Expanding Frontiers of Global Trade Rules: The Political Economy Dynamics of the International Trading System (Routledge Studies in the Modern World Economy)

Expanding Frontiers of Global Trade Rules

This book analyses one of the most controversial areas in the political economy of international trade, namely the issues surrounding the creation of new ‘trade rules’. Various concerns are addressed, including the environment, labour standards, intellectual property rights, trade facilitation, competition policy, investment and government procurement, to many conventional trade topics including the trade and development linkage. Nanda combines theoretical analysis with valuable insights derived from interactions with trade negotiators, politicians and activists, arguing for a dynamic policy framework, particularly in developing countries, with regular upgrading. He questions the effectiveness of the current global trade order in promoting development, highlighting not only the inability of conventional economics to capture the reality of international trade but also the neglect of some basic principles of economics. Nanda also argues that the WTO is not the right forum for addressing development issues because trade liberalization has traditionally been its objective. The contemporary issues raised in this book would be of interest to students and researchers engaged with international economic relations and economic law. It is also useful reading for policy makers and non-governmental agencies concerned with international trade. Nitya Nanda is Fellow with the Centre for Global Agreements, Legislation and Trade at The Energy and Resources Institute (TERI) in New Delhi.

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74 Expanding Frontiers of Global Trade Rules The political economy dynamics of the international trading system Nitya Nanda

Expanding Frontiers of Global Trade Rules The political economy dynamics of the international trading system

Nitya Nanda

First published 2008 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 This edition published in the Taylor & Francis e-Library, 2008. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Routledge is an imprint of the Taylor & Francis Group, an informa business © 2008 Nitya Nanda All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Nanda, Nitya. Expanding frontiers of global trade rules : the political economy dynamics of the international trading system / Nitya Nanda. p. cm. Includes bibliographical references and index. 1. International trade. 2. World Trade Organization. 3. Foreign trade regulation. 4. Competition, International—Government policy. 5. Economic development. I. Title. HF1379.N36 2008 382.92—dc22 2007039020 ISBN 0-203-92902-0 Master e-book ISBN ISBN10: 0-415-44295-8 (hbk) ISBN10: 0-203-92902-0 (ebk) ISBN13: 978-0-415-44295-4 (hbk) ISBN13: 978-0-203-92902-5 (ebk)

To my mother Kanaklata Devi

Contents

List of figures List of tables List of boxes Preface List of abbreviations 1 Introduction

xii xiii xiv xv xvii 1

2 WTO and development: it is all about mercantilist game

11

3 Liberalization of agricultural trade: path to development or chasing a mirage?

31

4 Deepening of the GATS: need for cautious treading

48

5 WTO and trade facilitation: some implications

59

6 Competition policy at the WTO: right diagnosis but wrong prescription

82

7 Multilateral framework on investment: much pain without gain!

101

8 As if TRIPS was not enough

120

9 WTO and environment: think locally, act globally?

133

10 Resisting the expansion: experiences and possible implications

142

11 Evolving a trade regime for development: some considerations

154

Notes Bibliography Index

167 175 187

Figures

2.1 2.2 2.3 3.1 4.1 7.1 7.2 7.3 10.1 11.1

Trade/GDP Average tariffs Real per capita GDP growth The global coffee bottleneck Structure of MA commitments by mode Share of different groups of countries in total FDI inflow FDI inflow in different groups of countries Total GFCF and total FDI inflow Spread of RTAs Actual and trend growth rates of global GDP

14 15 16 36 50 102 103 104 146 157

Tables

3.1a 3.1b 3.2 4.1 5.1 5.2 6.1 6.2 7.1 9.1 11.1

Regional distribution of crop area and agricultural inputs, 1995–97 average Regional distribution of value of crops, productivity and population, 1995–97 average Shares of developing and industrial countries in agricultural exports, 1980–81 to 2000–01 Trade in services by mode of supply Impact of improvement in trade facilitation on trade flows Expected implementation costs of different proposals Stages of institutional development of competition regimes Stages of institutional development and the cooperation agenda FDI-related regulatory changes 1996–2004 Growth in FDI stock in select polluting industries Some indicators of global integration

33 34 38 52 69 77 88 89 107 134 156

Boxes

2.1 3.1 3.2 5.1 5.2 6.1 7.1 8.1 11.1

The US trade regime – favouring developed countries! Upgrading standards: a fact sheet Indian Amul Dairy – a farmer’s success story Trade facilitation – existing WTO commitments Trade facilitation in the July Package The Doha mandate on trade and competition policy The Doha mandate on trade and investment TRIPS-plus commitments in EU FTAs The development experience of South Korea

26 40 43 63 65 93 114 122 162–163

Preface

The issue of expanding the frontiers of trade rules is, undoubtedly, one of the most controversial and interesting areas in the political economy of international trade. Though discussions on some of the issues have now been dropped from the Work Programme on the Doha Round of negotiations of the WTO as agreed under the so-called July Package of 2004, they remain as relevant as they continue to appear in most bilateral and regional trading arrangements with similar implications. Moreover, they may appear at the WTO as well at some future date. In fact, many experts believe that getting them included in bilateral and regional arrangements is nothing but preparing the ground for bringing them up at the WTO. By and large, developed countries have been pushing for expanding the frontiers of trade rules by bringing in new issues into the fold of the WTO, while developing countries have been opposed to such initiatives. It is also believed that such issues have played a significant role in the two most talked about Ministerial Conferences that collapsed. If the issues of labour standards and the environment were controversial at Seattle, the Singapore issues played the spoilsport at Cancun, though agriculture is another issue that played an important role in both these Conferences. Interestingly, agriculture is also a relatively new issue at the WTO, and on this, it is the developed countries that are on the defensive. Trade liberalization under the GATT/WTO, particularly during the Uruguay Round, has made it difficult for developing countries to use ‘strategic trade policy’ that had been used by most developed countries in their process of development. Moreover, the Uruguay Round also brought in several ‘behind the border’ measures that touch upon domestic public policy and governance issues – developing countries are yet to come to terms with them. More such commitments will leave very little policy space for national governments, as they will encroach upon domestic policy issues in a ‘one-size-fits-all’ manner, and of course from a developed world perspective. Thus, developing countries may be forced to follow economic policy regimes that may be good for developed countries but not necessarily appropriate for, maybe even harmful to, developing countries. This book touches upon several issues ranging from environment, labour

