Text prepared by the WTO General Council Chairman dated 19 October 1999 (WTO 1999).   They have been placed in a section entitled 'Implementation Concerns' in two paragraphs:  para 21 listing down proposals for 'immediate action' (i.e. proposed for adoption by a Ministerial Declaration at the Seattle meeting itself); and para 22 listing down issues and proposals to be reviewed within one year of the date of the Declaration. 

Despite the strong advocacy by many developing countries, the response of the developed countries to these proposals before and at the Seattle meeting was not encouraging. With the subsequent breakdown of the talks at Seattle, there was no Declaration and no possibility of these proposals being adopted.  However, paragraphs 21 and 22 of the draft Ministerial Text have remained an important reference set of issues signifying the problems developing countries face and their proposals for redressing these problems. Since the Seattle meeting, developing countries have continued to press for resolution of their demands on 'implementation issues.' At the WTO, a decision was made to address them at a series of special General Council meetings to deal with implementation issues. Although several meetings have been held, and developing country representatives have repeated their positions, they have been frustrated by the lack of response from developed countries (see Aboulnaga 2000; Khor 2000a).  An expression of their disappointment in the lack of progress in this regard was at the informal meeting of the WTO General Council on 30-31 July 2001 which conducted a 'stocktaking' of preparations for the WTO's Ministerial Conference of November 2001.

Developed countries seem to be taking a 'legalistic' and narrow contractual approach to the implementation problems faced by developing countries.  WTO agreements are seen as contractual and binding, and if developing countries want changes to address their problems, they have to offer new concessions (such as further market opening, or the expansion of the WTO mandate into new areas) in order that their requests be considered.  This suggests an acceptance of imbalances in the system, as attempts to correct existing imbalances are conditioned on acceptance of new obligations which themselves lead to new imbalances. A rejection of attempts to correct imbalances would be contrary to the spirit of a fair and balanced multilateral trading system that is of benefit to all members.  Moreover, should developing countries give in to the demands to offer more concessions and to allow new issues into the WTO, this would tilt the multilateral trading system further against the developing countries, thus making the situation far worse.

Following are some of the problems facing developing countries in implementing their obligations under WTO agreements on agriculture, TRIPS, TRIMs and services.

The Agreement on Agriculture

For many developing countries, food import liberalization began with IMF-World Bank structural adjustment programmes in the 1980s and early 1990s that reduced agriculture protection. The WTO Agreement on Agriculture accelerated this process, as developing countries (including LDCs) have to remove non-tariff controls on agricultural products and convert these to tariffs. Developing countries are then required to progressively reduce these tariffs, while LDCs are exempt from this requirement. The affected developing countries are required to reduce the tariffs by 24 per cent within a 10-year period. This process has brought greater global competition into the domestic farm sector, and in many developing countries it has threatened the viability of small farms that are unable to compete with cheaper imports. Many millions of small farmers could be affected. The process has also increased fears of greater food insecurity, in that the developing countries will become less self-sufficient in food. For many, food imports may not be an option due to shortage of foreign exchange.

Developing countries have also been constrained in regard to domestic subsidies for local farmers.  The overall amount of the relevant subsidies was recorded for 1995 as a ceiling, and developing countries (except LDCs) are required to reduce this amount by 13.3 per cent over the period of 10 years.  There is a small general de minimis exclusion from the subsidy discipline for developing countries of 10 per cent of the value of production (for product-specific subsidies) and 10 per cent of the value of total agricultural production (for non-product-specific subsidies); and also exemptions for limited purposes (such as investment subsidies and input subsidies for poor farmers). These exclusions apart, developing countries are now constrained from increasing the level of domestic support to their farmers and instead have to reduce it.  Developed countries, which in general have offered very high levels of domestic support, have committed themselves to only slightly reducing these. Most developing countries have previously maintained low levels of subsidy and are unable to increase them beyond the exemptions. And even in areas where domestic support is allowed, most developing countries cannot avail themselves of the facility because of the lack of financial resources. Developing countries (except LDCs) also have to reduce their export subsidies, in terms of budgetary outlays and total quantity of exports covered by the subsidies.

The concessions to developing countries are that the rates of reduction (of tariffs, domestic support and export subsidies) are two-thirds those for the developed countries, and that there is a longer implementation period (10 years compared to six years for developed countries).  LDCs are exempt from reductions. These concessions are minor, especially in view of the fact that developed countries are allowed to continue to maintain very high levels of import protection and agricultural subsidies.  Meanwhile, serious problems of implementation have emerged in developing countries.

Surges in Food Imports and Displacement of the Local Farm Sectors

One of the most comprehensive studies of the effects of the WTO Agriculture Agreement was conducted by the Food and Agriculture Organization (FAO), which surveyed the experience of 14 developing countries in implementing the agreement. The two-volume study (FAO 2000, 2001) made several interesting findings, including the following (FAO 2001: 3-26):

* Import liberalization had a significant effect.  The average annual value of food imports in 1995-98 exceeded the 1990-94 level in all 14 countries, ranging from 30 per cent in Senegal to 168 per cent in India. The food import bill more than doubled for two countries (India and Brazil) and increased by 50-100 per cent for another five (Bangladesh, Morocco, Pakistan, Peru and Thailand).

* Increases in food imports were generally significantly greater than increases in agricultural exports.  In only two countries was export growth higher while in most other countries import growth far outstripped export growth. The study also measured the ratio of food imports to agricultural exports and found it was higher in 1995-98 than in 1990-94 for 11 of the 14 countries.  An increased ratio indicates a negative experience, as it shows food import bills growing faster than agricultural export earnings.  The worst experiences were those of Senegal (86 per cent increase), Bangladesh (80 per cent) and India (49 per cent) (ibid.: 22-24).   As the FAO's Senior Economist concluded: 

A majority of the studies showed that no improvement in agricultural exports had taken place during the reform period.... Food imports were reported to be rising rapidly in most of the countries, and import surges, particularly of skim milk powder and poultry, were common. While trade liberalization led to an almost immediate surge in food imports, these countries were not able to raise agricultural exports due to weak supply response, market barriers and competition from subsidized exports (FAO 2000: 30).

* Although bound tariffs (i.e., levels of import duties that members are committed not to exceed) were generally high, the applied tariffs were on average much lower for countries surveyed. Most countries had already reformulated domestic policies under structural adjustment programmes. The simple average of the applied rates for 12 of the 14 countries was 22 per cent whereas the bound rate was 90 per cent. Some countries were obliged to set applied rates well below their WTO bound rates due to loan conditionality. While bound tariffs were high on average, there were several exceptions:  Egypt's rates (28 per cent average) were low; India's tariff binding was zero for 11 commodities (including sensitive items like rice and some coarse grains), and all of Sri Lanka's agricultural tariffs were bound at 50 per cent with applied rates capped at 35 per cent for 1999.

* Several case studies reported import surges in particular products, notably dairy products (mainly milk powder) and meat. In some regions, especially the Caribbean, import-competing industries faced considerable difficulties. In Guyana, there were import surges for many main foodstuffs that had been produced domestically in the 1980s under a protective regime:

In several instances the surge in imports has undermined domestic production. For example, fruit juices imported from as far away as France and Thailand have now displaced much of domestic production. Producers and traders of beans indicated that increasing imports have led to a decline in the production of minca peas, developed and spread throughout Guyana in the 1980s.  The same applied to local cabbage and carrot. The fear was expressed that without adequate market protection, accompanied by development programmes, many more domestic products would be displaced or undermined sharply, leading to a transformation of domestic diets and to increased dependence on imported foods (FAO 2001: 21).

In Sri Lanka, policy reforms and associated increases in food imports have put pressure on some domestic sectors, affecting rural employment:

There is clear evidence of an unfavourable impact of imports on domestic output of vegetables, notably onions and potatoes.  The resulting decline in the cultivated area of these crops has affected approximately 300,000 persons involved in their production and marketing.  The immediate possibilities for affected farmers to turn to other crops are limited. Consequently, the economic effects of import liberalization in this sector have been significant. (ibid.: 325-26)

* There was 'a general trend towards the consolidation of farms as competitive pressures began to build up following trade liberalization' and this has led to 'the displacement and marginalization of farm labourers, creating hardship that involved typically small farmers and food-insecure population groups, and this in a situation where there are few safety nets' (ibid.). The study noted especially the case of Brazil, where consolidation taking place in the dairy, maize and soybean sectors has affected traditional cooperatives and marginalized small farmers.

Lack of Implementation of Commitments to Net Food-importing Developing Countries and LDCs   

Net food-importing developing countries (NFIDCs), together with the LDCs, are expected to face a special problem due to the anticipated global liberalization of agriculture.  As subsidies for food production are expected to be progressively reduced in the developed countries, the prices of their food exports may increase and NFIDCs may thus face rising food import bills. This problem was recognized during the Uruguay Round, resulting in a Marrakesh Ministerial Decision on measures concerning the possible negative effects of the agricultural reform programme on LDCs and NFIDCs.  The Decision committed WTO members to, among other things, 'establish a level of food aid commitments sufficient to meet the legitimate needs of developing countries during the [agricultural] reform programme' and to 'give full consideration in their aid programmes to the need of LDCs and NFIDCs for technical assistance to improve their agricultural productivity.'  It also called on the international financial institutions to give special consideration to financial difficulties that LDCs and NFIDCs may face in financing imports and hence their eligibility to draw on the institutions' resources.

