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Executive Summary

If trade is not an end in itself but a means to balanced, equitable and sustainable development, the current global trading system must be reoriented towards the satisfaction of the needs of the world's people. This paper examines the present system and its implications and offers some suggestions for improving it.

For developing countries, external trade should be viewed as a crucial element of an overall development strategy towards sustainable growth and development. It should contribute to the generation of full employment and  fulfillment of needs in areas of food, health, education, and all this in the context of environmental sustainability. At the international level, it should cater to the needs of the least developed and developing countries, with guidelines and practical measures that improve their terms of trade, enhance their export capacity and sustain their balance of payments. Most importantly, trade policy should be seen as contingent on the specific conditions of each country depending on its level of development. A one-size-fits-all approach would not only not work but also, if enforced, potentially do more harm than good.

There are two main aspects to trade: imports and exports.  There should be a balance between the two, at least in the long run, for a developing country's trade policy to be sustainable.  Currently, developing countries face pressure on two fronts: rapid import liberalization (under International Monetary Fund-World Bank conditionality and World Trade Organization rules), and uncertain export earnings (especially in cases of low supply capacity and declining terms of trade). Pressures for import liberalization derive from mainstream trade theory, which holds that it will lead to lower prices and increased efficiency in the domestic economy, thereby benefiting both consumers and producers. However, empirical evidence shows no straightforward correlation between trade liberalization and overall economic performance as measured by GDP growth. Moreover, in order to benefit from import liberalization, several other factors need to be addressed, including competitiveness levels, macroeconomic stability, market access for exports, governance and human, institutional and productive capacity.  If imports are liberalized too rapidly when the conditions for  success are not present, there can be serious negative effects such as the de-industrialization, closure of local firms and job losses suffered by many countries.

Uncertain export earnings are a consequence of a lack of physical and technological infrastructure needed to make developing-country exports competitive, as well as unstable and declining terms of trade. Developing-country exports are concentrated in primary products, for which there has been a secular decline in world prices, leading to worsening terms of trade. Thus an increase in export earnings depends on a reorientation of the export sector towards value-added manufactures and services, and simultaneously, greater competitiveness in those sectors. These objectives are further hampered by the presence of tariff and non-tariff barriers in markets in developed countries, especially in the sectors in which developing countries have a comparative advantage.

Currently, developing countries are being asked to increase imports, despite being unable to expand exports, and many have found their trade deficits widening significantly. The multilateral trading system should be redesigned to help countries build economic capacity towards development--regulating commercial trade relations through rules that are balanced and that are designed to benefit developing countries, ensuring stable prices and fair terms of trade for developing countries' products, and permitting differential treatment to countries at different levels of economic development.

An examination of the evolution of the trading system shows that industrialization and rapid economic growth occurred in developed countries usually under conditions of protection of their domestic markets--though this does not imply that protection necessarily leads to industrialization or growth. The history of the General Agreement on Tariffs and Trade (GATT) and its successor, the WTO, is also replete with examples of how the major trading countries have been reluctant to agree to certain measures that would enable developing countries to benefit from the trading regime and how the rules of the system have been repeatedly bent to accommodate the protectionist interests of these major players. For several decades, the agriculture and textiles sectors remained outside the normal GATT disciplines on the insistence of the developed countries, and even after the Uruguay Round of trade negotiations (which was supposed to herald the liberalization of trade in these sectors) their markets remain highly protected.  Thus, developing countries have not been able to obtain their fair share of benefits from the trade system.

The objectives of the global trading system, as embodied in the GATT preamble, include:  'raising standards of living, ensuring full employment, growing volume of real income and effective demand, developing the full use of the resources of the world and expanding the production and exchange of goods.' The system is based on the most favoured-nation principle, which means that benefits extended to any one trading partner must be extended to all other WTO members, implying that benefits are shared among members. The safeguards mechanism and the balance-of-payments provision allow members to restrict imports and thereby share their burden of relief with other countries. The system is also supposed to provide protection from unilateral trade-restrictive action. The dispute settlement mechanism is also fairly efficient in some ways. However, most developing countries have not been able to take advantage of it, and some have also been frustrated at certain dispute settlement panel and Appellate Body decisions. The enforcement mechanism is based on retaliatory action, which is far more powerful in the hands of rich countries than of poor countries.  The system is also based on the principles of reciprocity and mutual advantage, which are in some important ways inappropriate for a system made up of countries with such diverse and unequal capacities.