xvi

Preface

standards, intellectual property rights, trade facilitation, competition policy, investment and government procurement to many conventional trade topics including the trade and development linkage. However, it gives more elaborate treatment to trade in agriculture, trade facilitation, competition policy, investment and intellectual property rights. Predominantly, this book is about the potential impacts of new or additional rules in these areas. This book also provides detailed accounts of the discussions on these issues at the WTO or other related fora, particularly since the Doha Ministerial Conference of the WTO. However, it often peeps into the more distant past as well, wherever felt necessary. This book has been written over a period of time, and expectedly, I benefited from several individuals and institutions in writing them. Some of them had given comments and suggestions on specific issues, which helped me in forming and refining ideas. First and foremost, I would like to thank Muchkund Dubey and Deepak Nayyar who initiated my interest in the subject. The former also took the pain of going through the entire manuscript and came out with several useful suggestions. I also must thank R. K. Pachauri, Director General, The Energy and Resources Institute (TERI); Ligia Noronha, Director, Resources and Global Security Division, TERI; Prabir Sengupta, Distinguished Fellow, TERI; Pradeep S. Mehta, Seceretary General, CUTS International; and other colleagues at CUTS and TERI; in particular, Sheetal Bharat, Bipul Chatterjee, Pranav Kumar, Prabhash Ranjan, Gaurav Saroliya, Diana Montero Melis, Alice Pham, Joie Chowdhury, Anandajit Goswami and Nidhi Srivastava for their encouragement and support. There are many others, and it is indeed difficult to recall all of them; however, I must express my sincere gratitude to Ratnakar Adhikari, Aditya Bhattacharjea, Lucian Cernat, Ha-Joon Chang, Giovani Andrea Cornia, Peter Drahos, Simon Evenett, Bernard Hoekman, Faizel Ismail, Janet Tay Swee Lian, Malathy Knight-John, James Love, Petros Mavroidis, S. Narayanan, Gesner Oliveira, Manoj Pant, Atiur Rahman, Manoj Sanyal, Pierre Sauve, Gregory Shaffer, Ajit Singh, M. A. Taslim and Samar Verma in this regard. Needless to say, I am solely responsible for any remaining errors and omissions as well as the views expressed in this book. Nitya Nanda

Abbreviations

ACP ANSAC AoA APEC ASCM ASEAN ATA BIT BNDES CAFTA CAP CARICOM CBD CEMAC CGE COMESA CUTS DDA DR DSB EAC EC ECLAC ECOWAS ECT EPA EPO EU FAO FDI FTA FTAA GATS

African, Caribbean and Pacific American Natural Soda Ash Corporation Agreement on Agriculture Asia-Pacific Economic Cooperation Agreement on Subsidies and Countervailing Measures Association of South East Asian Nations Admission Temporaire-Temporary Admission bilateral investment treaty National Bank of Economic and Social Development (of Brazil) Central American Free Trade Agreement common agricultural policy Caribbean Community Convention on Bio-Diversity Economic and Monetary Community of Central Africa computable general equilibrium Common Market for Eastern and Southern Africa Consumer Unity and Trust Society Doha Development Agenda Doha Round Dispute Settlement Body East African Community European Commission Economic Commission for Latin America and the Caribbean Economic Community of West African States Energy Charter Treaty economic partnership agreement European Patent Organization European Union Food and Agriculture Organization foreign direct investment Free Trade Agreement Free Trade Area of the Americas General Agreement on Trade in Services

xviii Abbreviations GATT GDP GFCF GI GPA ICAO ICC ICN ICSID IFAD ILO IMF IMO IPR IRU ITO LDC M&A MAI MEA Mercosur METI MFI MFN MIGA MRTPC NAFTA NT NTB ODA OECD PCT PLT PPM PTA R&D RBP RIA RTA S&DT SADC SCP SP SPLT

General Agreement on Tariffs and Trade gross domestic product gross fixed capital formation geographical indication government procurement agreement International Civil Aviation Organization International Chamber of Commerce International Competition Network International Centre for Settlement of Investment Disputes International Fund for Agricultural Development International Labour Organization International Monetary Fund International Maritime Organization intellectual property right International Road Transport Union International Transport Organization least-developed countries mergers and acquisitions Multilateral Agreement on Investment Multilateral Environmental Agreement Mercado Comun del Sur (The Southern Common Market) Ministry of Economics, Trade and Industry (of Japan) Multilateral Framework on Investment most-favoured nation Multilateral Investment Guarantee Agency Monopolies and Restrictive Trade Practices Commission (of India) North American Free Trade Area national treatment non-tariff barriers official development assistance Organization for Economic Cooperation and Development Patent Cooperation Treaty Patent Law Treaty Parts Per Million preferential trade agreement research and development restrictive business practice regional investment agreement regional trade agreement Special and Differential Treatment Southern African Development Community Standing Committee on the Law of Patents special product Substantive Patent Law Treaty

Abbreviations SPS SSM TBT TED TERI TIR TNC TRIMS TRIPS TRQ UN UN/DESA UN/ESC UNCHE UNCTAD UNCTC UNECE UNESCAP UNFCCC UPOV UR USTR WCO WEF WEO WIPO WWF

xix

Sanitary and Phytosanitary special safeguard measure Technical Barriers to Trade Turtle Excluder Device The Energy & Resources Institute Transit International Routier (International Road Transit) transnational corporation Trade-Related Investment Measures Trade-Related Aspects of Intellectual Property Rights Tariff Rate Quota United Nations United Nations Department of Economic and Social Affairs United Nations Economic and Social Council United Nations Conference on the Human Environment United Nations Conference on Trade and Development United Nations Centre for Transnational Corporations United Nations Economic Commission for Europe United Nations Economic and Social Commission for Asia and the Pacific United Nations Framework Convention on Climate Change International Union for the Protection of New Varieties of Plants Uruguay Round United States Trade Representative World Customs Organization World Economic Forum World Economic Outlook World Intellectual Property Organization World Wide Fund for Nature

1

Introduction

Since the beginning of the Uruguay Round (UR) of trade negotiations under the General Agreement on Tariffs and Trade (GATT), the global trade body has been on an expansion mode. Though developing countries wanted agriculture and textile and clothing, which were not included in the GATT framework, to be brought under multilateral rules, they had to pay a heavy price for it as the developed countries pushed several new issues into the multilateral trade framework.1 Thus, came global rules on trade in services, intellectual property rights (IPRs) and investment measures. However, even before most member countries of the GATT (now WTO) could appreciate the possible implications of an expanded global framework of trade that they had got out of the UR of negotiations, several other new issues were brought onto the table. Interestingly, this was done in the name of ‘putting development first’ at the WTO, as all these have implications for development. A belief, considered to be misconceived by many, was propagated that the WTO should have a proactive agenda to promote development and hence should make rules on every possible issue that has implications for development. Concerns have also been expressed that the inclusion of social and environmental issues in the WTO implies opening the window for never ending non-trade issues, including gender, human rights, animal welfare and social development, all of which fall in the purview of sustainable development. Nevertheless, all these issues have significant bearing for market access (MA), and indeed, this is the primary reason for bringing them for discussion or negotiation at the WTO. These are also expected to affect developing countries more than their developed counterparts.