Despite this Decision, and despite demands by the countries concerned in various WTO meetings, little has been done to implement the donor countries' commitment.  Instead, food aid has declined significantly, while the ability of the LDCs and NFIDCs to finance their increasing food import bills has deteriorated. Data in a 1998 UNCTAD study show that in the immediate post-Uruguay Round period, food aid deliveries to LDCs and NFIDCs fell sharply. Between 1994 and 1997, deliveries to LDCs fell from 4,871,094 to 3,089,340 tonnes in grain equivalent for cereals, and from 525,590 to 301,280 tonnes in product weight for non-cereals. Deliveries to NFIDCs fell from 1,627,819 to 574,795 tonnes for cereals, and from 170,470 to 109,107 tonnes for non-cereals.

According to Miho Shirotori, many LDCs and NFIDCs had depended for a large portion of their food imports on subsidized exports (as much as 26 per cent of their cereal import bills for LDCs and 46 per cent for NFIDCs in 1994-95), but the implementation of the export subsidy commitment made these shares drop to virtually nil since 1995-96:

Together with the decline in the relative contribution of food aid to cereal imports, the burden of food import bills to those countries has been increasing since the start of the implementation of the [Agreement on Agriculture] commitments. The ability of LDCs and NFIDCs to finance normal commercial imports of such basic foodstuffs, which depends crucially on their overall export earnings growth and changes in the terms of trade, has been declining in the last two decades. (Shirotori 2000:145)

The TRIPS Agreement

Many developing countries had tried to resist the entrance of IPRs as a subject in the Uruguay Round, and then tried to limit what they saw as the more damaging aspects of the proposals coming from developed countries.  But at the end of the Round, the developed countries succeeded in getting most of what they had been after in the TRIPS Agreement. TRIPS has instituted what is basically a 'one-size-fits-all' (or rather a minimum-but-large-size-for-all) system of IPRs, where high minimum standards are set for countries at differing levels of development. It is in the developing countries where the effects of many of the provisions are most acutely felt.  

Since TRIPS was established, there has been increasing evidence of social and economic problems caused by the introduction of stricter IPR laws as a result of implementation of TRIPS. This has led to a growing public perception that under the influence of TRIPS, the present IPR system is heavily tilted in favour of IPR holders vis-à-vis consumers and the users of technology. Their privileges and rights have been overly protected while their obligations in relation to the social and economic welfare of the public, and to technology transfer, have been under-fulfilled or unfulfilled.  There are also asymmetries between North and South in the balance of benefits and costs  (Correa 2000).  Developing countries are overwhelmingly dependent on innovations made in the North; patent applicants from developing countries constituted less than 2 per cent of all U.S. applicants between 1977 and 1996; and the developed countries dominate the trade in medium- and high-tech goods.  Thus, the worldwide establishment of strict IPR standards under TRIPS will result in benefits accruing overwhelmingly to the developed countries, paid for by the increased costs accruing to the developing countries.  

Among the problems faced in implementing the TRIPS Agreement are: 

* The increase in prices of consumer products (including some essential items such as medicines) charged by companies owning IPRs, which reduces consumers' access and affects their welfare, health and lives;  

* The high cost to firms in developing countries which have to pay royalties for use of technology, or are unable to get permission from IPR holders to use modern technologies, thus affecting the countries' ability to modernize; and

* The phenomenon of 'biopiracy' in which corporations (mainly of the North) have been able to patent biological resources and knowledge of their use (most of which originate in the South).

Effects on Consumer Access to Essential and Other Products

By preventing competition, IPR protection enables higher prices and reduces consumer access.  In the pre-TRIPS period, countries were able to set their own IPR regime and many developing countries exempted some items, such as pharmaceutical drugs and biological materials, from patentability. Under TRIPS, options for exclusion are explicitly stated.  Drugs and food products are not explicitly mentioned as products that can be excluded; some biological materials and processes appear to be included as items that must be allowed for patenting; and plant varieties must also be protected.

The case of pharmaceutical drugs provides an example of problems arising from TRIPS.  Over 50 countries (including developed countries) did not confer patent protection on pharmaceuticals prior to the negotiation of the TRIPS Agreement (UNCTAD 1996). Many developing countries regarded the absence of protection as necessary to promote access to drugs at competitive prices.   Implementation of TRIPS may lead to high drug prices, lower access and a weakening of national pharmaceutical industries. 

The well-publicized case of medicines for HIV/AIDS has recently highlighted this issue.  Patent-protected brands of medicines usually sell more expensively than generic non-protected versions. A year's supply to a patient of a combination of three patent-protected HIV/AIDS medicines costs US$10,000 to US$15,000 in the United States. The price for a similar combination offered by an Indian generic drug producer is around US$350-600.  An Oxfam study shows that the AIDS drug fluconazole is marketed by generic companies in Thailand at US$0.29 and in India at US$0.64.  This compares with market prices for brand-name drugs of US$10.50 in Kenya, US$27 in Guatemala and (until recently) US$8.25 in South Africa (Oxfam 2001).  

Public outrage over the high prices of AIDS medicines has resulted in multinational firms offering their patented drugs at discounted prices to some developing countries.  A multinational drug company announced it would supply a combination of two AIDS drugs at US$600 per patient per year to some developing countries, a price at which, it said, it would not make a profit.  There was thus an implicit admission that the regular sale price of US$10,000 or more (in developed countries) was much higher than the cost.

Ownership of a patent enables a company to price its protected drug much higher than if there were competition, for example, from generic or non-patented versions.  When the Brazilian government began producing generic AIDS drugs, the prices of equivalent branded products dropped by 79 per cent. Competition from generic alternatives can thus increase access to medicines significantly.  The production of AIDS drugs locally has enabled the Brazilian government to offer universal free treatment, making its AIDS programme one of the most successful.  (Medecins Sans Frontieres 2001).

Besides the specific case of HIV/AIDS medicines, developing countries face the problem of lack of affordable medicines in general. A study conducted by Health Action International (Bala et al.1998) provides examples of how prices of drugs can be higher when sold in developing countries. A comparative study showed that retail prices of 10 out of 13 commonly used drugs were higher in Tanzania (which has a per capita GNP of US$120) than in Canada (per capita GNP of US$19,380).   The average retail prices of 20 commonly used drugs in 10 developing countries of Central and South America were all higher than the average retail prices of the same drugs in 12 OECD countries. The average prices of drugs surveyed in South Africa were higher than in any of the eight Western European countries for which data are presented.

TRIPS does allow members to take compulsory licensing and parallel import measures to enable third parties to produce or import alternative versions of products that are patented.  However, developing countries have generally not made as much use of such provisions as they might have liked to, due to pressures put on some of them as well as their own uncertainties about the conditions under which these measures are legitimate.  Developing countries have put forward their views on the need for affirmation that TRIPS does not prevent members from taking public health measures, and for also affirming the conditions and procedures for taking such measures as compulsory licensing and parallel imports (Third World Economics, No. 259, 16-30 June 2001).

In the case of another product, computer software, prices are also usually far above cost level. If they have to purchase software products at the high market prices, many consumers in developing countries would be unable to afford them, and this would shut them out of an important part of the 'knowledge society' and contribute to the global digital divide.  As IPR enforcement becomes more effective, the would-be users of software (individual consumers as well as companies and educational institutions) will find their access significantly reduced.

Adverse Effects on Industries and Technology Upgrading in Developing Countries

Historically, technology transfer has played a key role in industrialization, and a large part of this transfer took place through firms learning, adapting and modifying (through reverse engineering) the technologies used by others.  Producers in developing countries will find it difficult or impossible to make use of this process with regard to technology which is IPR-protected, with the entry into force of TRIPS and associated national legislation.

TRIPS prohibits or severely restricts reverse engineering and other forms of imitative innovation, and also places the burden of proof on a person or firm claiming to use an alternative to the IPR-protected process to produce a product to show that the process is actually a different and alternative process. Domestic firms that wish to make use of the technology would have to obtain permission from the patent holder (which may or may not grant the permission, even if the applicant intends to pay the commercial rate), and pay expensive royalties.  Many firms may not be able to afford the fees; and those that can would find that the high cost reduces their ability to be competitive. The TRIPS regime thus places high obstacles to developing countries' efforts to upgrade technology levels, to modernize and industrialize.

Many of the present-day developed countries did not adopt IPR legislation, or strict IPR standards, when they were going through the stages of development that the developing countries of today are attempting to go through.  In Switzerland a century ago, as a rule, Swiss industrial inventions could be patented abroad where patent legislation was in effect, but as Switzerland itself had no patent laws, Swiss industries were free to copy foreign inventions without restrictions (Gerster 1998).  When most of the now-developed countries established their patent and other IPR laws in the 19th century, all of these IPR regimes were highly 'deficient' by the standards of today (Chang 2000).  Few of them allowed patents on chemical and pharmaceutical substances until the last decades of the 20th century.  Pharmaceutical products were patented only in 1967 in West Germany and France, in 1979 in Italy and in 1992 in Spain.  Chemical substances were patented only in 1967 in West Germany, in 1968 in Nordic countries, 1976 in Japan, 1978 in Switzerland and 1992 in Spain (ibid.). Yet the developing countries of today are asked to adhere to IPR standards that would effectively prevent them from taking the same technological path as the developed countries. 