Although significant benefits were expected to accrue to developing countries from increased market access, especially in agriculture, textiles and clothing, after many years of the WTO's existence, many of the anticipated benefits have not materialized. Access to developed countries' textile and agriculture sectors remains restricted, trade measures such as anti-dumping are used (often unjustifiably) against developing countries' exports, supply capacity remains weak in most developing countries, and a secular decline in commodity prices has adversely affected export earnings.

Developing countries face several types of problems in the WTO system.  First, some of the structural features of the system and many of the existing agreements are imbalanced against their interests.  Second, the anticipated benefits to developing countries have not materialized, a major reason being that the developed countries have failed to fulfill their commitments (e.g., in expanding market access in textiles and agriculture, or in providing special and differential treatment and assistance). Third, developing countries face mounting problems in attempting to implement their obligations under the rules.  Fourth, they face intense pressures to accept new obligations being proposed by developed countries under the rubric of 'new issues' and a new round of trade negotiations.  Fifth, the decision-making process is less than transparent or fair and makes it difficult for developing countries to adequately participate or to have their views reflected in the decisions of the organization, especially at Ministerial Conferences.

IMPROVING THE BASIC STRUCTURE

Addressing these problems requires a system that effectively takes into account the different capacities of different categories of members at different stages of development, so that the outcome will be an equitable sharing of benefits. Given the inadequacy of the structure based on reciprocity, there should be some structural improvement to redress the problem of overall imbalance, and structural changes to compensate for the handicaps of developing countries in the WTO system.

Special and differential treatment to developing countries should be made into binding commitments, rather than 'best-endeavour' clauses as at present. It should be formally accepted that developing countries undertake less and lower levels of obligations than developed countries.  Thus, differential and more favourable treatment to developing countries should apply to levels of obligation and not be limited to longer implementation periods, as is usually the case at present. Developing countries should not be obliged to give up or refrain from policies or measures supporting technological development and diversification of production and exports.  Developed countries should make concrete arrangements to encourage imports from developing countries.

TARIFFS

It should be recognized that developing countries need to fine-tune their trade policy instruments to support the growth of specific sectors as a dynamic process, and thus require flexibility in raising and reducing tariffs. The current procedure for raising tariffs beyond the bound level is very cumbersome and should be made smoother and easier. For infant-industry purposes, countries should be allowed to raise tariffs for a limited period to promote the establishment of an industry. The method of balancing the gains and losses in tariff negotiations should also be changed; the offer from a developing country should be evaluated not merely in terms of current trade but mainly in terms of future prospects for developed countries when the developing country's growth would enlarge its market.

TEXTILES AND AGRICULTURE

These sectors are both important to exporters in developing countries and subject to import restrictions or barriers by developed countries. In the case of textiles, although under the Uruguay Round the developed countries agreed to progressively phase out their quotas over 10 years to January 2005, they have retained most of their quotas even after seven years of implementation. Genuine liberalization was avoided by the device of 'liberalizing' mainly products that were not actually restrained in the past. This has raised doubts as to whether the developed countries will adhere to the 2005 deadline. They should give assurances in deed as well as in word that they intend to honour their commitments at the scheduled time, for example by accelerating genuine liberalization from now.  The International Textiles and Clothing Bureau (ITCB) has proposed that at least 50 per cent of the imports of products that were under specific quota limits should be liberalized by 1 January 2002.

In the case of agriculture, the WTO Agreement on Agriculture established disciplines including for market access, domestic support and export subsidies, and the developed countries were expected to reduce their protection.  In reality  the developed countries have been able to continue to maintain high levels of protection. Many of them set very high tariffs on several products; thus, even after the required  36 per cent reductions, they remain prohibitively high.    Domestic support has also remained very high;  in fact, the total amount of domestic subsidies in OECD countries has actually risen as there was an increase in permitted types of subsidies which more than offset the decrease in those subsidies that come under discipline. The export subsidies budget in developed countries is also to be reduced by only 36 per cent under the agreement.  