The issues at stake The issues brought in are of three types: the first type of issues will restrict MA of developing countries in the developed world, while the second type of issues will, by and large, lead to greater market opening for the developed world in developing country markets. The first category includes issues like environment and labour standards, and the second category includes issues like investment, competition policy, trade facilitation and government procurement which later

2

Introduction

came to be known as the Singapore issues. However, while the implications of the first type of issues are quite obvious, those of the second category of issues are not, as they may have some positive implications for development. The third type is the issue of IPRs where developing countries have hardly any stake, as most of them do not possess rights that might require protection. Whereas developing countries had opposed the first category of issues for obvious reasons, they opposed the second category of issues, primarily due to their lack of experience and capacity in these areas. Rather, they have been quite ambivalent and hesitant on the second category of issues on the face of the claims of substantial development pay-offs of the proposed rules on these issues made by the proponents. On IPRs, developing countries are asking for bringing down the rigours of protection, as they are essentially engaged in protecting the rights of developed countries on the one hand and unable to deal with the abuse of right holders on the other. Nevertheless, developed countries are trying to impose even higher standards of IPR protection through other fora. Since the Cancun Ministerial Conference, developing countries have been building pressure on developed countries on the issue of agriculture, which indeed is an unfinished agenda from the UR, and they have also succeeded in keeping majority of the new issues outside the negotiation agenda for the time being. However, they have not been dropped altogether and may be brought back to the negotiating table at a future date. Meanwhile, developed countries are pushing forward these issues in bilateral and regional trade deals, which is much easier, so as to build up legitimacy for including them in the multilateral trade framework in future. Indeed, these issues and their linkages with trade and development are quite complex. The claims on development pay-offs may be exaggerated and the costs of implementing them might not have been properly accounted for. Moreover, though some of them may have positive impact on the growth of trade, their impact on economic growth need not be positive. It is well recognized that trade can make significant contribution to the growth and development of a country. However, growth of trade and trade liberalization are not the same thing. Neither does the growth of trade necessarily ensure growth and development of a country. In general, while some developed countries have taken the lead in pushing for these issues, developing countries have opposed them, most often without showing any convincing reasons due to their lack of experience and capacity and the consequent weakness in their ability to articulate their views. However, they have often been criticized for taking such an approach which has been termed as ‘just say no attitude’. They have often succumbed to pressure to shed this negative image or due to the lure of development pay-offs. However, though some of them can have positive development implications, they are not always assured. The way the global rules in such areas are framed can, in fact, promote or hinder development. Thus, it is important that these issues are looked at closely, taking into account all possible concerns and perspectives. The present volume is an endeavour in that direction.

Introduction

3

The second chapter of this volume gives an overview of all these issues and puts them in perspective keeping in view the political economy of global trade negotiations. It notes that the founders of the WTO placed priority on raising standards of living and on sustainable development, and expansion of trade was a means to achieve these ends. However, such broad objectives are now being equated by many with the broadening of the means as well. The inclusion of a range of trade-related issues in the WTO implies opening the window for never ending non-trade issues. Against this backdrop, this chapter reviews the ‘means’ and ‘ends’ of the WTO in the context of trade-related issues. The existing trade-related agreements at the WTO, like Trade-Related Aspects of Intellectual Property Rights (TRIPS), Trade-Related Investment Measures (TRIMS) and, to some extent, General Agreement on Trade in Services (GATS) brought heavy obligations on developing countries while ignoring their export interests. The inclusion of the issues of environment and labour standards at the WTO are likely to restrict MA of developing countries without serving the purpose of sustainable development. Similarly, the Singapore issues, although have development implications, are likely to put heavy burden on developing countries without bringing commensurate benefits. It must be recognized that the WTO is essentially a platform for bargaining on MA, and development is hardly a concern in the process. Moreover, overloading the WTO in the name of development could destabilize the very institution, which may make the developing countries worse-off. It would be a far better option for developing countries to focus on their own MA and better terms of trade. The WTO needs to look back to its original purpose and instead of broadening the agenda; it must re-shift its paradigm to focus on ‘trade as an instrument for promoting development’ rather than just ‘trade and development’.

Liberalizing agriculture: panacea for development and poverty reduction? The third chapter deals with liberalization of agricultural trade. It is argued that though reduction of agriculture subsidies in developed countries is desirable, it is not likely to help developing countries to the extent it is generally believed. Developing countries have enough supply constraints of their own which need more of institutional support than trade liberalization. In fact, ignoring this can prove costly and going for sweeping liberalization in agriculture in developing countries can be disastrous even if subsidies are reduced. Also, reduction of subsidies in developed countries is unlikely to be a death knell for agriculture there, as is often feared. The major beneficiaries of such subsidies are the agro-business companies, and farmers would be able to adjust. There is a need to control the market power of big companies in markets for both agricultural inputs and final produce which is the major challenge to agriculture in both the developing and the developed worlds. Throughout the world, governments need to play a much more proactive role in providing institutional support, including developing and providing

4

Introduction

appropriate technologies and regulation of markets, not only to protect agriculture and farmers but also to protect the environment.

GATS – an instrument for promoting foreign direct investment but not trade The next chapter deals with trade in services, inclusion of which, along with IPRs, in the GATT/WTO framework became one among the most controversial issues during the UR as developing countries strongly resisted it. Finally, they agreed under pressure and on the assurance that the agreement on services would allow enough flexibility to liberalize at their own pace. GATS has two major implications. First, the way services were defined; it brought investment into the WTO through the backdoor. It also went far beyond the border measures and encroached upon areas of domestic policy and law making, the so-called behind the border measures, which were the exclusive domain of the nation states so far. GATS defined four modes of supply of services. These modes are: 1 2 3

4

cross-border supply (Mode 1) (e.g. cross-border business services, transborder data flows); consumption abroad (Mode 2) as with a consumer travelling to another country (e.g. tourism); commercial presence (Mode 3) (e.g. presence of suppliers from one member in another member’s territory for provision of services through foreign direct investment (FDI) or representative offices and branches); temporary movement of natural persons (Mode 4) (e.g. entry and temporary stay of foreign personnel providing those services).

However, GATS focused mainly on Mode 3 and relatively ignored the other modes. Interestingly, in conventional sense, it is the Mode 1 that can be considered as ‘trade’ while Mode 3 can be considered as ‘investment’. As a result, ‘investment in services’ got liberalized, while ‘trade in services’ continues to be restricted. It is believed that, in general, developed countries have distinct advantage in Mode 3, while developing countries have distinct advantage in Mode 4. The other two modes are mixed in this regard but developing countries can also gain if they are liberalized. However, there is not much that the WTO can do with Mode 2, it is for the exporting countries to attract consumers from abroad. Thus, the current GATS structure distinctly favours the developed countries. Nevertheless, some studies indicate that over the post-GATS years, developing countries have been able to increase their share in total global exports in services, which are being highlighted now to go ahead with more liberalization of services. Not only that this trend is not consistent and depends on the time period chosen, but also these estimates are not based on data collected on the basis of GATS definition of trade in services and hence cannot be linked to GATS. What

Introduction

5

is also being ignored is that the share of services in total exports (i.e. exports in goods and services) of developing countries has gone down over the years, and that, with a few exceptions like India, for most developing countries the balance of trade in services has actually deteriorated. However, such poor performance of developing countries may not reflect their lack of competitiveness in services and they may gain if barriers to ‘trade in services’ are removed rather than liberalizing ‘investment in services’.