As Carlos Correa concluded:

The strengthening and expansion of IPRs are likely to adversely affect the conditions for access to and use of technology, and thereby the prospects for industrial and technological development in developing countries.... Under the TRIPS Agreement, reverse engineering and other methods of imitative innovation--that industrialized countries extensively used during their own processes of industrialization--shall be increasingly restricted, thereby making technological catching-up more difficult than before. (Correa 2000: 18-19)

An example of difficulties facing local firms in developing countries is that of Indian industry attempting to adjust to India's implementation of its obligations under the Montreal Protocol, in which members have agreed to phase out their use of chlorofluorocarbons (CFCs) and other ozone-damaging substances by given target dates.  Indian-owned firms, which have been producing CFCs that are used in the manufacture of refrigerators and air-conditioners in India, wanted to produce an environmentally sound substitute, HFC 134a, instead. However, a few companies in developed countries control the patents to HFC 134a. An Indian company seeking access to the technology of producing HFC 134a was quoted a very high price (US$25 million) by a transnational company holding the patent. The supplier proposed to the Indian firm two alternatives to the sale, that it be allowed a majority share in a joint venture with the Indian firm; or that the Indian firm agree to restrict its exports of HFC 134a produced in India.  Both options were unacceptable to the Indian firm, and the quoted price was also far too high as it was estimated that the fee should at most have been US$2 to $8 million (Watal 2000).

This case shows the difficulty not only for a developing-country firm and industry to modernize its technology, but also for a developing country to meet its commitments under a multilateral environment agreement (MEA).  Even if a local firm is willing to pay the market rate to obtain permission to use patented technology, the patent holder can quote an unreasonably high price, or impose unacceptable conditions, or even refuse permission outright.  Moreover, although some MEAs may have financial-assistance, technology-transfer and technology-assisting clauses to benefit developing countries, in practice developing countries are finding that the developed countries may not adequately fulfil their obligations on assistance, and developing countries find difficulties and disadvantages in fulfilling their environmental obligations.

IPRs, Biological Materials and Biopiracy

Another major problem is the way TRIPS has facilitated the patenting of life-forms as well as 'biopiracy,' or the exploitative appropriation by transnational companies of the biological resources and traditional knowledge of local communities based mainly in developing countries.  Before TRIPS, most countries had excluded patenting of life-forms, biological resources and knowledge on their use.  This changed with TRIPS.  Article 27.3(b) of TRIPS allows patent exclusion only for plants and animals (but not micro-organisms) and for essentially biological processes for production of plants and animals (but not for non-biological and microbiological processes).  Thus it appears that WTO members have to allow patents for certain types of life-forms and living processes;  and it is being debated whether this also applies to naturally occurring life-forms and processes. If it applies, then the basic foundation on which the patent system rests is undermined, for patents must then be given for what are at best discoveries and not inventions. In any case, there is no scientific basis for allowing exclusions for certain organisms and not for others, and for certain living processes and not for others. This contradiction sticks out like a sore thumb.

Several scientists also argue that there is no scientific basis for the patenting of life-forms even if they are genetically modified.  The patent system is an inappropriate method for rewarding innovations in the field of biological sciences or in relation to biological materials and processes (Shiva 1995; Tewolde 1999; Ho and Traavik 1999). A fundamental critique of life patenting has been made by B.G.E. Tewolde, the African scientist who is general manager of the Ethiopia Environment Authority and chairperson of the Africa Group in the Convention on Biological Diversity (CBD). Tewolde points out that the patent system was drawn up to reward innovation in relation to mechanical processes and is inappropriate when applied to biological processes; unlike mechanical things and processes, living things are not invented and they also reproduce themselves. This is also true of genetically modified organisms.  Discoveries relating to life-forms and living processes should also be rewarded, but not through the patent system.

Distorting the meaning of patenting in order to make it applicable to life only serves to attract the rejection of the whole system. Who ever worried about the legitimacy of patenting before the 1990s, before it became known that the USA was allowing the patenting of living things?  But now, opposition is growing all the time, opposition not only to the legitimacy, but also to the legality of patenting.  (Tewolde 1999:11-12)

Article 27.3(b) also requires members to grant IPRs for plant varieties, either through patents or through a sui generis system.  Previously, few developing countries granted IPR protection for plant breeding and plant varieties.  TRIPS opens the door either to patenting or for a system of plant breeders' rights that may restrict the right of farmers to save, exchange and use seed.

Meanwhile, TRIPS has opened the floodgates to the corporate patenting of life, and to biopiracy.  The London-based Guardian's special report on 'The Ethics of Genetics' (15 November 2000) found that as of November 2000, patents are pending or have been granted by 40 patent authorities worldwide on over 500,000 genes and partial gene sequences in living organisms.  Of these, there are over 9,000 patents pending or granted involving 161,195 whole or partial human genes.

Patents have been given on genes or natural compounds from plants that are traditionally grown in developing countries (including rice, cocoa, cassava) and on genes in staple food crops originating in developing countries (including maize, potato, soybean, wheat). Patents have also been granted on plants used for medicinal and other purposes (e.g., as an insecticide) by people in developing countries.  Examples include a U.S. patent for the use of turmeric for healing wounds (this was successfully challenged by the Indian government on the ground that it has been traditionally used by Indian people for this purpose), and the patenting by American scientists of a protein from Thai bitter gourd after Thai scientists found its compounds could be used against the HIV/AIDS virus.

The thousands of cases of life patents and the increasing evidence of biopiracy have caused concern among a wide range of people and institutions, including governments of the South and their delegations at the CBD and WTO; organizations of farmers and indigenous peoples worldwide, particularly the South; development NGOs in the South and North; the environment community; and also the human rights community.

Questionable Claims and Unkept Promises

Disenchantment with TRIPS has also arisen because some of the claims made on behalf of a strict IPR regime have not been borne out, while some promises of benefits have not been fulfilled. It has been claimed that a strict IPR regime is needed in order to promote innovation and research by providing incentives. For example, Keith Maskus (1997, 1998) shows a positive link between patents and research and development.  However, a counter-argument has been made to the effect that IPRs can also discourage or help to prevent scientific research, especially in developing countries. Most patents are held by foreigners in developing countries, and local R&D can be stifled, as the monopoly rights conferred by patents restrict research by local researchers  (Oh 2000b). Dr. Ghayur Alam (1999) points out that the IPR policy changes in developing countries raise concerns that a strong IPR system will be 'extremely detrimental to local research' in the area of new plant varieties and genetically engineered plants. Researchers and librarians in the North are also concerned that current IPR practices and trends in information technology will constrain the flow and use of information.

TRIPS has many provisions that deal with technology transfer.  Article 7 on objectives states that IPRs should promote innovation and technology transfer.  Article 66.2 on LDCs states that developed countries shall provide incentives to their enterprises and institutions to promote technology transfer to LDCs.  However, little or nothing has been done by developed countries either to provide concessions or to give incentives to their enterprises to transfer technology to developing countries. Confidence that developed countries will fulfil their technology transfer obligations has consequently eroded.

The TRIMs Agreement

The TRIMs Agreement is causing some developing countries difficulties in their industrialization process as governments are now constrained from assisting local industry through the policy of encouraging the use of local materials. The local-content requirement is one of the investment measures prohibited by the agreement.

During the Uruguay Round, a number of developed countries had in fact wanted a broader investment agreement, to include the establishment of investment rules per se, that would have provided foreign investors with rights of establishment, national treatment and allowed much greater freedom from obligations, including investment measures and other performance requirements. However, developing countries were able to limit the agreement to 'trade-related investment measures' that are inconsistent with GATT. Several developing countries argued that certain investment measures or performance requirements are necessary to channel foreign investment towards national development policy objectives. They also noted the need for such measures to address restrictive business practices and other practices of transnational corporations that themselves restrict or distort trade. While some developing countries acknowledged that some investment measures may have potential trade effects, they stressed their need to regulate foreign investment to promote development goals and the resulting need for differential and more favourable treatment (Puri and Brusick 1989: 209).

In the end, it was agreed that investment measures that are in violation of the obligations under Article III (on national treatment on internal taxation and regulation) and Article XI (on general elimination of quantitative restrictions) of GATT 1994 would be prohibited under the TRIMS Agreement.  Among the prohibited measures placed in an 'illustrative list' in the agreement are two that have been used by developing countries:  (i) local-content requirement (obliging firms to use at least a specified minimal amount of local inputs) and (ii) foreign exchange balancing (limiting the import of inputs by firms to a certain percentage of their exports).