Meanwhile, developing countries are facing serious implementation problems in agriculture.  They have had to remove non-tariff controls and convert these to tariffs. Many developing countries have lower agriculture tariffs (some of them because of reductions under structural adjustment) and (with the exception of least developed countries) are expected to reduce the bound rates progressively.  Developing countries also have had low domestic subsidies (due to financial constraints). They are not allowed to raise these subsidies beyond a de minimis level and have (excepting LDCs) to reduce them if they are above this level.   Increased competition from imports has threatened the small farm sectors in many developing countries and increased fears of food insecurity. An FAO study in 14 developing countries concluded that liberalization in the agriculture sector has led, variously, to an increase in the food import bill, a decline of local production in products facing competition from cheaper imports, and a general trend towards consolidation of farms and displacement of farm labour. Promises to provide food aid to net food-importing developing countries (NFIDCs) and LDCs have also not been fulfilled.  Instead, food aid to these countries fell significantly and their ability to finance their increasing food bills deteriorated.

To rectify this situation, the domestic and export subsidies and tariff peaks in agriculture in developed countries should be drastically reduced. Meanwhile, developing countries must be allowed greater flexibility on the grounds of food security, protection of rural livelihoods and poverty alleviation. Food production for domestic consumption in developing countries (as well as the products of their small and non-commercial farmers) should be exempt from the Agriculture Agreement's disciplines on import liberalization and domestic subsidy. Also, developing countries should be able to use the special safeguard mechanism, whether or not they have taken to tariffication. There should be an agreement to effectively assist net food-importing countries.

SUBSIDIES

There is an imbalance in the treatment of subsidies.  Subsidies mostly used by developed countries (e.g., for R&D and environmental adaptation) have been made non-actionable (immune from counter-action) while subsidies normally used by developing countries (for industrial upgrading, diversification, technological development, etc.) have come under actionable disciplines. Subsidies such as the latter need to be recognized as an instrument of development rather than one of trade distortion, and should be exempt from countervailing duty and other forms of counter-action.

STANDARDS

International standards are used in determining permitted measures that countries can take under the agreements on technical barriers to trade and on sanitary and phytosanitary measures. Though they have to abide by these standards, developing countries are unable to participate in the standard-setting institutions due to inadequate expertise and/or resources. Thus, standards are set without adequately paying attention to the situation of developing countries and this may affect their market access.  Developing countries should be assisted to participate fully in the formulation of standards.  There should also be a rule that new standards can be set only if a minimum number of developing countries have been able to participate in the process.

BALANCE-OF-PAYMENTS PROVISIONS

Article XVIIIB of GATT 1994 allows developing countries to restrict imports if they face balance-of-payments (BOP) problems. However, the method of operation and some new decisions have made this provision less effective, and an important instrument for reducing the imbalance in the system has been made almost non-operational. The WTO increasingly relies on IMF reports to determine whether or not a bop problem exists. The IMF includes volatile and uncertain short-term flows (e.g., portfolio investments) and uncertain reserves in its assessment of a country's foreign reserves, thereby tending to overestimate them.  The current criterion of deciding on whether a BOP problem exists thus appears faulty.  Further, a recent decision in a dispute requires the developing country concerned to give priority to tariff-type action over direct import control measures.  This has reduced the capacity of developing countries to deal with the problem quickly and effectively. To correct these problems, the rules should specify that the existence of a BOP problem will be determined on the basis of long-term and stable reserves and flows only, and that developing countries' foreign-exchange-reserve requirements will be assessed on the basis of future development programmes rather than on past trends. Also, the determination of the existence of a BOP problem should be made by the WTO General Council, based on the recommendation of the BOP Committee, using the IMF reports as inputs only. Current rules (designed to deal with temporary BOP problems) should be supplemented with new rules to provide relief for structural BOP problems.

