Quad and its friends try to bury TRIMs review talks

The major industrial countries are blocking proposed amendments to WTO rules which would enable developing countries to promote domestic manufacturing capacity by imposing performance requirements on investors.

GENEVA: The members of the so-called Quad (Canada, the EC, Japan and the United States) have tried to ‘bury’ the WTO’s mandated review (under Article 9) of the Agreement on Trade-Related Investment Measures (TRIMs), when Brazil and India put forward in the Committee on TRIMs their proposal under the review that developing countries should be enabled to use a variety of “performance requirements” on investors.

The TRIMs Agreement has been one of the Uruguay Round agreements identified as preventing new entrants from industrializing and competing. The problems arising from the agreement’s favouring transnational corporations as against national governments have been compounded by the manner in which the WTO dispute settlement panel, in a complete travesty of international law interpretation (as in the Indonesia car dispute - see “Another blow to Third World industrialization?”, TWE #192), combined and bundled the obligations of the TRIMs Agreement and the GATT Articles, and in effect obliterated the WTO attempts to balance them in the Subsidies Agreement and the special provisions to favour the developing world. And the IMF contributed to the problem during the 1997-98 Asian crisis by requiring Indonesia, through a conditionality, to implement the panel ruling in the car dispute (and privately pressuring Jakarta not to appeal).

All this strengthened the case, in the run-up to the 1999 Seattle Ministerial Conference and then to last year’s Doha Ministerial, of developing countries using this item for review and changes being made a part of the “implementation exercise”, on which the Doha meeting has taken a decision asking for its consideration by the relevant WTO bodies and as part of the single undertaking, setting December 2002 as the deadline.

The major industrial nations are trying to bury this exercise by arguing that it has been considered and nothing need be done, as they have been attempting in other areas involving implementation and other issues brought up by developing countries. They have sought to end the entire consideration in the TRIMs Committee.

However, India and Brazil insisted on continuing the debate over the paper they introduced on 14 October, which was taken up for discussion in the afternoon and received some summary comments but without any substantive engagement. They said that there is a need for further discussions to deal with the issues on substance. The US opposed it strongly, and the TRIMs Committee chair is to hold further consultations on how to proceed.

Earlier, the chair (representative of Greece), in trying to close the discussion, appears to have said that this was the last meeting of the Committee this year, and that he was preparing a draft report, which, according to secretariat sources, is already ready. The chair apparently said the draft report, and only that, could be discussed at another meeting. This would have meant that the Brazil-India proposals would have been effectively buried in the Committee, without any further discussions or report to the Council for Trade in Goods and then to the Trade Negotiations Committee as part of the implementation issues. It is not clear what would happen now, but Brazil and India are pressing for another meeting and discussions before any report is or can be sent to the Council and in turn to the Trade Negotiations Committee and the General Council.

The Brazil-India proposals call for changes to the TRIMs Agreement by enabling the use of TRIMs by developing countries to: promote domestic manufacturing capabilities in high value-added or technology-intensive sectors; stimulate the transfer or indigenous development of technology;  promote domestic competition and/or correct restrictive business practices; promote purchases from disadvantaged regions in order to reduce regional disparities within their territories; stimulate environment-friendly methods or products and contribute to sustainable development;  increase export capacity in cases where structural current account deficits would cause or threaten to cause a major reduction in imports; and promote small and medium-sized enterprises as they contribute to employment generation.

Put forward in the light of earlier discussions and the Doha mandate on implementation issues, the Brazil-India paper brought out some of the ‘history’ (not cited by the WTO and others before panels) of the TRIMs Agreement itself - the Punta del Este mandate for the Uruguay Round; the way the agreement emerged, with developing countries clearly critical of the imbalances and the agreement going beyond the mandate; and the final shape of the agreement, including at their insistence a mandated review process.

Members’ reactions

The Quad members, supported by Mexico, opposed any changes to the TRIMs Agreement. Mexico, which under the present dispensation and its own membership in the North American Free Trade Agreement benefits the most from the uneven playing field created by the restrictions in the TRIMs Agreement, said that the present balance in the TRIMs Agreement should not be changed.

Canada said that there was enough flexibility, but also suggested that the Brazil-India proposal would discriminate against the least developed countries (LDCs) since they could not use it (because of institutional difficulties their governments face). The EC spoke of the special-and-differential-treatment principle already in the TRIMs Agreement, while Japan spoke of the worldwide tendency to remove restrictions on investors. The US saw no need to change the agreement.

Pakistan, supporting the Brazil-India proposal, said that there was no level playing field for developing countries to industrialize and develop, and the proposal to address the problem by enabling them to apply performance requirements was a step in the right direction.

In private, the four Quad members appear to have been telling India and Brazil that they would never agree to any review or amendments and hence the Brazil-India proposal cannot be discussed or addressed  further  under paragraph 12(b) of the Doha Ministerial Declaration (on implementation-related issues) and the consideration of the implementation-related questions under tiret 40.

At the TRIMs Committee meeting on 14 October, Canada, oozing with deep consideration for the plight of the LDCs, accused Brazil and India of discriminating against the LDCs by their proposals. In opposing the proposals, Canada argued that since the LDCs do not have the ability to apply performance requirements under the TRIMs Agreement, the proposals would discriminate against them and would enable countries like Brazil and India to use them and industrialize. This will hurt the LDCs.

Such Alice-in-Wonderland or Orwellian Animal Farm arguments can perhaps be advanced with a straight face only in the topsy-turvy world of the WTO.

However, in the world outside, even among mainstream economists, “deeper integration”, “globalization” and other such jargon used to push neoliberal models are being openly challenged. If unaddressed, this problem would unfold in not very comfortable ways for rulers everywhere.