Trade facilitation: will the costs match the benefits? The next chapter is devoted to trade facilitation, which receives relatively more attention in this volume, as this is the only Singapore issue that is on the active agenda of the WTO. It not only discusses the relevant issues from a theoretical perspective, but also analyses those issues by drawing experiences from South Asian countries. The lessons drawn are likely to be equally valid for other developing countries as well. By and large, developing countries’ opposition to an agreement on trade facilitation has been based primarily on their inability to shoulder more obligations and the strong likelihood of being dragged into the WTO dispute settlement process. There are other possible implications and that the case for further trade facilitation in developing countries is not well established, given the remarkable differences in their levels of development. It also appears that potential benefits of trade facilitation are exaggerated, particularly in the context of developing countries. They are unlikely to improve their trade performance only through improvements in trade facilitation if other areas related to supply side constraints as well as increasing non-tariff barriers (NTB) in the developed world remain unaddressed. Moreover, as suggested earlier, better trade performance may not necessarily lead to economic growth. Given this, the benefits that a trade facilitation agreement at the WTO is expected to bring, particularly for the developing countries, are doubtful. Under the belief that trade facilitation measures are likely to enhance trade and promote growth, the developing countries have taken several initiatives in recent years to improve their trade facilitation. However, they are still likely to fall short of the standards that the proposed WTO agreement on trade facilitation might set. Thus, the proposed agreement may impose high costs on them that may not be justified considering their resource constraints and several other competing development needs. Furthermore, some of the provisions in the proposed agreement relate to regional or bilateral issues, which some countries may prefer to deal with at their own level rather than invoking WTO provisions, due to geo-political reasons. Hence, the proposed WTO agreement is likely to be far less useful for them than it appears. However, it would be difficult for developing countries at this stage to refuse to an agreement on trade facilitation. They must, nevertheless, make best efforts to keep their obligations at the minimum. They should also see that they achieve sufficient gains in other areas, especially in agriculture. In any case, developing

6

Introduction

countries are making the best efforts to improve trade facilitation and hence the issue at stake is adequate assistance to them rather than global rule making.

A competition agreement that will not promote competition The fifth chapter is on competition policy, which argues that a properly framed set of global competition rules can bring significant benefits to developing countries. However, the way they have been proposed at the WTO does not inspire any such hope. On the contrary, they have the potential to be harmful particularly to the interests of developing countries. Discussion on multilateral rules on competition policy is by no means a new issue, as it has been on the world-trade agenda since the aborted Havana Charter. Indeed, there are good reasons for adopting a multilateral competition regime: MA, international cartels, export cartels, mergers and acquisitions (M&A) with international spillover and abusive practices by transnational corporations (TNCs) in small/developing economies to name a few. There is also a case for promoting international cooperation on competition, not only to tackle competition cases with international dimensions, but also to build capacities in developing countries to establish strong competition regimes. The case for a multilateral framework on competition at the WTO is not strong except for MA considerations. Neither are developing countries interested in promoting further MA through competition rules, nor have the proponents been candid enough to admit that indeed this has been the motive. Other competition problems, notably international cartels, are difficult to handle without a strong international authority, which in any case is not included in the proposed framework at the WTO. The alternative soft approach suggested, namely voluntary cooperation, can hardly serve any purpose. Moreover, given its character, the WTO is not the right forum for promoting such cooperation.

Investment agreement: giving rights without responsibilities The sixth chapter is about an investment agreement at the WTO. It looks at the potential costs and benefits of such an agreement, as well as examines the possibility of conflicts that this might create with the existing legal instruments in this regard. A multilateral agreement on investment at the WTO has been argued to be development-friendly, based on the premise that it will provide them with the ‘much needed’ foreign investment. Nevertheless, the so-called beneficiaries, i.e. the developing countries, have been opposed to it. This is not surprising, as it neither is established that such an agreement will bring them more investment, nor is there clear empirical evidence that foreign investment will promote development. As a matter of fact, making foreign investment work for development often requires regulating it keeping in view the local situation, and ironically, this will be made more difficult in a multilateral investment regime, the way it was proposed. The entire structure proposed in this regard was flawed as it

Introduction

7

attempted to ensure unrestricted freedom for the TNCs to operate in developing countries, without providing any safeguards against the possible misuse of their freedom. It also did not attempt to address the issue of incentive war that most countries are engaged in today to attract more foreign investment, often to the detriment of their development, a problem that can be solved only through a multilateral arrangement. In the context of a multilateral agreement on investment, the Doha Declaration mentions that ‘due regard for other WTO provisions and existing bilateral and regional agreements’ will be given. Among the existing WTO agreements, TRIMS prohibits negative incentives, GATS includes FDI through Mode 3, ‘commercial presence’, and TRIPS has implications for FDI in general and transfer of technology through FDI in particular. The existing investment instruments at the WTO or bilateral investment treaties (BITs) or regional investment agreements (RIAs) are very often biased against developing countries’ interests. If developing countries can take stock of all these and negotiate hard, there is a possibility that they can ensure, through multilateral negotiations, a better situation for themselves. But getting such an outcome is quite unlikely. However, it is quite possible that the proposed Multilateral Framework for Investment (MFI) may be in conflict with the existing agreements at the WTO. The proposed MFI may also be in conflict with the existing BITs or RIAs depending on the kind of provisions it includes. On the other hand, if ‘due regard for other WTO provisions and existing bilateral and regional agreements’, as mentioned in the Doha Declaration, is interpreted as all such provisions or agreements taking precedence over the proposed MFI, then there will be limited scope for its application, and the argument that developing countries might get a better deal at a multilateral forum compared to what they get through bilateral deals falls flat.

IPRs: owners’ robbery, users’ misery? The seventh chapter is about global rule making on IPRs. Though there has not been any attempt at the WTO to bring additional rules in this area, developed countries, particularly the United States and the EU, are pursuing such objectives through bilateral trade deals and the World Intellectual Property Organization (WIPO). This chapter analyses the proposed additional rules on the issue that are being discussed at the WIPO. This has significant implications for the WTO as well, as in future, pressure would be made to frame similar rules at the WTO. The new WIPO Patent Agenda threatens to erode much of the flexibility available under TRIPS for the design and implementation of a patent regime at the national level. Although its ostensible purpose is to streamline procedures and reduce costs, the ultimate aim of the proponents of this harmonization process, such as the United States, is to be able to grant a global patent, which would render national patent offices superfluous. However, despite the experience of the TRIPS negotiations, most developing countries took rather a

8

Introduction

long time to realize the importance of the new WIPO initiative and the need to participate actively in agenda formulation. Fortunately, thanks to the initiatives of some developing countries, an alternative development agenda was brought into the WIPO though the WIPO Patent Agenda also remained valid. Developing countries also registered some success with the Development Agenda though it is too early to say if that will finally blunt the WIPO Patent Agenda.

When protectionist pull and MA push pollute the environment When the issue of environment was first brought up at the GATT, the idea was not to make it a part of its agenda or take cognisance of environmental impacts of trade opening, but it was to express concerns that some developed countries were using environmental measures to restrict imports from developing countries. Ironically, today, environment has become a part of the WTO agenda ostensibly to protect the environment that we all share. In other words, we are talking about a regime where trade will be restricted on environmental grounds. However, the WTO agenda did not stop only at that. Living up to its truly mercantilist approach, it has proposed to do something else too that it is good doing at. The cause of environment is proposed to be used to promote MA as well. Thus, we see the issue of MA for environmental goods and services finds a prominent place in the WTO agenda on trade and environment. Ironically, the United States, one of the countries that refused to ratify the Kyoto Protocol has been among the most enthusiastic countries to promote this. There have not been similar efforts to make amendments to the existing WTO rules that might cause hindrance to nations’ efforts to promote the cause of environment. While high agricultural subsidies can be harmful to the environment, the rules on subsidies including those in agriculture can work as a deterrent if countries try to promote environment-friendly products or practices through subsidies. The developed countries have also been reluctant to discuss the issue of TRIPS acting against the protection bio-diversity as well as its potential negative impact on diffusion of environment-friendly technologies in developing countries. The environment has, thus, become more of a ploy to promote mercantilist interests.