While the prohibition arises from the provisions of Articles III and XI of GATT 1994, the practices were being adopted by some developing countries as policy instruments in their development strategies.  Now these policies have been definitively stopped by the TRIMs Agreement.  Developing countries in general would prefer that the prohibited measures be confined to those in the present 'illustrative list'. However, it is expected that some developed countries will propose extending the list so as to prohibit more investment measures.

Under the TRIMs Agreement, members had to notify the WTO of investment measures that are inconsistent with GATT 1994 within 90 days of the entry into force of the WTO agreements, that is, 1 January 1995. The notified measures are to be eliminated within two years (for developed countries), five years (for developing countries) and seven years (for LDCs).  The longer transition period by a few years is the only 'special treatment' afforded to developing and least-developed countries.

The implementation of the agreement can be expected to cause difficulties for developing countries.  Even if certain TRIMs are 'trade-distorting' in that they favour local products vis-à-vis imported products, they are nevertheless required by developing countries for meeting development objectives.  Such measures had been introduced (or may be useful to introduce) to protect the country's balance of payments, promote local firms and enable more linkages to the local economy. The prohibition of these investment measures will make the attainment of development goals much more difficult and cause developing countries to lose some important policy options to pursue their industrialization.

Several developing countries have already faced problems of implementation.  First, many countries faced difficulties in identifying the relevant TRIMs that were prohibited, or in meeting the notification deadline. Failure to meet the 90-day deadline may mean the inability to make use of the transition period. Among the 38 notifications submitted by 26 countries, 20 submissions were made after the deadline (Tang 2000: 3).

The second problem developing countries face is the potential threat of a complaint or case being brought against them.  Several cases involving the agreement have already been brought to the WTO dispute settlement process against developing countries. These include complaints brought by developed countries (mainly the United States, the EC and Japan) against Indonesia, the Philippines, India and Brazil (all in relation to their automobile sector).  There have also been cases against the Philippines regarding pork and poultry and against Canada regarding the automobile industry.

In the Indonesian case, the government believed that its national car programme (which included local-content requirements) did not constitute a prohibited investment measure and therefore withdrew a notification it had earlier submitted (after the deadline).  The panel hearing the case concluded that the sales tax and customs duty benefits obtained under the car programme for meeting local-content requirements violated the TRIMs Agreement.  The panel also concluded that the Indonesian tariff and luxury sales tax exemptions provided as incentives under the national car programme violated the Agreement on Subsidies and Countervailing Measures (Mashayekhi 2000b: 241-42).

The cases pursued so far against developing countries have serious policy implications for many developing countries and their implementation of the TRIMs Agreement. 'For example, the completed case against Indonesia on the automobile sector has made many developing countries consider [that] the Agreement is against their interests, disregards the obvious structural inequalities among the countries and aims at maintaining the industrialization gap between them and developed countries' (Tang 2000: 3).

A third problem developing countries face is that the transition period is too short to allow them to adjust their policies. Related to this is a fourth problem, that when they request an extension of the transition period (such a request is a right under Article 5.3 of the agreement), they can be subjected to scrutiny and pressure.

The five-year transition period for developing countries expired on 1 January 2000.  As a manifestation of the difficulties resulting from the inadequate length of the transition period, nine countries (Argentina, Chile, Colombia, Malaysia, Mexico, Pakistan, the Philippines, Romania and Thailand) requested an extension of the transition period for one or more of their existing investment measures, under Article 5.3 of the agreement.  The majority of these requests relate to local-content policies, and mainly in the automotive industry (Argentina, Chile, Malaysia, Mexico, the Philippines, Romania, Thailand) but also for other sectors such as agriculture (Colombia), milk and dairy products (Thailand) and shipbuilding (Romania).

In the case of Pakistan, extension by a minimum of seven years was requested in order to maintain the indigenization/deletion policy which provides incentives to promote the establishment and development of domestic industries. The programme's incentives fall under the TRIMs Agreement's illustrative list.  Industrial enterprises that opted for the programme are entitled to import raw materials, components and parts to assemble or manufacture specific items at concessionary tariff rates. Sectors included are general engineering, electrical goods, agricultural equipment and automobiles.  According to Pakistan's request, the large, medium and small enterprises that opted for the programme have benefited significantly.  The industries are at various stages of implemention of the programme, and consequently its abolition would be detrimental not only to these industries but also to the many enterprises having forward and backward linkages with these industries. The request added that such a measure would have a negative impact on the balance-of-payments situation, and would impede the process of technology transfer that is presently under way.  It also noted that the measure would inevitably have an adverse effect on the social situation due to displacement of labour and unemployment, and so would undermine the development efforts of the country (Pakistan 2000).

Countries requesting an extension have asked that their cases be treated together rather than on a case-by-case basis, and that an extension be given generally to developing countries. In order to justify why their applications should be granted, these countries have had to reply to a long series of questions from developed countries. There have been reports among trade diplomats that some developed countries had insisted on bilateral discussions (rather than having a multilateral decision or solution to the cases) because this type of bilateral consultation, ostensibly to enable those seeking extension to demonstrate their 'particular difficulties', was being used to extract other trade concessions from the requesting countries (Raghavan 2000d).

The more obvious grievances that developing countries have about the agreement are that the one-time notification requirement and the 90-day period for notification are unreasonable conditions for qualification for TRIMs transition periods and that the transition periods themselves are too short to allow them to make the needed adjustments. A more fundamental critique that is emerging is that the measures prohibited in the agreement are themselves useful and necessary instruments for developing countries' industrialization and development.  Therefore, some developing countries are of the view that even if the investment measures are trade-restrictive, developing countries should be allowed to make use of them, as part of their rights to special and differential treatment.

The General Agreement on Trade in Services

Before the Uruguay Round was launched, many developing countries had tried to resist the inclusion of the then 'new issue' of trade in services. They believed that bringing services into the GATT system would be against their interests as they would not have the capacity to gain from increased exports, while they would be pressured to liberalize their own services markets, which could result in their local companies losing ground to bigger foreign service providers.   Despite this reluctance, services became a part of the Round on the understanding that developing countries would gain in other areas (especially through more market access in agriculture, textiles and clothing). However, developing countries did not get the expected benefits from other areas.

In the meanwhile, there are many problems and potential problems associated with GATS, including the lack of data and proper assessment, imbalances in the agreement, the unequal outcome of benefits and costs, continual pressures (through successive rounds of negotiations) for developing countries to liberalize, and the narrowing of options for governments in regulating services or in operating public services.  The problems may become even more complex should some of the proposals being put forward in the ongoing round of services negotiations take effect.   Some of the issues are examined below.

Lack of Data, Making Assessment of GATS Effects Difficult

The Uruguay Round negotiations on market access within the services sector were conducted without the aid of data that could enable participants to understand the full implications and make some judgements of the costs and benefits of what was being negotiated. The area of services has lacked even the kind of rough data comparable to that on directions of trade in goods, which are used to make a rough assessment of the value of concessions given and exchanged in negotiations in the goods sector. For most developing countries, therefore, when it comes to the services negotiations, it has been like a case of  'a blindfolded person in a dark room chasing a black cat'  (Raghavan 2000f).

The current data on services trade, based on the IMF's balance-of-payments statistics, are not only highly aggregated and thus not meaningful, but are also on the basis of international transactions between residents and non-residents, and do not reflect the WTO definition of trade in services and the four modes of service delivery listed in GATS.

The issue of lack of data came up several times in the Uruguay Round negotiations, and UNCTAD and the UN statistical system began to try to figure out how to collect meaningful data. However, these attempts were not maintained.  The data issue is now being pursued by various institutions. However, at the current rate of progress, an agreement for national data classification and collection, and comparable international data and analysis, is unlikely to be available even by the beginning of the next decade.  Despite recognition of the lack of data, the major countries have continued the push for further negotiations and binding commitments without countries being able to make a proper assessment of the costs and benefits of entering into further commitments and obligations. Thus, there is a danger of developing countries being asked to make further market openings without being sufficiently able to assess the implications.

The lack of data is also hindering the ability to carry out a meaningful assessment on the effects of the services agreement on developing countries generally as well as on individual countries.   In the guidelines for the ongoing services negotiations, a coalition of developing countries has managed to include a provision that the Council for Trade in Services 'shall' continue to carry out an assessment of trade in services in overall terms and on a sectoral basis with reference to the objectives of GATS and Article IV in particular (on increasing the participation of developing countries in services trade and improving their access to distribution channels and information networks).  This is to be an 'ongoing' activity, and the 'negotiations shall be adjusted in the light of the results of the assessment.'  The Council 'shall also' conduct an evaluation, before completion of the negotiations, of the results attained in terms of the objectives of Article IV.

Developing countries, however, are still not clear on how the assessment could be done and on what basis. Unfortunately, developing countries do not have the capacity, individually or collectively, even to undertake national-level assessments.  Thus, until the problems of lack of data and the need for proper assessments at both the international and national levels are resolved, there is little basis for demanding further liberalization commitments from developing countries, since there is no evidence that the previous round of liberalization has benefited them, nor that further liberalization will benefit them, whereas there is clear evidence of the imbalances.

