TWN Briefings for WSSD No.13
WTO: The New Threats to Developing Countries and Sustainability
By Martin Khor
A. WTO AND UNSUSTAINABLE DEVELOPMENT
The WTO, its agreements and its expansionary grasp, is possibly the most dangerous threat to sustainable development. Added to the already imbalanced agreements that exist are now the tremendous pressures by the EU, US, Japan and other rich nations to expand the WTO’s powers to new and treacherous waters. New agreements are being pushed on investment, competition and government procurement. If these materialise, the new rules would further damage or destroy the development prospects of developing countries. The old and new agreements would spell the end of sustainable development.
B. WTO AND THE DOHA MINISTERIAL CONFERENCE
The WTO held its 4th Ministerial Conference in Doha (November 9-14, 2001). Before Doha, the developing countries were strongly arguing the case that the WTO membership should in the next years focus on resolving the problems arising from the Uruguay Round and the institutional and systemic issues that have arisen in the short life of this important institution.
However, the major developed countries pushed very hard to have the WTO expand its negotiating and rule-making mandate, including to incorporate new areas, such as investment, competition policy, government procurement and trade and the environment. This attempt at expansion was strongly resisted by a majority of developing countries.
Due to a series of manipulative tactics, the views and positions of many of the developing countries in key areas and topics were not adequately reflected (or not reflected at all) in the drafts of the Ministerial Declaration that were prepared in Geneva and in Doha.
This was especially in relation to the sections of the Declaration on the ‘Singapore issues’ (investment, competition, transparency in government procurement and trade facilitation) as well as on the environment. The Declaration implies that negotiations (towards new agreements or new rules) have been agreed to on the ‘Singapore issues’ following the Fifth Ministerial (scheduled for 2003) on the basis of an explicit consensus on ‘modalities’ of negotiations.
However, due to objections and requests for reformulation of this language at the last ‘informal’ session at Doha, the Declaration was tempered by a clarification by the Conference chairperson at the final official session to the effect that the consensus referred to would be required for negotiations to begin (the implication being that the required consensus would not be only for modalities). The interpretation of the Declaration and the Chairperson’s clarification can be expected to generate intense discussion in the months ahead. In any case, the Declaration does commit WTO members to discuss a list of elements and topics within each of the Singapore issues, which will have major implications for whether a consensus can be reached either on modalities or on the larger issue of the desirability of negotiating new agreements on these issues in the WTO. Therefore, there is a heavy workload for developing countries on these topics in the present new work programme before the Fifth Ministerial in Mexico in 2003.
C. A KEY STRATEGIC ISSUE:
RESOLVING THE IMBALANCES FIRST, OR PAYING AGAIN AS PART OF THE POST DOHA PACKAGE?
Developing countries are facing several problems in implementing their Uruguay Round commitments. They have identified more than a hundred issues regarding implementation problems, and proposed changes or clarification to many of the agreements, in order to rectify the situation.
Some problems that have or may arise include:
(a) the prohibition of investment measures (like local content policy) and subsidies, making it harder to encourage domestic industry;
(b) import liberalisation and constraints on domestic subsidies in agriculture, which may affect the viability of paddy farmers and other small food producers livelihoods of small farmers who will face stiff competition in future years from cheap (and maybe subsidised) imported foods [including competition due to AFTA implementation].
(c) the effects of a high IPR regime as a result of the WTO’s TRIPS agreement, that is expected to result in: (1) higher prices of medicines, computer software and other consumer items; (2) the patenting by foreign corporations and institutions of biological materials originating in developing countries and (3) higher cost for local firms to use industrial technology due to royalty payments.
(d) increasing pressures on developing countries to open up their services sectors to foreign firms.
These problems raise the serious issue whether developing countries can presently or in future pursue development strategies and objectives, including industrialisation, technology upgrading, development of local industries, survival and growth of local farms and agriculture, attainment of food security goals, and fulfilment of health and medicinal needs.