New issues – to be or not to be . . . The tenth chapter deals with the efforts made by developing countries in resisting the expansion of the WTO agenda and their partial success in this regard. Notwithstanding their implications for development, the new issues at the WTO are likely to impose a heavy burden on developing countries without bringing commensurate benefits. Not surprisingly, the EU insistence on them, particularly the Singapore issues, inter alia, led to the failure of the Cancun Ministerial. Nevertheless, the EU continued to push for these issues for some time. In the post-Cancun period, concerns were expressed that poor countries would suffer

Introduction

9

more in the ensuing international trade order that is likely to see spurt in bilateral and regional trade liberalization and increasing marginalization of the WTO. The subsequent experience proved that this fear was exaggerated. The developed countries had to scale down their expectations significantly on the face of the unity shown by developing countries, which could not be broken, though challenged by different means. Even the experiences during the Hong Kong Ministerial and afterwards indicate that the developed countries are yet to come to terms with the fact that they cannot take developing countries for granted. The developments in the aftermath of the suspension of the Doha Round (DR) negotiations in July 2006 indicate that the unity of the developing countries is not as strong as it was believed. Not only that Brazil is reconsidering the revival of negotiations on Free Trade Areas of Americas through which the United States attempted to flex its muscle in the entire western hemisphere, earlier considered to be dead, and a bilateral Free Trade Agreement (FTA) with the EU through Mercado Comun del Sur (Mercosur), but even India is considering such bilateral FTAs including with the EU and other developed countries. This can create a bandwagon effect and more and more developing countries may sign bilateral FTAs with developed countries and accepting conditions that they have been opposing at the WTO. Though these bilateral FTA negotiations are taking place on parallel tracks, what happens at the WTO may have some influence on the process. Nevertheless, it would not be as easy as the experiences of negotiations in the context of the proposed Free Trade Area of the Americas (FTAA) and Mercosur-EU inter-regional FTA show.

Global economy at a crossroads – craving for a rethink on the trade regime The expansion of the trade rules is essentially to promote greater MA, particularly in developing countries. It is thus important to assess the impacts of trade liberalization that has already taken place, not only from a theoretical perspective but also on the basis of the consequences on the ground. Moreover, the subject of the inclusion of non-trade issues cannot be analysed in isolation but needs to be seen in the overall context of the political economy dynamics of international trade. The expansion of trade rules could be a natural corollary of the prevailing global trade policy regime and its dynamics. Hence, even if developing countries have been successfully opposed some of these issues at the WTO, they found alternative routes in bilateral and regional trade agreements (RTAs). Naturally, if they are to be kept away from the domain of trade rules, or at least brought into the trade disciplines in such a way that they do not hamper development, then the overall trade policy regime may require reorientation. Since the GATT came into being, the economies of the world have been getting more integrated over time. Whether it’s the question of movement of goods, services or capital, they all have been growing fast and even much faster than the growth rate of the world gross domestic product (GDP) in most of the

10

Introduction

years. Much of this has happened because of GATT/WTO. But unilateral liberalization by the nations has also played a role. However, throughout this long period of global integration, the global economic growth has been on a declining path. It may also be noted that while the expected benefits of the UR as estimated by several researchers never realized, the researchers have been revising their estimates of the gains for a possible successful conclusion of the DR downwards. The question that arises is trade integration taking place just for the sake of it? Are countries liberalizing trade simply to jump on the bandwagon? While it has always been recognized that there can be losers and gainers in the process of global integration, a possible adverse impact on the global economy as a whole was not expected. This raises a question of whether the process of global integration, instead of promoting competition in the global market, actually reduces it and thereby hurts global efficiency and growth! This is important in the context of expansion of trade rules, as they are essentially to promote deeper integration. Given this, it would be worthwhile to take the opportunity of the ongoing slow down in the DR negotiation process to take a re-look at the global trade architecture rather than mindlessly engaging in bilateral trade agreements. It is more urgent to review the existing rules rather than to frame new rules particularly keeping in view long-term development interests of the developing countries. Developing countries need to focus their attention on MA rather than getting swayed by ‘promises of development’ which might not materialize at the end. They need to have flexibilities and better policy space within the global trade architecture. Increasing regionalization, primarily among the developing countries that are geographically contiguous, can be an important component in their strategy for development. Smaller countries, by coming together can provide the necessary protection to their industries at the same time can reap the benefits of economies of scale and competition.

2

WTO and development It is all about mercantilist game

Introduction Until the Doha Ministerial Conference, the WTO game was essentially between the United States and the EU – developing countries were fringe players only. At Doha, however, developing countries were fairly assertive and even created a near-deadlock. However, they eventually gave up in the face of bilateral, behind-the-scenes pressures and even arm-twisting and agreed for a deal that they never wanted (Page 2003). Ironically, it was supposed to launch a development round and even now the work programme envisaged in the Doha Declarations1 has come to be known as Doha Development Agenda (DDA). One may wonder why developing countries were so opposed to launching a development round. Or even now why they are sceptical about or even appear to be opposed to a significant part of the so-called DDA. Are they opposed to development? Certainly not! They are opposed to a particular type of development model that the developed countries are advocating as the most suitable for developing countries. The question that arises is, why the developed member states of the WTO are so obsessed with making the WTO development-friendly, if developing countries are not so keen? The answers are not difficult to find. The issue has been put most aptly by Malhotra (2002), ‘Indeed, an objective balance sheet of the process and outcomes at Doha make it clear that calling it the Doha Development Agenda stretches both reality and imagination’. Similar observations have been made by other experts as well (e.g. Stiglitz and Charlton 2004). The WTO system’s overriding purpose is to help trade flow as freely as possible – so long as there are no undesirable side effects. However, the preamble to the Agreement Establishing the WTO lists the following aspirations: raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with

12

WTO and development their respective needs and concerns at different levels of economic development (WTO 2002)

