Global Trends by Martin Khor

Monday 10 May 2004


Blurb:   A country’s economic performance and competitiveness can be affected by international factors such as the World Trade Organisation’s rules.  Between now and July, the WTO will hold intensive talks on some key issues such as the Singapore issues, industrial tariffs and services.  These will have significant effects on the economic prospects of developing countries.

In the next two months, there will be intensive talks in and about the World Trade Organisation’s agenda, as countries try to meet a new deadline of the end of July to conclude “framework agreements” on some issues. 

The key topics include the so-called “Singapore issues”, as well as agriculture and industrial tariffs.  The talks on services are also proceeding.

How these agreements will turn out will have serious implications.

The theme of last week’s Budget Dialogue sessions (chaired by Prime Minister and Finance Minister Datuk Seri Abdullah Badawi) was  “Public and Private Sector Partnership towards enhancing Malaysia’s Performance and Competitiveness.”

There are strong global dimensions relating to the country’s future economic performance and competitveness.

Strengthening the economy depends on managing both the domestic and international aspects.   Global developments can impact on the Malaysian economy’s performance, as shown by the financial crisis of the late 1990s.

The ability of the country to adopt its own policies depends on there being the “policy space” allowed to developing countries.  In recent years there has been concern that some existing rules and especially some proposals being put in the WTO by some developed countries can affect this “policy space” and constrain the country’s ability to maintain some important national policies.

The WTO’s Ministerial Conference at Cancun in September 2003 saw an attempt by major developed countries to introduce new rules or agreements in the WTO by starting negotiating on the “Singapore issues”.   However many developing countries (with Malaysia playing a prominent role) were against starting negotiations and they were able to prevail on this point.  

Following Cancun, the WTO members took a long time to get back into a negotiating mood.  However, negotiations and discussions have resumed since March 2004.  At the end of July, a General Council meeting will make some important decisions.

The “Singapore issues” (so-called as they were first introduced at the WTO’s Ministerial in Singapore in 1996) are investment, trade and competition, transparency in government procurement and trade facilitation. 

Since 1996, the developed countries have put immense pressure to start negotiations towards new WTO agreements on these four topics. Many developing countries have been resisting the start of negotiations.

If new agreements are formed on these issues on the lines proposed by the developed countries, it would be difficult for developing countries to maintain many of their key economic and social policies.   Economic performance and the competitiveness of the domestic firms (as well as farms) could be negatively affected.  

For example, under an investment agreement, Malaysia would find it difficult to regulate foreign investments (e.g. foreign investment requirements on entry, equity, joint ventures, inflows and outflows of funds, etc) and to give preferences or aid to local firms.

Under a competition agreement, assistance to local firms to promote their development and market share would be made difficult, as the principle of “free competition” between foreign and local firms would be stressed.  

On government procurement, the eventual aim is a treaty that would enable “national treatment” to foreign firms, and thus to prohibit preferences to local firms for government projects and supplies to government. 

The proposed agreements would curb Malaysia’s “policy space” to formulate national and development strategies.  They are aimed at curbing assistance to locals, whilst giving unprecedented rights to foreign goods, services and firms.   Social development policies such as balancing of equity shares, as well as macro-economic management, and regulation of financial flows, would be affected.       

Although the Cancun talks failed, an opportunity now exists to have at least the three issues dropped altogether from the WTO agenda.  A decision to do this can be proposed at the July meeting of the WTO General Council and if backed by a majority of developing countries, it could get these issues off the table.

At the General Council meeting of 15 December 2003,  45 developing countries led by Malaysia) issued an important joint communication on Singapore Issues.

The paper states:  “The co-sponsors of this paper, therefore, are of the view that all further work on Trade and Investment, Trade and Competition Policy and Transparency in Government Procurement should be dropped.”  

This indicates the view that the issues be dropped completely from the WTO, implying that there be no further discussions, even at the level of working groups.  On the fourth issue (trade facilitation), they asked that only further discussions and clarifications be continued.