The developing countries made strong requests in the process before the Seattle Ministerial of 1999 and the Doha Ministerial of 2001 that the implementation issues be resolved as a matter of first priority in the sequencing of the WTO’s future activities. The ‘new issues’ should not become subjects for negotiations, at least not yet. However, the developed countries have not agreed to this. There has been progress on very few of the implementation problems, and a set of some of them has been placed for consideration during the post-Doha work programme alongside the many other topics. The attitude of the developed countries seems to be that the developing countries had entered into legally binding commitments and must abide by them; any changes would require new concessions on their part. Such an attitude does not augur well for the WTO, for it implies that the state of imbalance will remain, and if developing countries ‘pay twice’ or ‘pay three or four times’, the imbalances will become worse and the burden more heavy.
The developed countries have put forward proposals for starting negotiations on the ‘Singapore issues’ after the Fifth Ministerial. Presumably the developing countries are being asked to accept these as issues for negotiations towards new agreements. If this were so, then it would be equivalent to making developing countries pay twice, thrice or four times. (They consider that they already paid by making so many concessions, for example agreeing to accept intellectual property, services and investment measures as subjects for agreements during the Uruguay Round, and yet they have not yet obtained the anticipated benefits in expanded market access in agriculture or textiles).
Developing countries are being told their requests on implementation problems and on getting greater access in the Northern markets will be considered as a package deal in the post Doha work programme with the implication that they have to accept negotiating new issues in the WTO. But new agreements and obligations in these new areas would not bring about reciprocal benefits, as the developed countries would stand to obtain most of the gains. The lack of reciprocity in benefits and costs would thus add to the present imbalances. Moreover, the introduction of the proposed new agreements is likely to be detrimental to developing countries, which will find even more of their development options closed off. And at the same time there is no guarantee that there will be a ‘rebalancing’ of the WTO rules and system, that the implementation problems will be resolved or that there will be really more meaningful access to Northern markets in agriculture, textiles and other sectors.
D. THE SINGAPORE ISSUES: GENERAL
In the final Doha Ministerial Declaration, Ministers agreed, on all four issues (investment, competition, transparency in government procurement, trade facilitation), that negotiations would take place after the Fifth Ministerial Conference (scheduled in Sept 2003) on the basis of a decision to be taken by explicit consensus at that Session on modalities of negotiations. This implies that a decision has already been taken in principle to start negotiations towards new agreements, and only the modalities of the negotiations have to be agreed to. Several developing countries objected to this.
As a compromise, the Conference chairman read out a ‘Chairman’s understanding’ that in relation to the four issues, a decision would indeed need to be taken at the Fifth Ministerial Conference by explicit consensus, before negotiations could proceed on the four issues. He also clarified that this would give each member the right to take a position on modalities that would prevent negotiations from proceeding until that member is prepared to join in an explicit consensus. This statement gave greater protection to developing countries that did not want to commit to negotiations.
The common theme of the first three issues is an attempt to maximise the rights of foreign enterprises to have market access to developing countries through their products and investment; to reduce to a minimum the rights of the host government to regulate foreign investors; and to prohibit government from measures that support or encourage local enterprises. If these agreements come into the WTO, developing countries will find it increasingly difficult to devise their own policies for development and for the building up of their local enterprises to be competitive. This attempt is being made by persuading developing countries to accept bringing these topics into WTO as ‘negotiating issues’. In the negotiations it will be argued that the ‘national treatment’ principle of WTO should be applied to these products. The developed countries will then use the means at their disposal to have new agreements reflecting their interests but which may become major obstacles to development or to survival and viability of local firms.
The position should be taken that these issues do not belong to the WTO as they are not directly trade issues. The application of ‘national treatment’ to the issues is inappropriate as it would prevent or hinder governments from adopting policies and measures needed for development and other national goals such as nation building and harmony among ethnic communities. Developing countries should take clear national positions strategically to prevent these issues from being made ‘negotiation issues’ and thus to prevent the establishment of new agreements on these issues. In WTO, the term ‘negotiation’ especially applied to ‘new issues’ implies that a commitment has been made to establish new rules or agreements. Historical record shows that during the negotiations, the developed countries have tremendous advantages to shape the agenda, principles and provisions of the issue and the agreement, and that the final outcome may not be in the interests of developing countries. It is thus important to prevent issues that are not appropriate from coming under a decision to start negotiations.