SERVICES

Since services enterprises in developed countries have far greater capacity than those in developing countries, the liberalization of services under the General Agreement on Trade in Services (GATS) has mainly benefited the former. Enterprises in developing countries generally lack the supply capacity to benefit from liberalization in developed- country markets. In an area where developing countries do have an advantage, such as the movement of labour, developed countries have not been prepared to undertake liberalization. Although developing countries are allowed under GATS to liberalize fewer sectors and transactions, it is not specified how this is to be operationalized. Negotiations on financial services showed that developed countries insisted on higher levels of commitments from developing countries.

There is a lack of adequate data on the services trade, making it difficult to assess the effects (in terms of gains and losses to a country and to developing countries as a whole) of GATS and services liberalization.  Other problems for developing countries include supply constraints and barriers to services exports to developed markets, and challenges faced from attempts by developed countries to alter the basic architecture of GATS.  There have also been concerns that GATS would affect the provision of and access to social services to the public. 

Measures should be taken to deal with these problems. The lack of data needs to be addressed, and until then, developing countries should not be expected to undertake further obligations. The special provisions for developing countries in GATS (Articles IV and XIX.2) should be seriously implemented, and a mechanism set up to monitor the implementation.   Developed countries should take concrete steps (such as providing incentives to domestic firms)  to encourage the import of services from developing countries. There should be concrete measures and time frames for liberalizing the movement of labour from developing countries to developed countries. The GATS provisions for flexibility in the choice of sectors and pace of liberalization for developing countries should be preserved. In discussions on developing new rules (including on domestic regulation), care should be taken to ensure that governments have both options and flexibility to make their own domestic regulations and that their policies are not adversely affected. Clarification of the nature and scope of exceptions for government services should be made, along with an assessment of whether (and to what extent) countries can have adequate flexibility in making national policies for basic services.

INTELLECTUAL PROPERTY RIGHTS

The Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement sets high minimum standards of intellectural property rights (IPRs) protection for all members. This one-size-fits-all approach is heavily tilted in favour of holders of technology as opposed to its consumers and users. The share of developing countries in the ownership of patents worldwide is minuscule and thus almost all the benefits from owning IPRs (such as royalties and extra profits resulting from the ability to charge higher prices) accrue to the developed countries' firms and institutions.  The granting of monopoly rights to IPR holders has curbed competition and enabled them to charge higher and often exorbitant prices. Under TRIPS, members cannot exempt medicines from patentability, in contrast to the pre-TRIPS situation where many countries did not allow patents for the pharmaceutical sector. The high prices of some medicines that have been facilitated by TRIPS have caused a public outcry, especially in relation to drugs for treating HIV/AIDS. The high-standard IPR regime is also making it more costly or difficult for local firms in developing countries to use patented technology.  Further, TRIPS makes it mandatory for members to allow patenting of some life-forms and living processes, as well as IPR protection for plant varieties. This has facilitated the spread of 'biopiracy,' in which indigenous knowledge and biological wealth of developing-countries are patented mainly by developed country firms. Promised technology transfer to poor countries has also not been forthcoming.

Many measures are required for TRIPS to become more balanced in its rules and implementation. Developing countries must be allowed to make maximum use of the flexibility in the agreement. They should be allowed to choose between various options in devising legislation, without being subjected to external pressure or influence. The mandated review of Article 27.3b of TRIPS should eliminate the artificial distinctions between those organisms and biological processes that can be excluded from patents and those that cannot. One way to do this, as proposed by the Africa Group in the WTO, is to agree that all living organisms and their parts, and all living processes, cannot be patented. It should be determined that nothing in the TRIPS Agreement prevents members from taking public health measures, including compulsory licensing and parallel importation, which can make medicines accessible and affordable to the public.  The TRIPS objectives and transfer-of-technology provisions (including Arts. 7, 8 and 66.2) should be operationalized.  Developing countries should also be given flexibility to exempt certain products and sectors on the grounds of public welfare and the need to meet development objectives. Finally, WTO members should consider whether the WTO is the appropriate institution to house an agreement such as TRIPS, which is basically a protectionist device. 