It is clear from this preamble that the WTO’s founders put an accent on raising standards of living and on sustainable development and expansion of trade was a means to achieve these ends. However, such broad objectives are now being used to justify the broadening of the means as well. This is, however, not a completely new phenomenon. Such a tendency could be found even during the UR of negotiations as countries signed agreements like Agreement on TRIPS and Agreement on TRIMS as some countries insisted that the so-called trade-related issues need to be dealt within the WTO framework. Riding on this trend, several other issues have been brought into the WTO discourse, especially at the Doha Ministerial. When developing countries were already resisting the inclusion of environment and labour standards, the socalled new (Singapore) issues, investment, competition policy, trade facilitation and transparency in government procurement have been brought into the agenda. The Doha Ministerial Declaration has brought environment into the negotiating agenda for the first time. Pressure was rather high at the failed Cancun Ministerial to launch negotiations on the new issues. Moreover, after the mainstreaming of environment into the work programme of WTO, the next target could well be labour standards. Demanding the inclusion of social issues in the WTO implies opening the window for never-ending non-trade issues including gender, human rights, animal welfare and social development, all of which fall in the purview of sustainable development. Indeed, sustainable development is such a broad concept, that one can propose bringing several such issues under the purview of the WTO, using the plea of promoting sustainable development. The list of issues may be endless. Given this context, it is imperative to revisit the ‘means’ and ‘ends’ of the WTO and what these so-called trade-related issues mean for them (means and ends). Such concerns have been echoed by distinguished academic commentators, especially after the Doha Ministerial. For instance, Helleiner (2002) claims that ‘consensus’ was achieved at Doha, as ever before ‘through bilateral, behind-thescenes pressures, dealing and bullying’. He concludes, ‘It is time for these urgent and breathless rounds to be replaced by careful, steady, step-by-step efforts, aimed at agreed long-run global objectives, to bring purpose, order and credibility to the global trade regime and poverty eradication around the world’.

Trade and development: the linkage Trade can significantly contribute to growth and development of a country. However, growth in trade and trade liberalization are not one and the same thing. Trade liberalization is neither a necessary nor a sufficient condition for expansion of trade or promoting development in a country. This can be illus-

WTO and development

13

trated through a comparison of the experiences of Vietnam and Haiti. Vietnam engages in state trading, maintains import monopolies, retains quantitative restrictions and high tariffs (in the range of 30–50 per cent) and has not been a member of the WTO till the end of 2006. Haiti, a WTO member, has slashed import tariffs to a maximum of 15 per cent and removed all quantitative restrictions, earning a rare applaud from the United States and the multilateral institutions. Vietnam has experienced GDP growth rates in excess of 8 per cent per annum, has sharply reduced poverty, has expanded trade at double-digit rates, while Haiti has stagnated and suffered deteriorating social indicators and has made little progress (Rodrik 2001). Vietnam is one of the top 20 countries in terms of attracting foreign investment, while Haiti is among the bottom 20 (UNCTAD 2003). The experience of Mexico is also worth noting in this regard. Mexico started its economic reforms in the early 1980s which saw a culmination in 1994 with the signing of North American Free Trade Area (NAFTA) along with the United States and Canada. It also signed a comprehensive economic partnership agreement (EPA) with the EU in 2000. It is thus the only developing country that has such a deep integration with the two largest markets of the world. But what have been the impacts? If one looks at the flows of FDI into Mexico and exports out of it, the country has shown exceptionally good performance. But even if one ignores the issues like poverty and inequality, in purely GDP growth terms, the country’s performance has rather been disappointing. Between 1994 and 2005, Mexico’s growth rate has been only 2.7 per cent per year compared to an average 6.7 per cent in the 1970s and 3.7 per cent in the 1980s (Zarsky and Gallagher 2004). Similarly, most of the sub-Saharan African countries embarked on trade liberalization even before the establishment of the WTO, under the conditionalities of the multilateral lending institutions like the World Bank and the International Monetary Fund (IMF). However, neither these countries could expand their trade nor could they grow or develop. In fact, many of them experienced negative growth after they liberalized their trade. The emphasis on trade liberalization is based on the premise of promoting global efficiency. However, global efficiency does not necessarily ensure efficiency in all countries or all regions. In 1988, output per worker in the United States was more than 35 times higher than output per worker in Niger. In just over ten days, the average worker in the United States produced as much as an average worker in Niger produced in an entire year (Hall and Jones 1998). In such a situation, Niger cannot freely compete with the United States, irrespective of what the comparative advantage theory says. We are not living in a simple two-commodity world but the economic structure is now quite complex and intra-industry trade constitutes quite a significant proportion of total trade. Moreover, the comparative advantage theory is based on static efficiency considerations, which do not necessarily promote dynamic efficiency. The modern theory of endogenous growth yields an ambiguous answer to the question of whether trade liberalization promotes growth. The answer varies

14

WTO and development

depending on whether the forces of comparative advantage push the economy’s resources in the direction of activities that generate long-run growth (via externalities in research and development (R&D), expanding product variety, upgrading product quality and so on) or divert them from such activities (Rodrik 2001). In recent years, a study by Dollar and Kraay (2001) has been widely quoted as an evidence of trade promoting economic growth. However, it has been pointed out that the arguments and evidence presented by Dollar and Kraay are flawed and far from convincing. Dollar and Kraay attempt to show on the basis of empirical evidence that a group of ‘post-1980 globalizers’, or developing countries that have ostensibly been more open to trade than others in the period from the early 1980s to the late 1990s, have grown faster than ‘non-globalizers’, and growth of trade volumes is associated with higher growth of average incomes. Globalizers identified by them are the top one-third in terms of their growth in trade relative to GDP between 1975–79 and 1995–97 of a group of 72 developing countries for which data on trade as a share of GDP in constant local currency units since the mid-1970s were available, while non-globalizers refer to the remaining developing countries in this group. However, as can be seen from Figure 2.1 and Figure 2.2, the non-globalizers identified by them are actually ‘more globalized’ both in terms of trade as a share of GDP (higher trade/GDP ratio) and tariff barriers (lower average tariffs). It may also be noted that the so-called non-globalizers achieved a very high trade/GDP ratio (60 per cent) even in the 1970s, which was four times higher than the ‘globalizers’ and double of that of rich countries. But their trade/GDP ratio has been falling during 1980s and 1990s despite the fact that they reduced their tariffs further.

70 60

Rich countries Globalizers Non-globalizers

Trade/GDP (%)

50 40 30 20 10 0 1960s

1970s

1980s Period

Figure 2.1 Trade/GDP (source: Dollar and Kraay (2001)).

1990s

WTO and development

15

Trade-weighted average tariffs (%)

70 60

Rich countries Globalizers Non-globalizers

50 40 30 20 10 0 1960s

1970s

1980s

1990s

Period

Figure 2.2 Average tariffs (source: Dollar and Kraay (2001)).