Below is a description of each of the four Singapore issues (investment, competition, transparency in government procurement, trade facilitation) and the implications for developing countries should agreements of the type envisaged by their proponents be established.
E. TRADE AND INVESTMENT
The main proponents of an investment agreement would like international binding rules that allow freedom of foreign investors the rights to enter countries without conditions and regulations, and to operate in the host countries without most conditions now existing, and be granted ‘national treatment’ and MFN status. Performance requirements (e.g., equity ownership restrictions, obligations on technology transfer, export orientation, geographical location, etc.) and restrictions on movements of funds would be prohibited. Investment incentives may also be disciplined. There would also be strict standards of protection for investors’ rights, for example in relation to ‘expropriation’ of property. (A wide definition could be given to expropriation; the NAFTA experience is worth noting, where expropriation includes government policies such as health or environmental measures that affect the future earnings and profits of an investor; full compensation to the investor is required).
An international agreement on investment rules of this type is ultimately designed to maximise foreign investors’ rights whilst minimising the authority, rights and policy space of governments and developing countries. This has serious consequences in terms of policy making in economic, social and political spheres, affecting ability to plan in relation to local participation and ownership, balancing of equity shares between foreign and locals and between local communities, the ability to build capacity of local firms and entrepreneurs, and the need for protecting the balance of payments and the level of foreign reserves. It would also weaken the bargaining position of government vis-a-vis foreign investors (including portfolio investors) and creditors.
SUGGESTIONS: An investment agreement in WTO is most likely to be damaging to development options and interests. The position that should be taken in the WTO is as follows: Investment is not a trade issue, and thus bringing it within the ambit of WTO would be an aberration and could cause distortion to the trade system. It is certainly not clear that the principles of WTO (including national treatment, MFN) that apply to trade in goods should apply to investment nor, that if they were applicable, that they would benefit developing countries. Traditionally developing countries have had the freedom and right to regulate the entry and conditions of establishment and operation of foreign investments; restricting their rights could cause adverse repercussions.
Eventually it can be argued that there is no consensus on modalities of negotiations, nor even on the principle of whether there should be an agreement in WTO, and that therefore there should not be a decision to start negotiations at the Fifth Ministerial meeting of 2003.
F. TRADE AND COMPETITION POLICY
At present, there is hardly any common understanding let alone agreement among countries on what the competition concept and issue means in the WTO context, especially in terms of its ‘interaction’ with trade and its relationship with development. The whole set of issues of competition, competition law and competition policy and their relation to trade and to development is extremely complex. The proposal of the proponents of a WTO agreement is to have multilateral rules that discipline Members to establish national competition law and policy. These laws/policies should incorporate the ‘core principles of WTO’, defined as transparency, non-discrimination (MFN and national treatment.) Thus, the location of the venue of the competition issue and the agreement within the WTO would bias the manner in which the subject and the agreement is to be treated. In this case, the ‘core WTO principles’ would be applied to competition.
Competition law and policy, in appropriate forms, are beneficial, including to developing countries. However each country must have full flexibility to choose a model which is suitable, and which can also change through time to suit changing conditions. Having an appropriate model is especially important in the context of globalisation and liberalisation where local firms are already facing intense foreign competition. In particular, developing countries must have the flexibility to choose the paradigm of competition and competition policy/law that is deemed to be more suitable to their level of development and their development interests.
The EU proposal for competition policy to provide ‘effective opportunity for competition’ in the local market for foreign firms, and thus to apply the WTO ‘core principles’ to competition law/policy would affect the needed flexibility for the country to have its own appropriate model or models of competition law/policy.