INVESTMENT MEASURES

Under the Trade-Related Investment Measures (TRIMs) Agreement, governments are constrained from adopting certain investment measures that oblige or encourage investors to use local materials or restrict imports, as this is counter to GATT's Article III (on national treatment) and Article XI (on quantitative restrictions).  The illustrative list of prohibited measures includes local content policy (which developing countries had used to increase the use of local materials and improve linkages to the local economy) and some aspects of foreign exchange balancing (aimed at correcting balance of payments problems).  Implementation of TRIMs has already given rise to problems in several developing countries, some of which have requested extension of the transition period. To rectify these problems, developing countries should be given another opportunity to notify existing TRIMs; and the transition period should be extended for all developing countries in line with their development needs.  Provisions should be introduced that allow developing countries flexibility to use investment measures for development objectives.  The review process should consider exempting developing countries from the disciplines on local content and trade balancing policies. At the same time, there should not be an extension of the illustrative list; nor an attempt to extend the agreement to cover investment rules per se.

TRADE AND ENVIRONMENT

There have been public concerns about both the adverse environmental effects of trade, and the need to prevent environmental issues from being used as the basis for protectionism against developing countries' products. International trade, and trade liberalization can contribute to environmental degradation.  However, in handling this problem, developing countries and their products should not be penalized. Concepts such as processes and production methods (PPMs), internalization of environmental costs, and eco-dumping, if applied in the WTO context, could pose a protectionist danger against products of developing countries, which have lower environmental standards in production processes.  Discussions on the complex links between environmental standards, PPMs and trade, if any, should be held outside of the WTO. There should not be rules in the WTO that link environmental standards to trade sanctions. 

Environmental problems requiring rules should be dealt with through multilateral environment agreements (MEAs).  The WTO should not be an obstacle to measures in MEAs that are agreed to on genuinely environmental grounds.  Countries should not inappropriately invoke the notions of 'free trade principles' or 'WTO rules' to counter attempts to forge international agreements that deal with genuine environmental problems.

Discussions in the WTO on trade and environment should be carried out in the context of the wider context of sustainable development.  The critical component of development should be given adequate weight and the UN Conference on Environment and Development (UNCED) principle of 'common but differentiated responsibility' should apply.  The WTO should give priority to discussing the effects of TRIPS on the environment and sustainable development, and the agreement amended to take this into account.  The issue of domestically prohibited goods should also be given more emphasis.

NEW ISSUES AND A NEW ROUND

Proposals have been made (mainly by developed countries) to expand the WTO's mandate by negotiating agreements on several new issues. The first set of 'new issues' includes investment rules, competition policy and government procurement. These three issues have a similar theme:  to expand the rights and access of foreign firms and their products in developing countries' markets, and to curb or prohibit government policies that encourage or favour local firms and the domestic economy. The proposed investment rules would place governments under greater pressure to liberalize foreign investments and to bind the level of liberalization; prohibit or otherwise discipline 'performance requirements'; allow free inflows and outflows of funds; and protect investors' rights, for example through strict standards on compensation for 'expropriation.'   The proposed rules on competition would require members to establish competition law and policy.  Within that framework, it is proposed that the WTO non-discrimination principles be applied, so that foreign products and firms can compete freely in the local market on the basis of 'effective equality of opportunity.'  Thus, policies and practices that give an advantage to local firms and products could be prohibited or otherwise disciplined. It has also been the intention of some developed countries to bring government procurement policies (presently exempt from the WTO's multilateral disciplines) under the system, whereby the non-discrimination principles would apply with the effect that governments would have to open their procurement business to foreigners and the current practice of favouring locals would be curbed or prohibited.  This serious step is unpopular with developing countries. Thus the current proposal is for an agreement confined to transparency in government procurement. If such an agreement is established, it is likely that attempts would be made to extend it to the market access dimension. These three issues have been the subject of a "study process" conducted in working groups.

The second set of issues relate to labour and environmental standards. Attempts to bring these issues for discussion (and possible rules) in the WTO have been strongly resisted by developing countries, which fear they are likely to be used as protectionist devices against their products.   

Developed countries have advocated that at least the first set of new issues be taken up in a new round of negotiations. Many developing countries have objected  to this.  Their concerns include that:  (i) the new obligations arising from these issues would further curtail their development options and prospects;  (ii) these are non-trade issues and bringing them into the WTO would be inappropriate and distort and overload the trading system; (iii) the WTO should focus on resolving problems arising from existing agreements and the mandated agriculture and services negotiations instead of launching negotiations in new areas that would divert attention; (iv) they have serious lack of understanding of the issues and of resources to negotiate on them. These concerns are justifiable and make it inappropriate to launch a new comprehensive round that includes the proposed new issues as topics for negotiating new agreements.