Imbalances in Services Outcome, with Little or No Reciprocal Benefits to South 

As described in Chapter 3, the services agreement contains inherent imbalances. It favours major services-exporting countries that can take advantage of liberalization, while disadvantaging developing countries that lack the capacity to benefit from exports.  Also, it specifically includes obligations to liberalize the movement of capital (for example, in Article XI and Article XVI.1 footnote) but the same special treatment has not been given to the movement of labour, which is of interest to developing countries.

In terms of sectoral commitments, various countries undertook obligations to liberalize the import of services (via the four modes of supply) in a particular sector by easing the market entry conditions and by providing national treatment (treatment no less favourable than that accorded to the similar domestic service provider). The major benefit went to enterprises of the industrialized world, in terms of their market entry through the mode of 'commercial presence'.  The opportunities have opened up mainly for the service providers of developed countries as the developing countries undertake the liberalization of services imports.

The result has been that the developing countries have given concessions without effectively getting any in return. Within the services trade, there are imbalances in the distribution of benefits between industrialized and developing countries. The commitments undertaken in GATS do not reflect the interests of developing countries in terms of commercially meaningful sectoral and modal coverage.   Moreover, developing countries have not derived benefits through scheduled commitments from their industrialized-country partners in terms of Article IV (increasing developing countries' participation) and Article XIX (providing flexibility for developing countries) of GATS (Mashayekhi 2000a).

In addition, it is now generally accepted that the opening of the capital account in developing countries and premature liberalization of their financial sectors has been a major factor behind the financial crises that hit them from time to time, and that they should be wary of both opening the capital account under the IMF Articles of Agreement and financial services liberalization in GATS (Oh 2000a).

It has been argued that GATS is beneficial as services liberalization helps developing countries by increasing efficiency and providing required inputs.  Even if this were so, developing countries can choose to liberalize selectively and autonomously, without making binding commitments at the WTO; thus, if the liberalization turns out to have negative effects, they can reverse course without having to pay any compensation.

Since the Uruguay Round, follow-up negotiations, instead of moving to reduce the imbalances in GATS, have aggravated the inequity. New agreements were finalized on a priority basis in sectors such as financial services and telecommunications services, which are primarily important to developed countries.  Developing countries have been pressured to make high levels of commitments in these sectors.  In fact, the United States had decided not to join the first agreement on financial services mainly because it thought that some developing countries had not made adequate commitments on liberalization.  These two sectoral agreements have tilted the balance further in favour of the developed countries, as they are the major providers of services in these sectors, and developing countries have hardly any supply or export capacity in these sectors (Das 1998b).

When the financial services negotiations were concluded in December 1997, the WTO secretariat, and the U.S. and EC delegations were effusive in their praise for the accord.  However, many developing countries were of the view that there had been no reciprocal benefit for their enterprises in a trade dominated by the suppliers of the developed countries.  The Egyptian Ambassador expressed the view that the negotiations and the accord were a 'one-way affair' that concentrated benefits in the hands of the developed countries' firms which could now enter and compete in the South, whereas the South's banks and firms were unlikely to penetrate Northern markets (Raghavan 1997b: 2-4).

Supply Constraints and Barriers to Services Exports of Developing Countries

In the implementation of GATS, developing countries face structural problems that hinder their ability to export services, as a recent UNCTAD study points out:  'The efforts of developing countries to develop services as a major export item and contributor to development and to penetrate the world market for services have faced considerable barriers.  These include barriers to market access and national treatment, as defined in Article XVI and XVII of GATS, as well as difficulties in market entry caused by anti-competitive practices, subsidies and so forth' (UNCTAD 1999a: 9).

Among the major supply constraints that prevent developing countries from building a competitive service sector are: lack of human resources and technology to ensure professional and quality standards; weak telecommunications infrastructure; lack of a national strategy for export of services; lack of government support to help service firms, especially small and medium enterprises; weak financial capacity of firms; lack of a presence in major markets; and an inability to offer a package of services  (ibid.: 5).

Among the barriers to market access discouraging exports from developing countries from entering the developed countries are: lack of commitments on movement of labour (resulting in limits to access to intra-corporate transferees, strict and discretionary visa and licensing requirements, lack of recognition of qualifications); prohibition of foreign access to service markets reserved for domestic suppliers; price-based measures (discriminatory airline landing fees and port taxes, licensing fees);  subsidies granted in developed countries that have an adverse impact on developing-country exports;  technical standards and licensing with restrictive effect; discriminatory access to information channels and distribution networks;  and practices of mega firms (ibid.: 7).

Anti-competitive structures and practices also affect developing-country exports.  Many markets for services are dominated by a few large firms from developed countries and a number of small players.  As a result, in most service sectors, the larger operators face little effective competition as the size of the next tier of competitors is so small.  For example, 80 per cent of the market in tourism belongs to Thomson, Airtours, First Choice and Thomas Cook.  Service providers from developing countries are mainly small- and medium-sized, and they face competition from large service multinationals with massive financial strength, access to the latest technology, worldwide networks and a sophisticated information technology infrastructure. The trend in mergers and acquisitions and strategic alliances has exacerbated this concentration. UNCTAD studies on health, tourism, air transport and construction have highlighted the possible anti-competitive impact of these new business techniques. For example, vertical integration between tour operators and travel agents creates considerable market power that puts competitors at a disadvantage.  The structure of distribution channels and information networks in several service sectors has also shut out competition.  For example, in tourism and air transport, strategic global alliances and global distribution systems have restricted competition and present major barriers to market entry by developing countries (ibid.:  6-8).

Limits to Benefits from the GATS Architecture and Challenges Arising from Attempts to Change it 

It is often claimed that the architecture of GATS is more friendly to developing countries (compared to other agreements such as TRIPS), as commitments apply only in sectors offered by the country (the 'positive-list' approach) and to the chosen extent of liberalization as entered in each country's schedules.  Thus in theory, it allows each country to liberalize at its chosen pace and in the various sectors that it believes to be appropriate. It includes a principle of 'progressive liberalization' rather than a minimum standard of liberalization, and Article XIX prescribes 'appropriate flexibility' for individual developing-country members to open fewer sectors and liberalize fewer types of transactions. Even so, developing countries face many problems and challenges:

* Even if a commitment to liberalize is made on the basis of a 'voluntary offer,' once such a commitment is made, it cannot be withdrawn or modified, without giving adequate compensation.  Thus, if a country were to later find it has made a mistake in making some of its commitments, or it later decides it would like to develop the capacity of local firms in particular sectors in which it has made commitments, it would face serious difficulties in attempting to modify the relevant commitments.  In other words, the commitments in GATS are constraints to policy options in the future.  The principle of 'progressive liberalization' also implies that a member is obliged to increase its liberalization commitments.  The process of progressive liberalization 'shall be advanced' through successive rounds of negotiations 'directed towards increasing the general level of specific commitments' (Article XIX).  Thus, countries are under pressure through new rounds of negotiations to 'roll forward' their liberalization commitments, which are binding, but they are unable to 'roll back' these commitments, except through a willingness to offer adequate compensation.

* Although in principle, developing countries should be able to liberalize their services according to their own pace and sectors, in practice, they generally and individually often face pressures to open up. For example, during the financial services negotiations, major developed countries applied pressure on developing countries to offer higher levels of commitments.  At the concluding stage of the negotiations, hours after the deadline had passed, the United States was still pressuring Malaysia to increase its offer that in the insurance sector foreign firms will be allowed to own up to 51 per cent of the equity in insurance ventures (Raghavan 1997b: 2-4).

* In the ongoing new round of services negotiations, which started in 2000, developed countries have made it clear that they intend to push for ambitious levels of liberalization, including by developing countries.  For example, the U.S. proposal of 13 July 2000 for the 'Framework for Negotiations' states: 'Our challenge is to accomplish significant removal of these restrictions (on trade in services) across all services sectors, addressing measures currently subject to GATS disciplines and potentially measures not currently subject to GATS disciplines, and covering all ways of delivering services'  (United States 2000).  The United States has also advocated 'meaningful liberalization,' which appears to be in contrast to the concept of 'progressive liberalization.'

* Although countries may now choose within each sector whether and how to liberalize, new approaches have been proposed that would in effect widen or accelerate the liberalization process. The proposed changes (e.g., a 'horizontal modalities approach,' a 'formula approach,' a 'cluster approach' or even a 'negative list approach') would, if accepted, affect the present architecture of GATS.  Countries thus have to carefully assess attempts to change the present system.

Development or Extension of Rules

Effects on development may also arise from the process of developing rules in GATS negotiations.  One important example is the exercise to develop rules on domestic regulation.  Under GATS (Article VI: 4), the WTO is mandated to develop 'necessary disciplines' to ensure that 'measures relating to qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade.' This issue is being discussed in the Working Party on Domestic Regulation.  Targeted for disciplining are government regulatory measures that can fall under the broad categories of qualification requirements, technical standards and licensing requirements, which affect any service sectors, not only those in which countries have made commitments.  Under the proposed new disciplines, governments may be required to show that the regulations are necessary to achieve an objective that is held to be 'legitimate' by the WTO (a 'necessity test'); and that it was not possible to adopt a less commercially restrictive alternative measure.  The proposed disciplines, if adopted, can be expected to significantly constrain governments from exercising their authority to regulate some aspects of services.  A regulation could be struck down if the regulating government fails to demonstrate that it is not more burdensome than necessary to meet a WTO-sanctioned legitimate objective (Sinclair 2000: 75-81). 