Competition can be viewed from many perspectives. From the developing countries’ perspective, it is important to curb the mega-mergers and acquisitions taking place, which threaten the competitive position of local firms in developing countries. Also, the abuse of anti-dumping actions in the developed countries is anti-competitive against developing countries’ products. The restrictive business practices of large firms also hinder competition. However these issues are unlikely to find favour with the major countries, especially the US, which wants to continue its use of anti-dumping actions as a protectionist device. If negotiations begin, the EU interpretation of competition; i.e., the need for foreign firms to have national treatment and a free competition environment in the host country, could well prevail, especially given the unequal negotiating strength which works against the developing countries. The likely result is that developing countries would have to establish national competition laws and policies that are inappropriate for their conditions. This would curb the right of governments to provide advantages to local firms, and local firms themselves may be restricted from practices, which are to their advantage.
What is required is a paradigm to view competition from a development perspective. Competition law/policy should complement other national objectives and policies (such as industrial policy) and the need for local firms and sectors to be able to successfully compete, including in the context of increased liberalisation. From a development perspective, a competition and development framework requires that local industrial and services firms and agricultural farms must build up the capacity to become more and more capable of competing successfully, starting with the local market, and then if possible internationally. This requires a long time frame, and cannot be done in a short while. It also requires a vital role for the state, which has to play the role of nurturing, subsidising, encouraging the local firms. The build up of local capacity to remain competitive and become more competitive also requires protection from the ‘free’ and full force of the world market for the time it takes for the local capacity to build up. This means that development strategy has to be at the centre, and competition as well as competition policy has to be approached to meet the central development needs and strategy.
Therefore some of the conventional models of competition may not be appropriate for a developing country. On the other hand other models may be more appropriate, but their adoption may be hindered or prohibited by a WTO agreement on competition that is based on the ‘core principles of WTO.’
SUGGESTIONS: There is not a convincing case for a multilateral set of binding rules to govern the competition policies and laws of countries; and there are especially justified grounds for serious concern if such an agreement were to be located within the WTO, as it is likely to be skewed in a way that is inappropriate for the development interests of developing countries as a result of the attempt by proponents to apply the ‘core principles’ of WTO to the issue and to the agreement. If a multilateral approach is needed, there are other venues that are more suitable, for example, UNCTAD already has a Set of Principles on Restrictive Business Practices. Moreover, if the objective is to arrange for cooperation among competition authorities of countries, then it is unnecessary and inappropriate for the WTO to be the venue.
G. TRANSPARENCY IN GOVERNMENT PROCUREMENT
The Singapore WTO Conference (1996) agreed ‘to establish a working group to conduct a study on transparency in government procurement practices, taking into account national policies, and based on this study, to develop elements for inclusion in an appropriate agreement’. The decision does not specify that there must result an agreement; it only commits Members set up a working group to study the subject of transparency and based on this study to develop the elements to include in an appropriate agreement. It is thus important to discuss what an appropriate agreement, if any, should be like, from the perspective of the interests of developing countries and also their need for policy flexibility.
The study in the working group, and the agreement, is only mandated to cover transparency (and not the practices themselves), and this limited scope has been reaffirmed by the Doha Declaration. However, the major countries advocating this issue had made clear their ultimate goal to fully integrate the large worldwide government procurement market into the WTO rules and system. At present, WTO Members are allowed to exempt government procurement from WTO market access rules. The exceptions are those Members who have joined the WTO’s plurilateral agreement on government procurement. Hardly any developing country is a member of this plurilateral agreement. Since developing countries have found it unacceptable to integrate government procurement and its market access aspect into the WTO, the major developed countries devised the tactic of a two-stage process: firstly, to draw in all Members into an agreement on transparency; and secondly, to then extend the scope from transparency to other areas (for example, due process) and then to the ultimate areas of market access, MFN and national treatment for foreign firms. This is clear from various papers submitted to the WTO.
If the integration of procurement into WTO eventually takes place (as is clearly the aim of the major developed countries), governments in future will not be allowed to give preferences to local companies for the supply of goods and services and for the granting of or concessions for implementing projects. The effects on developing countries would be severe.