The ambassadors of Brazil and India, Luiz Felipe de Seixas Correa and KM Chandrasekhar, introduced their paper in the morning session, and the discussions were postponed to the afternoon. (Most of the discussions earlier had been focussed on the Chinese Transitional Review Mechanism.) There were only brief initial reactions at the afternoon meeting (with the few developing-country delegates shuttling among 3-4 formal and informal sessions and unable to be present and participate effectively anywhere). There have also been reports of heavy pressure from the major industrial countries on the developing countries who have received some limited time waivers under the TRIMs Agreement for their automobile industries, not to support the more fundamental Brazil-India proposal.

In the afternoon meeting, many of the developing countries (those who have gained temporary waivers, and others being promised other benefits) were apparently not present, according to some trade officials and diplomats.

In opposing the proposals, and arguing that “review” did not mean “consideration of changes”, the major industrial countries also advanced pseudo-arguments on economic efficiency. A number of mainstream economists have now published studies that clearly show there is no efficiency gain in preventing governments from countering the restrictive practices of corporations through performance requirements. These economists have in fact come around to the view that to gain some benefits in terms of capital, employment and technology transfers (all claimed of foreign  investments), governments must be able to exercise control, direction and regulation over the activities of corporations.

Interestingly, in a presentation to the Committee on Trade, Debt and Finance, the Executive Director of the UN Economic Commission for Latin America and the Caribbean (ECLAC) and noted Latin American economist, Jose Ocampo, argued that for developing countries, who need finance for development and need to conserve foreign resources, avoid debt and export to earn money, the option lay between use of tariffs and/or measures like TRIMs. As an economist he found tariffs to be more trade-restrictive, inefficient and less desirable, while TRIMs improved exports and enhanced local capacities. He recognized that TRIMs were not now legal, but appears to have stopped short of pointing to the mandated review of the TRIMs Agreement and the need to have a new look at it in the light of experience.

The case for performance requirements

The Brazil-India paper refers to Article 9 of the TRIMs Agreement establishing a comprehensive provision for its own review, which thus included the possibility of proposing amendments to the agreement. This provision stemmed from the understanding of many members at the end of the Uruguay Round, especially the developing countries, that the scope of the agreement had gone beyond the mandate set at Punta del Este (“following an examination of the operation of GATT Articles related to the trade-restrictive and distorting effects of investment measures”).

The paper also pointed to paragraph 12 of the Doha Ministerial Declaration, which states that negotiations on outstanding implementation issues shall be an integral part of the WTO’s work programme and that these issues include those set out in tirets 37 to 40 on implementation issues at the WTO. The Brazil-India paper refers to issues related to tiret 40.

The two-country proposal also pointed out that since the end of the Uruguay Round, the argument against the use of investment measures has lost much of its theoretical strength. New developments in the theory of international trade have raised doubts with respect to models of perfect competition and have seen them to be unrealistic or based on questionable assumptions. Nor has there been empirical evidence to support the  view that TRIMs inevitably result in trade distortions.

A recent joint study by the secretariats of the UN Conference on Trade and Development (UNCTAD) and the WTO, while not being decisive on some performance requirements, has weighed in against the general assumption that such measures necessarily distort trade. History provides many examples of successful recourse to investment measures to address developmental objectives as well as to offset trade-distorting effects of certain forms of corporate behaviour which, in the case of developing countries, may affect the efficient allocation of resources in a more negative way than investment measures. Other currently WTO-compatible measures have revealed themselves to have a much more distorting effect on international trade, particularly in sectors of export interest to developing countries, than those related to investment.

The gap between developed and developing countries in terms of technology also tends to grow over time, as the international economy moves from the traditional factors of production into a paradigm of production reliant on technology, knowledge and innovation. TRIMs in the area of science and technology are necessary in order for these countries to increase their share in the higher-technology segment of international trade and to avoid what would inevitably be a decline of their participation in world trade as a whole as high-technology goods become the only dynamic sectors.

As for competition policy (flagged by the TRIMs Agreement for review), new evidence has shown that TRIMs, if properly implemented, would generate benefits to the competitive environment. The massive expansion of corporate power over the last two decades in developed and developing countries poses risks that can be reduced through incentives to other investors to compete in the domestic market.

TRIMs can also be valuable instruments of regional development policies, and in circumstances where goods originating from disadvantaged regions of developing countries cannot compete in the short term with goods produced by more advanced methods or technologies and it did not make economic sense for the state to support these regions indefinitely. TRIMs associated with purchases from companies located in those disadvantaged regions can provide an additional stimulus for such companies to grow and improve their ability to compete.

The Brazil-India paper also posited TRIMs in the context of sustainable development and to ensure stability of trade flows in the context of structural external financial weaknesses. Faced with structural imbalances on the external front, developing countries should be encouraged to increase exports in order not to restrict imports with deflationary policies. TRIMs related to exports can be less restrictive than deflationary policies for a country’s external trade flows and for the multilateral trading system as a whole.

The TRIMs Agreement disregarded such structural inequalities among member countries and, apart from the transitional periods for developing countries, has no specific meaningful clauses for special and differential treatment. The absence of effective and operative special-and-differential-treatment clauses makes the agreement “one example of reverse special and differential treatment,” the Brazil-India paper said. While developed countries had decades to choose when, how and in which economic sectors to apply such measures, developing countries had their right to choose simply revoked.

The balance-of-payments provision exceptions, which recognized that quantitative restrictions allowed developing countries to conserve their foreign currency assets for purchases of imports for development, and other provisions like the Enabling Clause, are clearly insufficient in providing the necessary flexibility to make use of investment measures for development policies. There is hence a need to amend the TRIMs Agreement to enable performance requirements to be applied by developing countries. (SUNS5216)                                            

From Third World Economics No. 293 (16-30 November 2002)