The development of new rules in three other areas---safeguards, subsidies and government procurement---is also mandated in GATS. Many developing countries have been advocating that GATS should also have a safeguards provision (which GATT has) to enable temporary protection during situations when there is serious injury to domestic producers.  However, there are some complex issues to consider with regard to whether an effective safeguards mechanism can be set up in the area of services.  These include the lack of data on services (needed to make the case for injury and to show that the cause of injury is increased imports); and how safeguards can be applied in respect to foreign service providers in the country.

The WTO is also mandated to negotiate disciplines to avoid distortive effects that subsidies may have on trade in services. Negotiations on this issue are bound to raise many difficult and complex issues, for example, how sensitive areas such as government subsidies in health, education and social welfare will be treated, and whether and how the national-treatment principle will apply to subsidies in relation to resident and non-resident service providers, and subsidies embedded in services consumed locally and abroad  (Sinclair 2000: 85-89).

According to Article XIII, the market access and non-discrimination obligations of GATS shall not apply to government procurement of services; however, further negotiations are required.  Some developed countries have asked for consideration for specific rules and commitments on government procurement under GATS (e.g., United States 2000). The possible inclusion of government procurement (for goods and possibly services) to cover transparency, at least initially, is also being discussed in a WTO working group on transparency in government procurement.  The possible development of new disciplines in this area seems designed to widen the scope of commitments by developing countries.

Public Concerns that Provision of and Access to Social Services will be Affected

Citizen groups are concerned that GATS is creating conditions that may ultimately affect the public's access to social services, such as health care, education, water supply and social welfare, that traditionally have been provided by the public sector. Among the concerns is that governments would come under pressure to change the conditions under which public services are provided, for example, to privatize such services, to allow competition from the private sector and from foreign firms, and to privatize natural resource-based items, such as water, and also sell them to foreign countries.

Many 'public services' have traditionally been provided by government, at federal, state or municipal levels, or by agencies linked to the government.  There have been assurances by the WTO secretariat that under GATS countries are not 'compelled' to liberalize and that they are bound by GATS disciplines only in sectors and sub-sectors they have agreed to liberalize.  'The WTO is not after your water,' states a WTO document responding to NGO concerns, adding that public services maintained or supplied by a government need not be opened to foreign competition (WTO 2001a).

There is some degree of ambiguity as to the extent to which government services are exempted from the coverage of GATS.  According to Article I of GATS, the definition of 'services' covered in the agreement gives an exception to 'services supplied in the exercise of governmental authority,' and that term in turn means 'any service which is supplied neither on a commercial basis nor in competition with one or more service suppliers.' Thus, government services provided on a commercial basis are subject to GATS provisions, as are government services supplied in competition with any other suppliers.  In many countries, there are many aspects of education, health care, housing and other social services in which the government as well as the private sector provide services, and it could be argued that in these aspects the government service is in competition with other suppliers, and thus falls under the GATS purview.

On the issue of whether governments are pressured to privatize or open up public services activities to foreigners, the situation is also more complex in the case of developing countries. It is also necessary to consider the way in which the IMF and the World Bank  have operated through structural adjustment conditionality to get governments to privatize several formerly government-supplied services and infrastructural projects and schemes and also to pry open developing-country markets for foreign service suppliers (including participation in the privatization schemes).  Many developing countries have been required to privatize water supply, sanitation and other services and to charge 'user fees' to bring in revenue, as well as open up the field for private entities to provide the service, whether in competition with or as a complement to the public service (Raghavan 2001c).

Once the public service is privatized, it ceases to be an exempted government service. Even in a case where privatization is partial, or where the government still maintains its service but allows private entities to also participate in supplying that service, in terms of Article I.3(c) of GATS, such a service may no longer qualify as a service 'supplied in the exercise of governmental authority' and thus could be brought under GATS.

Thus, the IMF and World Bank on the one hand, and the WTO on the other hand, can play complementary roles in generating a process by which public services are either commercialized, privatized, opened up for competition from private entities, or opened up to foreign service suppliers.  While the initial prompting for privatization, commercialization, competition and liberalization might begin with IMF-World Bank conditionality, pressures could then build for the countries involved to bind these decisions or policies under GATS.

In conclusion, since many 'governmental services' can and do fall under the purview of GATS, there are grounds for concern that countries could come under pressure to accept  requests that they open up public services to foreign competition, and that, moreover, these services come under the purview of the cross-cutting rules of GATS.  Also, for many developing countries that are under structural adjustment programmes, there are elements external to the WTO that generate pressures for public services to be commercialized, privatized and liberalized, which would then make these services ineligible for classification as exempted government services, and thus subject to GATS rules and processes.

TRADE, ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

Before and since the establishment of the WTO, there has been considerable concern about both the environmental effects of trade liberalization, and the need to prevent the environmental issue from being used as a new instrument for protection against products of developing countries. On the one hand, there is evidence that current patterns of trade have had and are having negative effects on the environment (e.g., by increasing resource depletion or the spread of harmful technologies); and in some ways, there can also be a positive effect (e.g., through trade in environmentally friendly technology).  On the other hand, the need for measures to improve environmental protection and standards should not be used for protectionist objectives that would act against the interests of developing countries.   Discussions should be framed not in the context of 'trade and environment,' but rather in the broader and more appropriate context of 'trade, environment and sustainable development.' The concept of sustainable development, as it has evolved through the UN Conference on Environment and Development (UNCED) process, involves a combination of concerns for environmental protection, equity between and within countries, and the need for development and fulfilment of human needs for present and future generations (Khor 1996; 1999a).

'Trade and environment' is already an issue within the WTO, due to a Ministerial decision at Marrakesh in 1994. Issues linking trade and environment are being discussed at the WTO's Committee on Trade and Environment.  However, there is no specific agreement in the WTO that deals with the environment.

That there are links between trade and environment cannot and should not be denied. Trade can contribute to environmentally harmful activities. Ecological damage, by making production unsustainable, can also have negative effects on long-term production and trade prospects.  In some circumstances, trade (e.g., trade in environmentally sound technology products) can assist in environmental protection. What is of concern in looking at the trade-and-environment relationship is the advocacy of the use of trade measures and sanctions on environmental grounds.  Some environment groups and animal rights groups believe that national governments should be given the right to unilaterally impose import bans on products on the grounds that the process of production thereof is destructive to natural resources and animal life, and that WTO rules should be amended to enable these unilateral actions. 

Some groups, and some developed-country members of the WTO, have also advocated a set of concepts linking trade measures in the WTO to the environment.  These include processes and production methods (PPMs), internalization of environmental costs, and eco-dumping.  The three concepts are inter-related.  When discussed in the WTO context, the implication is that if a country has lower environmental standards in an industry or sector, the environmental cost of that country's product is not internalized and the price of the product is thus too low (being unfairly subsidized by the low standards), amounting to 'eco-dumping.'  As a result, an importing country would have the right to impose trade penalties, such as levying countervailing duties, on the goods concerned.

This set of ideas poses complex conceptual and practical questions, particularly as they relate to the international setting and to the WTO.  Developing countries are likely to find themselves at a great disadvantage within the WTO negotiating context should the issue become the subject of negotiations. 

One of the main issues is whether all countries should be expected to adhere to the same standard, or whether standards should be allowed to correspond to different levels of development. The use of a single standard would be inequitable, as poorer countries that can ill afford high standards would find their products uncompetitive. The global burden of adjustment to a more ecologically sound world would be skewed towards the developing countries. This is counter to the 1992 UNCED principle of 'common but differentiated responsibility,' which recognizes that developed countries bear greater responsibility for the causes of the ecological crisis and also have greater resources to counter it, and should therefore bear a higher share of the global costs of adjustment.

Given the unequal bargaining strengths of North and South in the WTO, the complex issues relating to processes and production methods (PPMs), cost internalization and trade-related environment measures should not be negotiated within the WTO. If these are discussed at all, the venue should be the United Nations (e.g., in the framework of the Commission on Sustainable Development), where the broader perspective of environment and development and the UNCED principles can be brought to bear.

Unilateral trade measures taken by an importing country against a product on grounds of environmentally harmful production methods or processes also run the risk of protectionism, by which developing countries would be penalized. However tempting unilateral import bans may be for the environmental cause, they are inappropriate, as they could lead to adverse consequences such as industry closings and job losses and eventually even be counter-productive. Policies and measures to resolve environmental problems (and there are many such problems, many of them urgent) should be negotiated in international environmental fora and agreements.  These measures can include (and have included) trade measures.

The relationship between the WTO and its rules and the multilateral environment agreements is also the subject of debate in the WTO.  On the one hand, there is the fear (on the part of developing countries) that a system of blanket and automatic WTO approval of trade measures adopted under an MEA (e.g., by an amendment to Article XX of GATT to enable ex-ante approval of MEA measures) could lead to abuse and protectionism. One of the sticking points is what constitutes a 'multilateral environment agreement,' as this term may include not only truly international agreements, convened, for example, by the UN, open to all members and enjoying near-universal consensus, but also agreements drafted by a few countries which then invite others to join (and could then also enjoy exemption under the proposed amended WTO rules). The fear of protectionist abuse explains the reluctance of developing countries to amend Article XX, which they regard as flexible enough to accommodate environmental objectives.

