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Chapter 6

Towards a Trading System for Human Development

As this paper has demonstrated, the global system of trade has a number of systemic and structural problems that require change. The proposals in this chapter thus point to longer-term directions of the system and its orientation.

RETHINKING TRADE LIBERALIZATION

The many problems in world trade, in particular the inequities in the sharing of benefits and the perception by some countries and groups that they have incurred costs and losses, call for a rethinking of the dominant model of trade policy that has advocated across-the-board rapid liberalization for developing countries. Given the negative experiences of many developing countries, an important conclusion is that trade liberalization should not be pursued automatically, rapidly, as an end in itself, or in a 'big-bang' manner. Rather, what is important is the quality, timing, sequencing and scope of liberalization (especially import liberalization), and how the process is accompanied (or preceded) by factors such as the strengthening of local enterprises and farms, human resource and technological development and the build-up of export capacity and markets.

A logical conclusion must be that if conditions for success do not currently exist in a country, a decision to proceed with import liberalization (or liberalization of services, including investments) can lead to specific negative results and even an overall situation of persistent recession. Therefore, developing countries need adequate policy space and freedom to be able to choose between different options in relation to their trade policies.  They should have the scope and flexibility to make strategic choices in trade policies and related policies in finance, investment and technology, in order to make decisions on the appropriate extent and scope of liberalization, taking into consideration their need for local production units to remain viable and indeed to grow and thrive. The timing of liberalization may be planned in accordance with the improvement of capacity and standard of local firms; while the choice of products and services to be liberalized may partly depend on the stage of development of local enterprises in different sectors and their state of readiness to compete.

The need for this kind of flexibility should be reflected in the rules and operations of the WTO.  Moreover, institutions such as the International Monetary Fund (IMF) and World Bank should review their loan conditionalities relating to trade policy.

While developing countries should be given more flexibility on import liberalization on account of their weaker capacities, developed countries should be required to implement liberalization more strictly in areas of export interest to developing countries, since the developed countries have strong enough capacities. Indeed, developed countries need to liberalize more rapidly in areas of export interest to developing countries, such as agriculture, textiles and clothing and industrial products protected by tariff peaks and tariff escalation.  As pointed out in this paper, the developed countries have not treated the developing countries fairly in the operation of the post-Second World War trading system, from the beginning of the GATT system up to the present. Developed countries have obtained exemption from integrating agriculture and textiles in the liberal trade regime, and these sectors remain highly protected even now. Unlike developing countries, which have overall structural weaknesses in their economies and lack capacity to compete, developed countries have much more capacity to restructure their economies and thus to absorb employment losses in sectors where they are inefficient and transfer labour to other sectors that are expanding.

Thus, the next phase of liberalization in the trade system should focus on developed countries.   Moreover, if developed countries provide more meaningful market access to developing countries, the latter will have much more opportunities to expand their export earnings, thus laying the foundation for higher imports, and to transfer jobs and resources from less efficient industries to the higher-revenue export sectors that have opened up.

REORIENTING THE WTO: DEVELOPMENT AS THE MAIN PRIORITY

The preamble to the Marrakesh Agreement Establishing the WTO recognizes the objective of sustainable development and the need for positive efforts to ensure that developing countries secure a share in international trade growth commensurate with the needs of their economic development.  However, in practice, development is not seen as a primary WTO objective; nor was it a primary purpose of the Uruguay Round or the Marrakesh Agreement.

Since liberalization is only a means, and its process has to be carried out with great care and caution, the objective of development should become the overriding principle that guides the work of the WTO, and the rules and operations of the organization should be designed to produce development as the outcome.  As proposed by Helleiner (2000), the WTO should be reconceptualized as a development institution: 'In the future, the WTO should be assessed primarily on the basis of its achievements towards poverty reduction and sustainable global human development,' stated Helleiner, who also suggested that a thorough and independent review be carried out of the developmental consequences of the content and actual implementation of the Marrakesh Agreement, including the capacity of the WTO's current governance arrangements and staffing to promote global development in the future (Helleiner 2000: 19).

In line with this, the WTO approach to trade liberalization, including its operational principles, should be reviewed.  Given the recent evidence that there is no direct or automatic link between import liberalization and growth, and in light of the export difficulties facing many developing countries, a more realistic approach should be adopted by WTO members.