The EU, Japan and some other countries are still wanting talks to continue on all four issues.  But if a strong majority of developing countries take a strong position that three of the issues should be knocked off the agenda, they could well succeed.

Between now and July, there is a thus a window of opportunity to eliminate these controversial issues once and for all, and thus save the WTO much unnecessary conflict and tension.   If this opportunity is taken, the threat to the continuation of national development policies can be removed.   What is required is an effort to united as many developing countries as possible to take a common position.

The WTO is also negotiating a new round of industrial tariff cuts, under the title “non agriculture market access” (NAMA).  The main text being considered is known as the Derbez text (after the name of the Mexican Trade Minister who chaired the Cancun conference).

However there are many problems in the Derbez text, which could threaten the viability and growth of local firms.

Firstly, it wants a ”non-linear formula” to be applied to all categories of goods.

This formula dictates that there be steeper and steeper percentage tariff cuts, the
higher are the tariffs. Many developing countries have and require higher
tariffs to protect their small industries.  The non linear formula will
drastically reduce their tariffs, resulting in cheap imports that threaten their domestic industries.

 Secondly, it dictates that almost all presently unbound tariff lines shall be bound at twice the present applied rate (i.e. that tariffs cannot be raised above this bound level) and also be subjected to the non-linear formula.  This would have very serious implications for many countries as many sectors will be opened to cheap imports.

Thirdly, there is also a “sectoral approach” proposal, that tariffs be brought down quickly to zero in a few years for seven or more sectors. Local firms in these sectors will be affected.

As an answer to these proposals, the following positions can be taken:  

* Developing countries should not be subjected to the "non-linear" and sectoral approaches.

*  Developing countries should be given the flexibility to determine their own rate of tariff reduction.  This could be similar to the approach in the Uruguay Round talks (1987-95), in which developing countries were given a target of average overall reduction of 27%, with the flexibility to choose the rates of each tariff line.  Moreover, products and industries that are sensitive or important need not have any tariff reduction.

*  Developing countries also had the option in the Uruguay Round of choosing the products for which to bind their tariffs.  This flexibility should also be retained.

Another area of negotiations is services.  Some of the major developed countries (and some developing countries) have made requests through the WTO services negotiations for Malaysia (and other developing countries) to commit to remove existing restrictions and regulations (or to prohibit future ones) in a wide range of service sectors, including finance, distribution, telecommunications and other utilities, professional services, etc. 

They would like foreign service providers not to face restrictions regarding entry and equity ownership. 

It is important to note that there is a difference between unilateral liberalization, which is done by a country at its own pace and liking, and liberalization under WTO commitments.  

In the first, the country can decide it is in its own interests to liberalise and allow foreign participation up to a degree;  if circumstances change, the country can change its policies and re-introduce restrictions or regulations, without having to be penalized. 

However, if liberalization measures are committed under the WTO (by entering into the schedules in the services agreement), the country is legally bound to stick to these levels of liberalization and cannot alter them unless compensation is made.

Thus, if some degree of liberalization is seen to be desirable in particular sectors, it may be better to carry out this exercise unilaterally without necessarily committing it under the WTO.

The services agreement in WTO also allows countries to choose its own rate of commitments.  Thus although a country like Malaysia may received requests for liberalization of many sectors from many countries, it need not agree to them.   Developing countries are especially allowed by the WTO services agreement to liberalise fewer sectors and at a slower pace.  

A services master plan mapping out national strategy for services should be formulated.  Within that plan, the enhancement of domestic services sector, and their potential for export, should be aimed for.  The plan should also propose what is the optimal level of foreign participation in the various sectors.  Based on this, the desired scope and pace of liberalization can be determined.

Liberalisation measures, when deemed appropriate, can be undertaken on a “unilateral” basis, without necessarily committing these measures (or without necessarily at the same level liberalized) in the WTO.  This allows for flexibility to change policies or revert back, should the need arise.

It should be clear that whist other countries are free to make requests, the country is not obliged to agree to any of the requests, and should thus not feel “pressurized” into making commitments beyond what it is comfortable with.