On the other hand, there is the genuine fear on the part of environmental groups (and some WTO members) that negotiations in new MEAs can be (and are being) undermined by the proposition put forward by some countries that WTO rules prohibit trade measures for environmental purposes, or that WTO 'free-trade principles' must take precedence over environmental objectives. Such arguments were used by a few countries during negotiations for an international Biosafety Protocol under the Convention on Biological Diversity.  Such arguments may not be correct, as the WTO allows for trade measures agreed to in MEAs through the present Article XX (although not in the ex-ante manner proposed by some countries).  The invocation of WTO principles or rules by a few delegations to counter proposals by those that want to establish checks on trade in products that are (or may be) environmentally harmful has led to the impression that commercial interests are placed before global ecological and safety concerns and is part of the reason for the erosion of public confidence in 'free trade' and the WTO system.

For many NGOs (especially in the South) as well as developing countries, an important 'trade and environment' issue is the effect of the TRIPS Agreement in hindering access to environmentally sound technologies and products. Another concern is that Article 27.3(b) of TRIPS makes it mandatory to patent some categories of life-forms, and to provide for the intellectual rights protection of plant varieties. As noted in the section above on TRIPS, both of these issues may have adverse consequences for biodiversity, the knowledge for its sustainable use, and community rights relating to biological resources and traditional knowledge.

EXPANSION OF THE WTO INTO NEW AREAS

A major area of debate in the WTO is the desirability or otherwise of expanding its mandate to cover new areas. One of the main points of contention is that many of the new areas being proposed are not directly trade issues, whereas the WTO is a trade organization. Proposals have been made, mainly by developed countries, to introduce such issues as investment rules, competition policy, transparency in government procurement, trade facilitation, electronic commerce, labour standards, and environment standards.  Many of these formed part of the proposals for new negotiations put forward mainly by developed countries as part of a proposed comprehensive new round of multilateral trade negotiations to be launched at the Seattle Ministerial meeting of 1999.  Since that meeting failed to produce a Declaration, developed countries have renewed their attempts to introduce these new issues as subjects for negotiations through a new round.

Before and after Seattle, a large group of developing countries were either opposed or not prepared to accept the introduction of these new issues as subjects for negotiating new agreements.  There are at least three main reasons for this (see Khor 2000b; 2001b):

* The WTO should focus in the next few years on reviewing problems of implementing existing agreements and making the necessary changes to them. These are enormous tasks, which will not be properly carried out if there is a proliferation of new issues in a new round of negotiations. Due to extremely limited human, technical and financial resources of developing countries, they have been unable to adequately study the proposals or their potential effects, and they lack the capacity to undertake protracted negotiations on these issues.  Moreover, should negotiations begin, the focus of their diplomats and policy-makers would be diverted away from the review process to defending their interests on the new issues, which have the potential of having extremely serious effects. The limited time of the WTO would also be mainly devoted to the new issues.

* The proposed new issues would also have serious implications for the development options and prospects of developing countries. There is a belief that placing such issues as investment rules, competition policy and government procurement within the WTO is sought by developed countries to take advantage of the WTO's enforcement capability (the dispute settlement system) and impose disciplines on developing countries to open their economies to the goods, services and companies of developed countries.  As regards labour and environment standards, developing countries have argued that they should not enter the WTO as they could be used as protectionist devices against the products and services of developing countries.

* Accepting the proposed new issues would expand the WTO mandate to incorporate even more non-trade areas. (The non-trade issue of IPRs is already in the WTO through TRIPS.) Issues such as investment rules, competition policy and government procurement are strictly not trade issues and it has been argued that they do not belong in the WTO, particularly as subjects of new agreements. Applying GATT/WTO principles (that were drawn up for trade) to non-trade issues may lead to distortions in how the issue is dealt with, as well as of the trading system.  Moreover, taking on the new issues (and the additional obligations they entail) would overload the multilateral trading system and add to its tensions.  The WTO would be even more split on North-South lines, threatening the goodwill, functioning and even survival of the system.

Multilateral Investment Rules

Developed countries would like a new WTO agreement for multilateral rules on investment that give new and expanded rights to foreign investors by making it easier for them to enter countries and operate freely as well as having provisions to strengthen the protection of their rights.  Attempts to establish a high-standards Multilateral Agreement on Investment  (MAI) have failed so far at the OECD.  The efforts of the proponents have now shifted to pursuing an agreement at the WTO. Under such rules, pressures would be mounted on WTO member states to liberalize investment flows and grant national treatment to foreign investors and firms, and bind these commitments so that there cannot be reversals. Governments would lose a large part of their present rights to regulate the operations of foreign investors.  Restrictions on the free flow of capital into and out of the country could be prohibited or constrained.   Moreover, the performance requirements that host governments now place on foreign companies (such as limitations on equity, obligations on technology transfer and on the use of local professionals) would come under pressure. There could also be a proposal to prohibit or discipline the use of investment incentives to attract foreign investments.

The critical issue in the discussion is not whether countries value or welcome foreign investment, for almost all countries are presently seeking to attract such investment. Rather, the real issue is the extent to which governments have the need and the right to regulate investments, including foreign investment, and the extent to which foreign corporations should be granted rights of entry, establishment, national treatment and freedom from obligations and regulations by the host state.  Whilst the proponents advocate enlarging and guaranteeing foreign investors' rights, the opponents or skeptics emphasize that states need  to regulate investments, especially foreign investment, in order to maximize benefits and minimize costs to the host country and in line with national goals, and are concerned that the proposed investment agreement would curb the rights and ability of the host countries to regulate.

Implicitly acknowledging that an MAI replica would not be politically acceptable to many developing countries nor to civil society worldwide, some developed countries have proposed a modified investment agreement, in which countries could select the degree of liberalization and national treatment to offer in a 'positive list' on a sector-by-sector basis, and covering only foreign direct investment (FDI). However, this can be seen as a tactical move, since once such a watered-down version enters the WTO, there will likely be increasing pressures for developing countries to liberalize rapidly and to offer greater market access. Moreover, other developed countries would like the agreement to cover more than FDI.

The entrance in principle of investment policy per se would greatly expand the mandate of the WTO, and further narrow the development policy options of developing countries in a crucial area.  Developing countries would find it increasingly difficult to defend the viability of (or to give preferences to) local investors, firms or farmers, all of which constitute much smaller units than the transnational companies and will thus find it difficult to withstand competition from the latter. Domestic enterprises would face the possibility of their products being wiped out by competition from bigger foreign firms, or of being taken over by them.

Trade and Competition

Another agreement being sought in a new round would cover multilateral rules on competition.  The EC has advocated an approach to competition in the WTO that would discourage domestic laws or practices in developing countries that favour local firms, on the ground that they restrict free competition from foreign products and firms. The EC argues that what it considers to be the core principles of the WTO (transparency, MFN treatment and national treatment) should be applied to competition policy through the proposed WTO agreement. One of the major aims is to provide foreign firms 'effective equality of opportunity' in the host countries' markets  (European Communities 1999; Khor 1999b). 

The agreement would oblige developing countries to establish domestic competition policies and laws that would prohibit or discourage distinctions between local and foreign firms.  The competition laws themselves would not be able to make such a distinction.  Policies that give importing or distribution rights (or more favourable rights) to local firms (including government agencies or enterprises), or practices among local firms that enable them to have better marketing channels, could be challenged and it is possible that disciplines may be developed on them.  It would be argued that policies or practices that give an advantage to local firms create a barrier to foreign products or firms, which should be allowed to compete on equal terms as locals in the local market under the principle of free competition.  Such pro-local practices and policies are likely to be targeted for phase-out or elimination in negotiations for a competition agreement.

At present, many developing countries would argue that giving favourable treatment to locals in fact favours competition, in that the smaller local firms are given some advantages to withstand the might of foreign giants, which otherwise would monopolize the local market.  Providing the giant international firms equal rights would overwhelm the local enterprises, which are small and medium-sized in global terms. However, this will be contested by the counter-argument that foreign firms should be provided a 'level playing field' to compete 'equally' with smaller local firms and that this interpretation of 'competition' should be codified in an agreement.

In discussions within the WTO Competition Working Group, developing countries have raised issues of concern to them, including the restrictive practices of transnational companies and the abuse of anti-dumping measures by the United States and other developed countries (which prevents the competitive exports of developing countries from having access to their markets). However, the inclusion of such issues under the topic of 'competition' has been less welcome. Given the relatively weak negotiating position of developing countries, it is likely that the interpretation of developed countries will prevail.

Government Procurement

At present, government procurement is excluded from the MFN-treatment and national-treatment obligations of GATT 1994 and it is thus outside the scope of the WTO's multilateral rules. (Members may, however, voluntarily join the plurilateral agreement on government procurement, although very few developing countries have done so.)  Thus, governments are now able to have their own rules on procurement practices, and many developing countries give preferences to local firms, suppliers and contractors.