DISPUTE SETTLEMENT SYSTEM

The dispute settlement system is a powerful arm of the system.  It has the potential to provide protection to weak trading partners; in practice, however, weak countries are handicapped. Enforcement of rights and obligations by taking retaliatory action against an erring country is often impractical for a weak country, which, given the economic and political cost, will hesitate to take retaliatory action against a strong one. The ultimate relief provided by the enforcement mechanism is thus heavily weighted against weak countries.  Further, the high cost of raising and pursuing a dispute in the panel and Appellate Body makes most developing countries hesitant to do so. The delay in relief and inadequate relief also work against developing countries.

Moreover, it appears that the panel and Appellate Body (AB) have engaged in substantial interpretations of the rules, thereby shifting power from the legislative organs of the WTO. Despite the rule that panel and AB recommendations and rulings cannot add to or diminish the rights and obligations in the agreements, and that the right of authoritative interpretation is vested in the Ministerial Conference and General Council, the interpretations have in many cases significantly added to the obligations and eroded the rights of developing countries.  Also, the legalistic approach to trade disputes that has developed has some negative implications.  Since a consensus is required (by members sitting as the dispute settlement body) to reject a panel or AB report, in effect panel and AB decisions are almost automatically accepted.  Moreover, the WTO secretariat has been playing a major and inappropriate role in guiding the dispute settlement process, raising questions about the impartiality of the Secretariat and the system. 

There should be a mechanism in the rules that provides for joint action by all members against an erring developed country, if a developing country successfully brings a complaint and the situation reaches a stage when retaliation against a developed country is to be applied. In addition, in cases where a developing country's position is upheld against that of a developed country, the rule should provide financial compensation to the developing country for the costs of pursuing or defending the case, retrospective from the time the action was initially taken. Further, countries should be explicitly prohibited from enacting legislation that permits unilateral action in the area of trade covered by the WTO; nor should countries be allowed to threaten such retaliation or publish a list of products to be penalized, the value of which is several times that of the actual trade damage claimed, as these have been used to exert pressure on countries.

Body (which can be carried out by an independent bureaucracy); restrictions To improve the structure and operational aspects of the dispute settlement system, the following are some suggestions: institutional and structural separation between the WTO secretariat and the work of servicing panels and the Appellate on the behind-the-scenes role of the WTO secretariat (it should play its role, if any, in the open, before the panel and in the presence of the parties to the dispute); Appellate Body members should get legal advice from the pleadings and arguments of the parties about the law, and not from the secretariat;  and rulings should be binding on parties by the present negative-consensus method, but cannot be made a precedent nor become an authoritative interpretation to be applied in future unless the interpretation is adopted and approved in a separate process by the General Council through a positive consensus (this can prevent expansion of the WTO's remit as is now taking place); the General Council can also give an instruction that panels and ABs should not undertake substantive interpretations.

TRANSPARENCY AND PARTICIPATION IN THE WTO

Unequal capacity has led to unequal degrees of participation by developing countries, a problem made worse by the relative lack of transparency in key WTO operations. To start with, developing countries are in general seriously understaffed both in capitals and in Geneva and are thus unable to follow or take part in the WTO's deliberations.   Despite the 'one country one vote' rule, in practice, a few major countries have been able to dominate decision-making in critical aspects, using informal meetings to make decisions among a small group of members that are then passed along to the other members.  The so-called "Green Room" process of exclusive decision-making is especially prevalent at and before Ministerial Conferences, where important decisions are taken.  'Consensus-building' is also normally embarked on when proposed by the major players as opposed to the developing countries.

  The WTO needs to evolve more inclusive, participatory and transparent methods of discussion and decision-making, in which all members are fully enabled to participate and make proposals.  Decision-making procedures and practices that are non-transparent and non-inclusive (including the "Green Room" meetings), and especially before and during Ministerial Conferences, should be discontinued.  The WTO secretariat should also be impartial and seen to be impartial. In particular it should not be seen to be taking sides with the more powerful countries at the expense of the interests of developing countries.  The system must reflect the fact that the majority of members are developing countries and must provide them with adequate means and with appropriate procedures to enable them to voice their interests and exercise their rights. Further, citizen groups must be allowed to follow developments in WTO and channels opened to make their views better heard.