Government procurement and policies related to it have very important economic, social and even political roles:
· The level of expenditure, and the attempt to direct the expenditure to locally produced materials, is a major macroeconomic instrument, especially during recessionary periods, to counter economic downturn.
· There are national policies to give preference to local firms, suppliers and contractors, in order to boost the domestic economy and participation of locals in economic development and benefits.
· There is specification that certain groups or communities, especially those that are under-represented in economic standing, be given preference
· For procurement or concessions where foreign firms are invited to bid, there could be a preference to give the award to firms from particular countries (e.g. other developing countries, or particular developed countries, with which there is a special commercial or political relationship).
Should government procurement be opened up through the national treatment and MFN principles, the scope and space for a government to use procurement as an instrument for development would be severely curtailed. For example:
· If the foreign share increases, there would be a ‘leakage’ in government attempts to boost the economy through increased spending, during a downturn.
· The ability to assist local companies, and particular socio-economic groups or ethnic communities would be seriously curtailed.
· The ability to give preferences to certain foreign countries would similarly be curtailed.
Given the great importance of government procurement policy as an important tool required for economic and social development and nation building, it is imperative that developing countries retain the right to have full autonomy and flexibility over its procurement policy. The attempts to draw this issue into the WTO are thus of grave concern.
Given the ambitions of the major countries, it is realistic to anticipate that following the establishment of an agreement on transparency, there will be strong pressures to extend its scope to also cover market access, or the rights of foreign companies to compete on a ‘national treatment’ basis for the procurement business. Thus, the discussions on ‘transparency’ and on a ‘transparency agreement’ should be seen in the light of the strategic objective of the majors to draw in the developing countries into the real goal of market access and full integration of procurement practices. Therefore if there is an agreement on transparency, it is likely to be the start of a slippery slope that could lead, in years ahead, to a full market-access agreement.
SUGGESTION: A major strategic decision should be taken as to whether to prevent the issue of government procurement from entering the WTO as a negotiating topic. If so, then even a transparency agreement should not be welcomed. It should be recognised that the existence of a transparency agreement would make an eventual market-access agreement very difficult to stop.
H. TRADE FACILITATION
As with other Singapore issues, a decision on negotiations in this subject will be taken at the Fifth Ministerial. It is thus also not clear whether there will be negotiations towards an agreement on trade facilitation in the WTO. The Doha Declaration (para 27) states that until the Fifth Ministerial the Council for Trade in Goods shall review and as appropriate clarify and improve relevant aspects of Articles V, VIII and X of GATT 1994 and identify the trade facilitation needs and priorities of Members, particularly developing and least developed countries. [Article V is on freedom of transit, Article VIII is on fees and formalities connected with import and export and Article X is on publication and administration of trade regulations.]
Although the term ‘trade facilitation’ may seem innocuous, the establishment of multilateral rules in this area may be disadvantageous to developing countries as they may find it difficult to adhere to the standards or procedures envisaged. According to Das (2000): ‘There are grave dangers involved in the potential agreements in this area if the proposals of the proponents are incorporated in the form of binding commitments. The main objective of the proponents is to have the rules and procedures similar to theirs adopted by the developing countries. It ignores the wide difference in the administrative, financial and human resources between the developed countries and developing countries. Also it does not give weightage to the wide difference in social and working environment’. For example, it may be proposed that physical examination of goods by the customs authorities should only be in a small number of cases selected on a random basis to improve the flow of goods through the customs barrier. But this increases the risk of avoidance of payment of adequate customs duties. Such a practice may be appropriate for the major developed countries where the chances of leakage is negligible, but it may not be appropriate for the developing countries where leakage is higher.
SUGGESTION: Negotiations should not start on trade facilitation after the Fifth Ministerial. Clarification and improvement of the rules in these areas will add to the commitments of the developing countries in the WTO, adding new burdens and may have adverse implications too. Improvements in trade facilitation should be made through national efforts aided by technical assistance, rather than through imposing additional obligations in the WTO.