The aim of the developed countries (as revealed in their earlier proposals on the subject in the WTO) is to bring government procurement policies, practices and procedures under WTO disciplines, and apply the national-treatment principle whereby foreign firms would have at least equal rights as locals to the procurement business, and governments would lose the ability to give preference to the latter. Foreign firms that are not satisfied with the decisions on awards would be able to request their own governments to take a case to the WTO.  The objective of developed countries is to enable their firms to have access to the extremely lucrative procurement market in the developing world.

 As most developing countries would object to having their public-sector spending policies and practices changed so drastically, developed countries designed a two-stage plan for bringing this issue under WTO rules: an initial agreement limited to achieving greater 'transparency' in government procurement, then a broader agreement to cover liberalization, market access for foreign firms, and the national-treatment principle. The first phase would inject the procurement issue into the WTO multilateral system and the second would seek to 'fully integrate' government procurement into the WTO. This strategy was revealed in U.S. and EC presentations and papers during preparations for the 1996 Singapore Ministerial meeting. At that meeting it was decided to form a working group to study transparency in government procurement and to propose elements for an appropriate agreement.

Many developing countries have insisted that a transparency agreement, if there is one, should not be a step towards further negotiations aimed at liberalization and national treatment in the procurement business.  However, it can be expected that if a multilateral agreement on transparency in government procurement is established, it would be followed  by intense pressures to extend it to market access and national treatment issues (Khor 2000b). At stake for developing countries is the right of governments to reserve some of their business for local firms.  A full procurement agreement would prevent or hinder developing countries from being able to use an important instrument for assisting local firms, and for national development, macroeconomic and socio-economic objectives. 

A New Round of Industrial Tariff Cuts

Another economic issue proposed for incorporation in a new round is 'industrial tariffs,' which would entail reduction of tariffs on manufactured products.  If the proposed negotiations were focused on the elimination of tariff peaks and tariff escalation in the sectors of developed countries that are of export interest to developing countries, this issue could benefit developing countries.  In fact the prospect of this has been used as an argument to draw developing countries into agreeing to negotiate this issue.  However, the record of the developed countries on this (see Chapter 2) raises the question of whether these countries are really prepared to remove or substantially reduce their protection in areas where developing countries can meaningfully make inroads.       

On the other hand, since the tariffs in industrial products are generally lower in developed countries, it can be expected that a new round of industrial tariff cuts would mainly entail new commitments by the developing countries, most of which have already significantly reduced their industrial tariffs in recent years.  Many did this under the IMF-World Bank structural adjustment programmes.  In recent years, many African and Latin American countries have suffered from 'de-industrialization,' in which local industries and enterprises have been closed or taken over as they are made uncompetitive by imported products.

Disturbing evidence of post-1980 liberalization episodes in the African region has been described by Buffie (2001: 190-91).  For example, Senegal experienced large job losses following liberalization in the late 1980s; by the early 1990s, one-third of all manufacturing jobs had been eliminated. In Côte d'Ivoire, the chemical, textile, shoe and automobile assembly industries virtually collapsed after tariffs were abruptly lowered by 40 per cent in 1986. Similar problems have plagued liberalization attempts in Nigeria, while in Sierra Leone, Zambia, Zaire, Uganda, Tanzania, and the Sudan, liberalization in the 1980s brought a tremendous surge in consumer imports and sharp cutbacks in foreign exchange available for purchases of intermediate inputs and capital goods, with devastating effects on industrial output and employment. In Ghana, industrial sector employment plunged from 78,700 in 1987 to 28,000 in 1993, due mainly to the fact that 'large swathes of the manufacturing sector had been devastated by import competition' (ibid.). Adjustment in the 1990s has also been difficult for much of the manufacturing sector in Mozambique, Cameroon, Tanzania, Malawi and Zambia, where import competition precipitated sharp contractions in output and employment in the short run, with many firms closing down operations entirely.

Similar problems have been experienced in other regions. In Latin America, for example:   'Liberalization in the early nineties seems to have resulted in large job losses in the formal sector and a substantial worsening in underemployment in Peru, Nicaragua, Ecuador and Brazil.  Nor is the evidence from other parts of Latin America particularly encouraging' (Buffie 2001: 190). The regional record suggests that the typical outcome is a sharp deterioration in income distribution, with no clear evidence that this is temporary.

A further round of cuts in industrial tariffs, if it involves binding industrial tariffs at lower levels in developing countries where local industries do not have the capacity to withstand competition from cheaper imported products, may well result in further difficulties for the domestic manufacturing sector in those countries.

TRANSPARENCY AND PARTICIPATION IN THE WTO

Although in theory, the WTO consists of members that are equal in terms of formal decision-making rights, in reality, many developing countries have been unable to realize their participation rights.  Some do not even have a Mission in Geneva, where the WTO is headquartered; others are understaffed and unable to adequately follow the discussions and negotiations. The few officials on staff also cover meetings in the United Nations agencies and are often unable to be present at meetings taking place simultaneously in the WTO. Even if they are present, many officials from developing countries are unable to adequately keep up with the often complex negotiating issues involved and thus are unable to make an impact.  Unequal capacity thus leads to unequal degrees of participation.

This problem of unequal capacity to participate is made more acute by the relative lack of transparency in some key aspects of WTO operations, which in turn has an adverse effect on the participation problem. The WTO has been and remains one of the most non-transparent of international organizations. The main reason for this is its working methods and system of decision-making.

In terms of formal arrangements, decisions are made on the basis of 'one country, one vote' and by consensus, thus giving the WTO the appearance of an organization in which decision-making is democratic. Decisions are taken by the General Council (comprising diplomats of member states based in Geneva), or representatives in subsidiary bodies (such as the TRIPS Council or the Agriculture Committee).   Major decisions are also made or endorsed by the members' Trade Ministers meeting at the Ministerial Conference, which  normally takes place once in two years.

In practice, GATT and the WTO have been dominated by a few major industrial countries.  Often, these countries negotiate and decide among themselves, and embark on an exercise of winning over (sometimes through intense pressure) a selected number of more important or influential developing countries, in 'informal meetings.'  Most WTO members may not be invited to these informal meetings and may not even know that they take place, or what happens there. When agreement is reached among a relatively small group, the decisions are rather easier to pass through.  The meeting of a limited number of countries to work out an agreement among themselves is referred to in WTO jargon as 'the Green Room process,' so named after the colour of the room of the GATT Director-General in which many such meetings took place during the Uruguay Round.  In the WTO era, this Green Room process has taken place especially in the intense negotiation period prior to and at Ministerial Conferences, including the first Ministerial in Singapore and the third Ministerial in Seattle.

The system of decision-making by 'consensus' is also implemented in an odd way.  On issues where a majority of developing countries, which form the vast majority of WTO members, may agree, it is said that 'there is no consensus' should even a few developed countries disagree with the majority, and the issue concerned is effectively killed or has no chance of being successfully dealt with.  However, should the major powers (especially the United States, the EC, Japan) agree on a particular issue, while a sizeable number of developing countries disagree and a large number remain silent, the major powers are likely to embark on a process they call 'building a consensus'.  In reality, this means a process (sometimes prolonged) of wearing down the resistance of the outspoken developing countries until only a few remain 'outside the consensus.' It is then relatively easy to pressure these few remaining countries to also agree to 'join the consensus.'

In 1996, developed countries lobbied very hard to get three topics  (investment, competition, government procurement) introduced as new issues for study (and eventual negotiation for agreements) in the WTO. They wanted the Ministerial Conference in Singapore in December 1996 to endorse this. During the preparatory process, a significant number of developing countries vocally objected.  Thus there was clearly no consensus.  Nevertheless, the issues became the main topic at the Ministerial through the device of the Director-General writing a letter to the Chairman of the Ministerial requesting the latter to consider taking up the three issues, and the establishment of a small 'informal group' of 30 countries to negotiate the final text of the Ministerial Declaration.  Who selected the countries, on what basis, and what they were discussing, were not known to Conference delegates as a whole.  Only on the night before the Conference ended were all the delegations summoned, given the final draft that had been thrashed out in secret by the small group, and asked to endorse it without change. Although several Ministers protested at the non-transparent and undemocratic process, the draft was eventually adopted unchanged.  In it were decisions to establish new working groups on investment, competition and government procurement, which had only a few days earlier been objected to by many developing countries.

In 1999, in the few months before the Seattle Ministerial Conference, the Green Room process was put into effect by the WTO Director-General.  Several small negotiating groups were set up to discuss various issues of contention, but most developing countries were not invited to be in these.  At Seattle itself, small negotiating groups were set up, with each group having its own topic.  Many developing countries were not invited to be in any of the groups.  Even within the small groups, developing countries' representatives were unhappy with the way the meetings were conducted, and how conclusions were sought.  Eventually, many developing countries (especially members of the Africa Group and the Caribbean countries) made clear in statements on the eve of the conference's closure that they would not join in the consensus if a draft Declaration was put forward on the final day.  This was a major contributing factor to the failure of the Seattle meeting.

 

 


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