It should be reaffirmed that the ultimate objectives of the multilateral trading system are increased living standards, full employment, economic growth, and sustainable development (as stated in the preamble to the Marrakesh Agreement) and that reduction of tariffs and other trade barriers is only a means.

Since developing countries form the majority of the WTO members, their development should be the first and foremost concern of the WTO.  Since it is by no means certain that liberalization under all conditions will contribute to growth, income or development in each developing country, there should be sufficient flexibility in WTO rules to enable each developing country to determine the scope, rate and timing of liberalization according to its own plan, judgment and schedule.

The test of a rule, proposal or policy being considered in the WTO should not be whether it is 'trade-distorting' but whether it is 'development-distorting.' Since development is the ultimate objective, while reduction of trade barriers is only a means, the avoidance of development distortions should have primacy over the avoidance of trade distortions. So-called trade distortions could in some circumstances constitute a necessary condition for meeting development objectives.   From this perspective, the prevention of development-distorting rules, measures, policies and approaches should be the major concern of the WTO. Its reorientation towards this perspective is essential if there is to be progress towards a fair and balanced multilateral trading system with more benefits rather than costs for developing countries.   Such a reorientation would make the rules and judgment of future proposals more in line with empirical reality and practical necessities.

Taking this approach, the goal for developing countries would be to attain 'appropriate liberalization' rather than 'maximum liberalization.' There should be a relaxation of pressure on developing countries for further liberalization, whether in trade in goods, in services, or in investment, and this should apply in the WTO as well as other organizations such as the IMF and the World Bank.

WTO rules should be reviewed to screen out those that are 'development-distorting,' and a decision could be made that, at the least, developing countries be exempted from being obliged to follow rules or measures that prevent them from meeting their development objectives.  These exemptions can be on the basis of special and differential treatment.

RETHINKING THE SCOPE OF THE WTO MANDATE

It is misleading to equate the WTO with the 'multilateral trading system,' as is done in many discussions. In fact, the WTO is both less than and more than the global trade system. There are key issues regarding world trade that the WTO is not seriously concerned with, including the trends and problems of the terms of trade of its members, the problems in primary commodity markets (including low commodity prices), and the lack of productive capacity and supply constraints faced by many developing countries.  On the other hand, the WTO has become deeply involved in domestic policy issues such as intellectual property laws, and domestic investment and subsidy policies.  There are also proposals to bring in other non-trade issues including labour and environment standards. Helleiner makes the point that the WTO name does not accurately describe its actual sphere of activity, and that 'on the basis of current practice it might better be called the World Market Harmonization Organization'  (Helleiner 2000: 16).

The WTO and its predecessor GATT have evolved trade principles (such as non-discrimination, MFN treatment and national treatment) that were derived in the context of trade in goods.  It is by no means assured or agreed that the application of the same principles to areas outside of trade, such as intellectual property, services, investment and competition policy, and also to social issues such as labour and environmental standards, would lead to positive outcomes. Indeed, the incorporation of non-trade issues into the WTO system could distort the work of both the WTO and the multilateral trading system.

Therefore, a fundamental rethinking of the mandate and scope of the WTO is required.  First, issues that are not trade issues should not be introduced in the WTO as subjects for rules.  This rule should apply at least until the question of the appropriateness and criteria to assess proposed issues is dealt with satisfactorily in a systemic manner.

Second, a review should be made of the issues that are currently in the WTO to determine whether the WTO is indeed the appropriate venue for them.  As pointed out in Chapter 5, prominent trade economists, such as Jagdish Bhagwati and T. N. Srinivasan, have concluded that it was a mistake to have incorporated intellectual property as an issue in the Uruguay Round and in the WTO.   There should be a serious consideration, starting with the mandated review process, of transferring the TRIPS Agreement from the WTO to a more suitable forum.

In the case of services, although there are trade aspects involved, GATS also contains important non-trade aspects, in particular, investment or commercial presence.  Even in relation to the trade aspect, the characteristics of the services trade are not the same as those of trade in goods. Thus, the integration of services into an international organization whose principles, operations and dispute settlement system were designed for and originated from trade in goods, may not have been appropriate.  Indeed, several developing countries had maintained in the period before the launching of the Uruguay Round, as well as during its initial period, that services should not be brought under the ambit of GATT and its successor organization. Given the imbalances in GATS, including the sharply differing levels of capacities in the services industries of developed and developing countries (resulting in non-reciprocal benefits to developed countries as an outcome of the implementation of GATS), and the fact that GATS intrudes to such a large extent into the realm of domestic policies, there is a good case for reopening the debate on the nature of services, and whether it has been inappropriate for a world trading organization to incorporate this issue. The issue of whether it is more appropriate, and more to the benefit of developing countries, for GATS to operate as a sui generis agreement with its own organization outside of the WTO should be considered.   