There are also several issues relating to trade that are of critical concern to developing countries, but which are not dealt with by the WTO.  They include the following. 

WEAK SUPPLY CAPACITY

Many developing countries are unable to realize the benefits from trade because of their weak or inadequate capacity to produce, market and export.  Thus even if there is better market access, this supply constraint prevents them from taking advantage of it.  There should thus be a coordinated programme by various agencies to increase these countries' supply capacity.

CORRECTING FOR DECLINING TERMS OF TRADE

The continual weakening of commodity prices, especially in relation to the prices of manufactures, has led to a trend decline in the terms of trade for many developing countries. Between 1980 and 1989, Sub-Saharan African countries suffered a 28 per cent decline in terms of trade, causing them a $56 billion income loss (15-16% of GDP) in 1986-89. Although this is the single most important trade concern for a large number of developing countries, and one which used to have high priority, especially in the UN Conference on Trade and Development (UNCTAD), it has been neglected in recent years, and international cooperation (e.g., through producer-consumer commodity agreements) has faded. UNCTAD and the Common Fund for Commodities should review the experience of commodity agreements and look into the possibility or desirability of reviving them. One possibility is to initiate a new round of commodity agreements aimed at rationalizing the supply of raw materials (to take into account the need to reduce depletion of non-renewable natural resources) while ensuring fair and sufficiently high prices (to reflect their ecological and social values). In the absence of producer-consumer cooperation, producers of export commodities could decide to rationalize global supply so as to better match global demand. The periodic increase in oil prices obtained through coordination among producing countries is an example of the benefits that producers can derive from such cooperation.

TOWARDS A TRADING SYSTEM FOR DEVELOPMENT

The paper also makes suggestions on some systemic and structural aspects of the global trade system. First is the need to rethink the dominant model of trade policy. Instead of acting on the assumption that rapid liberalization is beneficial for developing countries, the stress should be on the appropriate quality, timing, sequencing and scope of import liberalization and the need for fulfilling conditions for successful opening up. If conditions for success are not present, import liberalization can cause overall problems. Thus, a new approach is needed whereby developing countries are given the flexibility to make strategic choices in trade and other related policies. The need for such flexibility should be reflected in the WTO's rules and operations; and the World Bank and IMF should also review their conditionalities relating to trade. In addition, developed countries need to liberalize more rapidly in areas of export interest to developing countries, since the former have the capacity to restructure their economies, and since they have for so long unfairly restricted access to developing countries in areas such as textiles, agriculture and selected industrial products.  Moreover, if developed countries provide more meaningful market access to developing countries, the latter will have more opportunities to expand their export earnings, thus increasing their future capacity for successful import liberalization.

There is also a need to reorient the WTO towards sustainable development as the main priority and operational principle.  Since liberalization is only a means to an end, and its process has to be carried out with great care, the objective of development should guide the work of the WTO, and its rules and operations should be designed to produce development as the outcome. This requires a fundamental rethinking of the WTO mandate and scope.  The test of a rule, proposal or policy 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.  Some 'trade-distorting' measures could be required to meet development objectives; and the prevention of development-distorting rules, measures and approaches should be the overriding concern.  Developing countries should aim to attain appropriate liberalization rather than maximum liberalization. WTO rules can be reviewed to screen out those that are development-distorting, and developing countries can be exempted from following rules preventing them from meeting their development objectives. 

There should also be a rethinking of the mandate and scope of the WTO.  First, issues that are not related to trade should not be included as subjects for rules. Second, a review of the issues that are currently in the WTO should be made to determine whether the WTO is indeed the appropriate venue for them. There should be serious consideration of transferring the TRIPS Agreement from the WTO as well as whether it is more appropriate for GATS to operate as a sui generis agreement with its own organization outside of  the WTO.  Third, within the WTO's traditional ambit of trade in goods, there is a need for a more realistic and sophisticated approach to liberalization in relation to developing countries, informed by actual conditions and the historical and empirical record. Imbalances in agreements related to goods should be ironed out, with the 'rebalancing' designed to meet developing country needs and to be more in line with the realities of the liberalization and development processes.  With these changes, the WTO can better play its role in designing and maintaining fair rules for trade and thus contribute to a balanced trade system designed to produce and promote development.