Comparing these with Figure 2.3, it can also be argued that the ‘globalized’ countries have performed much worse than the ‘non-globalized’ countries during 1980s and 1990s. Inclusion of China and India, who have performed spectacularly during this period, in the category of globalizer is also quite problematic, as they are well known to be reluctant, slow and cautious liberalizers. It may be noted in this context that the previous studies in this regard came out with mixed findings. Sachs and Warner (1995) and Frankel and Romer (1999) claimed to find a positive impact of trade on growth, while Harrison (1996) and Rodriguez and Rodrik (1999) were sceptical or have found a negative impact. Moreover, most such studies, while assessing the impact of trade or trade openness, equate trade openness with trade orientation or propensity to trade as they measure it in terms of share of trade in GDP, which is not appropriate. For example, the share of trade in GDP for the United States is about 20 per cent, while the same for India and Vietnam are about 30 per cent and 100 per cent, respectively. Will anybody accept that India is more open to trade than the United States is or Vietnam is one of the most open economies of the world? Hence, if at all, some of these studies found a positive relationship, one can only say that the propensity to trade is good for growth, and the impact of trade openness or liberalization can be very different particularly in a dynamic situation. The simple analysis of Ghosh (2002) is also worth mentioning. It observes that merchandise exports from developing countries have been growing much faster (at 11.3 per cent per annum) than the world average of 8.4 per cent since early 1980s. There has also been and a big shift in developing country exports, away from primary commodities (whose share has fallen from 51 per cent in 1980 to only 19 per cent in 1998) and towards manufactured goods, which now

16

WTO and development

Real per capita GDP growth (%)

70 Rich countries Globalizers Non-globalizers

60 50 40 30 20 10 0 1960s

1970s

1980s

1990s

Period

Figure 2.3 Real per capita GDP growth (source: Dollar and Kraay (2001)).

account for more than 80 per cent of their exports. Further, the largest increase has been in the exports of manufactures with high skill and technology intensity (whose share jumped from 12 per cent of total developing country exports in 1980 to 31 per cent in 1998). Despite all these, there is no evidence of improved income shares of developing country exporters. It may not be a good idea to think about a long-term growth strategy completely ignoring international trade and foreign investment issues. However, it must also be recognized that opening up completely to foreign trade and investment is not the panacea for development. The successful countries are those who have been able to judiciously combine the opportunities offered by international markets with appropriate policies to create a congenial environment for investment. Stimulating domestic entrepreneurship is probably more important than wooing foreign investment. Failure to do this can have adverse consequences, especially for developing countries with limited capacity to absorb external shocks. The founders of the WTO recognized this and hence defined the purpose of the WTO as to help trade flow as freely as possible – so long as there are no undesirable side effects. The rest of this chapter discusses a few so-called trade-related issues on which agreements have already been made at the WTO. It also presents those on which developing countries are under pressure to sign agreements and their possible implications for them. Finally, it analyses the suitability of the WTO to promote an integrated agenda to address the development concerns in the light of the negotiating approach of its members and suggests some changes in the manner in which the issue of development is handled at the WTO.

WTO and development

17

Trading-off development Some members of the WTO have been taking the above-mentioned issue of side effects too far. They talk of taking care of these side effects through trade measures even if they are remotely linked to trade or trade is just one of the many contributing factors. Moreover, they also talk of taking care of all other contributing factors in a one-size-fits-all manner. These issues are taken up ostensibly to promote development, but in reality they are essentially to facilitate deeper entry to their markets and, in the process, ultimately hamper development by curbing policy flexibility – they become unable to mould their policy regime to suit their development requirements. Existing anomalies Many of the existing agreements that constitute the WTO framework contain anomalies that work against the interests of developing countries. Such anomalies have been historically inherited in the form of exclusion of agriculture and textiles and clothing from the GATT framework. During the UR of negotiations, developing countries sought to remedy such inequities in the system. They got only small concessions as agriculture and textile and clothing were brought into the system while maintaining differential treatment for these sectors. However, what they had to offer in return was much more, making the system even more unequal (Dubey 1996). Some of the issues are briefly discussed here. TRIPS The inclusion of TRIPS into the WTO domain was an anti-thesis of trade liberalization and competition. TRIPS is about restricting trade and competition and guaranteeing high profits for the TNCs at the cost of consumers worldwide. TRIPS goes against the principle of competition as it facilitates longer existence of monopolies. Ironically, TRIPS was brought under the WTO under the pressure of the United States that frequently swears by the virtues of trade liberalization and competition. Indeed, TRIPS does not belong to the WTO, as Professor Jagdish Bhagwati has observed, ‘the TRIPS does not involve mutual gains; rather, it positions the WTO primarily as a collector of intellectual propertyrelated rents on behalf of multinational corporations’.2 TRIMS The real significance of the TRIMS Agreement lies in what it was supposed to be – not what it is. Originally, it was proposed that a comprehensive agreement on investment be included under the WTO regime. This would guarantee national treatment (NT) for foreign investors and ban any kind of government regulation on foreign investment such as technology transfer requirements, restrictions on the transfer of profits overseas, controls on foreign exchange

18

WTO and development

flows, government reviews of foreign investment performance, nationalization and expropriation. The governments of the European Commission (EC), the United States, Japan and Canada tried to push this proposal through, arguing that it would ensure more FDI inflows to developing countries, thus accelerating their development. But it faced strong resistance from the unconvinced governments of developing countries. So a watered-down TRIMS Agreement was the result. Nevertheless, developing countries had to surrender some effective instruments, which could be useful to deal with their macroeconomic problems. Interestingly, though the WTO claims that this is not an investment issue, countries can use those instruments on their national firms if they find it necessary but not on foreign firms. Thus, the agreement has actually forced the governments to offer more than NT to foreign firms. The Agreement also eroded the capacity of national governments to deal with restrictive business practices (RBPs) of TNCs. TRIMS could be used as instruments to deal with some of the RBPs indulged in by the TNCs. However, the TRIMS Agreement has outlawed some of the measures and therefore governments are left without many tools to tackle RBPs of TNCs (Puri and Brusick 1989). Besides, the Agreement on TRIMS has a built-in agenda under Article 9 of the agreement, wherein the members could recommend expansion of the WTO acquis to both investment policy and competition policy. It was this provision that was invoked to set up two study groups to examine the necessity of further accords on investment policy and competition policy at the first Ministerial Conference of the WTO in Singapore in December 1996, thus further broadening the WTO agenda. GATS GATS is another agreement signed at the end of the UR of trade negotiations that involved several non-trade issues. As expected, it has wished in the preamble, to: establish a multilateral framework of principles and rules for trade in services with a view to the expansion of such trade under conditions of transparency and progressive liberalisation and as means of promoting the economic growth of all trading partners and the development of developing countries (WTO 2002) However, what followed in the agreement is sheer mockery of the cause ‘the development of developing countries’. The agreement brought in several non-trade issues, especially through rules on Mode 3 and Mode 4 of supply. However, the two modes have not been given equal treatment. Theoretically, labour and capital movements play the same role