Within the WTO's traditional ambit of trade in goods, there is also significant room for reform. As argued in various parts of this report, it is time to rethink the orthodox belief that trade liberalization is necessarily good for developing countries and that rapid liberalization is the best policy. A more realistic and sophisticated approach, informed by actual conditions and the empirical and historical record, is called for. And this should be reflected in the work of the secretariat, and in the attitudes and proposals of members.  

The WTO should also reorient its primary operational objectives and principles towards development, as elaborated above.  The imbalances in the agreements relating to goods should be ironed out, with the 'rebalancing' designed to meet the development needs of developing countries and to be more in line with the realities of the liberalization and development processes.

With these changes, the WTO could better play its role in the design and maintenance of fair rules for trade, and thus contribute towards a balanced, predictable international trading system which is designed to produce and promote development.

THE ROLE OF OTHER ORGANIZATIONS

Reformed along the lines above, the WTO could then be seen as a key component of the international trading system, coexisting with, complementing and co-operating with other organizations within the framework of the trading system.

Other critical trade issues should be dealt with by other organizations, which should be given the mandate, support and resources to carry out their tasks effectively.  These tasks should include: (i) assisting developing countries to build their capacity for production, marketing, distribution and trade; (ii) monitoring and stabilizing commodity markets, with a view to ensuring reasonable prices and earnings for commodity-producing developing countries; (iii) addressing the restrictive business and trade practices of transnational corporations that reduce the prospects for smaller firms to engage in production and trade. These issues have previously been dealt with in UNCTAD, which still deals with them, but with less capacity to do so.

A number of economic issues also relate to the conditions needed for trade to serve development needs. These include the developing countries' need for stable or improving terms of trade, for avoiding BOP difficulties and reducing or eliminating their external debt overhang, for a more stable system of capital flows and exchange rates, and for securing financing for trade and development. These issues are being dealt with by the international financial institutions and by the United Nations and its agencies. The way these issues are dealt with (or not dealt with) has an impact on trade and the trading system, and on whether the developing countries will be able to enjoy a process of trade for development. Thus, there must also be complementary reforms in the global financial system, in which a major objective would be to orientate the financial system to support developing countries' capacity to participate in trade for their development process.

There are other issues that are not traditionally considered 'core' economic issues but which nevertheless have an impact on trade, and which are also impacted by trade. Such issues, which include environmental, social, cultural, workers' rights and human rights issues, should be dealt with in the appropriate forum established for each, such as the UN Environment Programme (UNEP), the World Health Organization (WHO), the International Labour Organization (ILO) and the UN Commission on  Human Rights. These organizations should monitor and assess how the trade process impacts on their particular area, and be able to take or propose measures to deal with these issues where necessary. 

While the WTO should identify, recognize and deal with the problems that may arise from the impacts of its rules (or their implementation) on other areas, social or environmental standards should not be linked to trade measures within the WTO. However, the WTO should incorporate social and environmental concerns and objectives into its operational principles, rules, assessment systems and negotiating processes.

GOVERNANCE OF THE TRADING SYSTEM

In order for international trade to be reoriented towards human development, a conceptual and operational framework should be drawn up within which the roles of the various institutions involved in issues related to the international trade system could be clarified. The WTO (slimmed down appropriately, along the lines suggested above) and UNCTAD would still play the most critical roles in this system, but other organizations would also have significant functions. The coordination function could be carried out under the United Nations, in the context of the Economic and Social Council (ECOSOC) or one of its bodies, or a new body functioning under its direction.  It is important that the system of governance of the trading system be open and transparent in its operations, as well as participatory and democratic, with the developing countries being able to fully participate in decisions.  The deliberations should, in principle, also be open to non-governmental organizations. Citizen groups and the public in general must be able to follow what is going on, and have channels open to them to make their views and their voices heard.

 

 


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