A reformed WTO should be seen as a key component of the international trade system, coexisting and cooperating with other organizations within the framework of the trading system.  Several critical trade issues could be better dealt with by other organizations, which should be given the mandate, support and resources to carry out their tasks effectively. UNCTAD should be revitalized to better fulfil its traditional roles, including assisting developing countries to build their production and trade capacity; ensuring reasonable prices and earnings for commodity-producing developing countries, addressing restrictive business practices of big companies, and promoting technology transfer to and development in developing countries.

For trade to serve development needs, complementary reforms in the global financial system are needed in order to meet developing country needs for stable and equitable terms of trade, avoiding balance of payments difficulties, reducing debt, creating a more stable system of capital flows and exchange rates and securing financing for development.

Other issues that impact on and are impacted by trade (including environmental, social, cultural and human rights issues) should be monitored and assessed in such fora as the UN Environment Programme (UNEP), the World Health Organization (WHO), the International Labour Organization (ILO) and the UN Human Rights Commission. These organizations should also be able to take or propose measures to deal with these issues where necessary. 

With regard to governance, for international trade to be reoriented towards development, a conceptual and operational framework would have to be drawn up within which the roles of the various institutions would be clarified. 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.

Finally, it is important that the system of governance of the trading system should be open and transparent in its operations, and become both 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.

POSTSCRIPT: THE DOHA MINISTERIAL CONFERENCE AND AFTER

This paper  was prepared before the WTO's Fourth Ministerial Conference in Doha in November 2001. The Postscript updates the paper  by describing the three main documents emerging from the Conference: a general Ministerial Declaration, a Declaration on the TRIPS Agreement and Public Health, and a Decision on Implementation-Related Issues and Concerns.  The work programme emerging from Doha will be very heavy, and will involve new negotiations, including in the following areas:  market access in non-agricultural products; some aspects of trade and environment; clarification of certain rules and of the dispute settlement system; the set of implementation issues and concerns;  as well as the mandated agriculture and services negotiations and the mandated reviews of TRIPS and TRIMs. Also in the work programme are more focused discussions on the four 'Singapore issues' (investment, competition policy, transparency in government procurement and trade facilitiation); examination (in two new working groups) of the issues of 'trade, debt and finance' and  'trade and technology transfer'; electronic commerce; and small economies.

Perhaps the most controversial aspect of Doha and its preparatory process was the treatment of the Singapore issues. Despite opposition by a large number of developing countries to negotiations in these issues, successive drafts of the Ministerial Declaration (released in Geneva and then in Doha) committed members to negotiations.  Views of developing countries in these and other areas were ignored in the drafts, causing frustration among them and raising anew the issues of non-transparency and lack of democracy.  In a final working session, several developing countries requested amendments to the final text to remove the commitment to negotiate the Singapore issues, and this led to a compromise in which the conference Chairman announced that an explicit consensus would be needed at the Fifth Ministerial Conference before negotiations could proceed.  Nevertheless, the Declaration indicates that the discussions on these issues until the next Ministerial Conference will take on the tone of pre-negotiations. 

The Doha process also resulted in many developing countries being dissatisfied with the non-transparent, manipulative and undemocratic nature of decision-making in which the views of a large section of the membership were systematically ignored in the most important text embodying the most significant decisions of the WTO Conference. A hotly disputed draft of the Ministerial Declaration produced in Geneva was transmitted unchanged (and without indicating the differences of view on crucial topics) to the Doha Conference, thus placing the developing countries at a great disadvantage.  Doha also saw the return of the 'Green Room' process where an exclusive group of a few countries negotiated parts of the final Declaration in a marathon all-night session. Unless the decision-making system and procedures are reformed to enable fair and effective participation of developing countries, their efforts to promote their interests and views will not bear fruit. 

 

 


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