WTO and development

19

in promoting efficiency – Mode 3 involves movement of capital, while Mode 4 involves movement of labour. Yet, the agreement focused on Mode 3 and ignored Mode 4, even as the developing countries have a comparative advantage in Mode 4 while developed countries in Mode 3. Trading in environment and ‘labour-pains’ Out of several non-trade issues, labour and environment have been a major bone of contention between the developed and developing countries for a long time. The status of labour and environment are different in the WTO. There is a committee on trade and environment, which has a mandate to hold discussions on a ten-point agenda. On labour standards, it was agreed during the Singapore Ministerial Meeting (1996) that the International Labour Organization (ILO) is the competent body to set and deal with core labour standards, but that there should be a dialogue between the ILO and the WTO. After the Doha Ministerial Conference, the situation has further changed. The Ministerial Declaration has brought environment into the negotiating agenda for the first time in spite of opposition by the developing countries. After the mainstreaming of environment into the work programme of the WTO, the next target could well be labour standards. Many people think that the issue of trade-labour linkage is dead. However, the final Declaration of Doha Ministerial on the issue of labour standards states: ‘We reaffirm our declaration made at Singapore Ministerial Conference regarding internationally recognised core labour standards. We take note of work under way in the ILO on the social dimension of globalisation’ (WTO 2001a). This mixing up of trade with non-trade issues certainly does not promote the trade agenda. The arguments from developing countries including India on extraneous and protectionist nature of these issues are quite understandable (Mehta 2003). However, will it promote sustainable development in developing countries? If development is to be sustainable, then the environment needs to be protected. However, developed countries believe that the poor countries cannot really do anything about that as they cannot enact or implement an appropriate law. They, therefore, want to bring the issue of environment into the WTO, as sustainable development is one of its objectives. They could not find any alternative other than trade sanctions. The United States even tried this formula unilaterally, the ‘shrimp-turtle case’ being an obvious example. In the ‘shrimp-turtle’ case, the US government, by virtue of its enabling legislation (Sec. 609 of US Endangered Species Act) imposed a ban on the import of shrimps, which were trawled without using Turtle Excluder Devices (TEDs). However, one should ask whether this step improves the situation in exporting countries. Consider the case of India, one of the affected countries. The ban was unlikely to reduce harvesting of shrimps or introduction of TED. The demand for shrimps in Indian market is also reasonably high, but heavy demands in the United States and other developed markets push the prices beyond the reach of

20

WTO and development

many potential consumers. The continuation of the ban might have led to a situation where the shrimp harvesters would have caught more shrimps to maintain the same level of earnings, thus killing more turtles. Similarly, a ban on products coming from industries that employ child labour can worsen the situation of the poor children. The existence of child labour is not just due to the greed of employers but also due to poverty. Very often, children and their parents work in the same industry. A ban can, therefore, worsen the situation of the affected families putting pressure on the children to earn more. Indeed, the whole family may shift to a non-tradable industry, probably more hazardous and less paying. This was in fact observed in Pakistan when the United States revoked trade benefits under the Generalized System of Preference (GSP) in 1996 for certain goods, such as leather sporting goods due to poor record of labour standards including child labour.3 If developed countries really care about these issues, then they should provide strong support in the direction of education and other means of keeping children out of streets and workplaces. Moreover, only a miniscule proportion of child labour is employed in tradable sectors that can be affected by an import ban. For example, in India, which accounts for the largest concentration of child labour, the export-oriented sector employs just about 5–7 per cent of total child labour of the country (CUTS 2003). No such figure is available for tradable industries that significantly damage the environment. But, the situation is not likely to be different. Talking about tackling the problems of child labour abuse or environmental damage in developing countries through trade sanctions has no logical or empirical basis. Both developed country consumers and developing country producers are responsible for the environmental damage or labour abuse that takes place in developing countries. If markets were not able to take care of such problems, then the best solution would be to find a mechanism to tax the consumers and subsidize the producers, rather than putting a complete ban. This can be done, for example, by providing generous development assistance to developing countries. However, the issue here seems to be not of protecting the environment or labour rights but to restrict imports from developing countries. Is it not an irony that the United States, which has shown utter disregard for the Kyoto Protocol and even failed to ratify ILO conventions on workers’ rights against discrimination on the basis of race or gender at home, has been pressing for environment and labour standards at the WTO? New roads to MA It is well recognized that domestic reforms and enhancement of capabilities are necessary to take advantage of greater MA in other countries that might come through multilateral trade liberalization. This linkage was taken as an alibi to bring several new disciplines at the WTO. Promotion and maintenance of a sound competition regime as well as a good investment climate, providing better trading infrastructure and thereby reducing the transaction costs of the trader,

WTO and development

21

ensuring efficiency in government procurement are all noble goals and have positive implications for development. It is, however, not established that an agreement at the WTO or any other trade agreement could be an effective or appropriate means to promote these developmental goals. Yet, such issues were forced into the WTO agenda in the Singapore Ministerial much against the wishes of the developing countries and ironically ‘to promote development’. As if developing countries were opposed to their own development and it was only the developed countries that were keen on it! Though at Singapore it was decided to study the issues of competition policy, trade and investment, trade facilitation and transparency in government procurement, substantial ‘progress’ was achieved on these issues at Doha, as the Declaration adopted in the Meeting recognized the utility of having multilateral agreements in these areas. It also adopted a work programme to clarify the elements of a possible multilateral framework and also expressed the willingness of the members to launch negotiations after the Fifth Ministerial Meeting, subject to an explicit consensus on the modalities of negotiations. However, many of the countries remained sceptical about the benefits and rationale of such agreements. During Cancun Ministerial Meeting, these issues played a significant role, as many believe that the Ministerial failed because of the adamant insistence of the EU to start negotiations on these issues which most developing countries opposed. The EU, Korea and Japan had been at the forefront of the countries pushing for multilateral agreements on these issues, especially investment and competition at the WTO. Most developing countries, particularly India, Malaysia, Egypt, etc., have been opposed to such agreements, while the United States had been quite indifferent. Most developing countries also feel that any more obligations at the multilateral level mean more expenditure on structural adjustment and enforcement mechanism. They think that the costs of making such adjustment may turn out to be larger than the expected benefits. Trade and investment As mentioned before, even during the UR trade negotiations, developed countries advanced the idea of framing multilateral rules to further liberalize the foreign investment regime. Developing countries were opposed to any such idea, primarily on the grounds that they were unwilling to embark on multilateral negotiations on investment under the GATT, which was essentially devoted to trade relations. Eventually, the developing countries agreed to negotiate on four clusters of investment-related matters. The four agreements under the auspices of GATT that relate to investment issues are: 1 2 3 4

TRIMS, GATS, TRIPS and Agreement on Subsidies and Countervailing Measures (ASCM).

22

WTO and development

TRIMS explicitly and exclusively deals with ‘negative investment measure’ issues, such as local content requirement and export balancing. The Agreement on TRIPS also has a bearing on FDI matters in that the definition of these rights and the adherence to the international standards and procedures constitutes part of the framework within which foreign investment takes place. The GATS relates to FDI matters since it recognized establishment of a local company, either as a subsidiary or as a joint venture, by a foreign service provider as mode of trade in services. With respect to ASCM, certain investment incentives lie within the definition of a subsidy and as such are prohibited. The demand for a comprehensive investment agreement at the WTO, however, came back once again in the Singapore Ministerial Conference. Many developing countries are, however, not convinced, as no evidence exists that an international investment agreement would increase the investment flows to developing countries. Empirical studies have shown that the FDI inflows are largely driven by the ‘gravity factors’, like market size, income levels, extent of urbanization, geographical and cultural proximity with major source countries and the quality of infrastructure. The policy factors that a multilateral agreement would try to control play a relatively minor role (Correa and Kumar 2003). On the whole, the multilateral framework under the WTO includes many of the provisions that the exporters of capital from the developed countries have been demanding so far. Hence, developing countries anticipated that the post-UR era would significantly increase the flow of FDI, particularly to developing countries. However, investment flows to developing countries have actually gone down as a proportion of total FDI since the establishment of the WTO. The share of developing countries in the global FDI inflow, however, increased once again in 2001, not because they performed better but the developed countries have been affected more by the global slowdown in the aftermath of the September 11. This can be due to the fact that developing countries are already providing a reasonably stable investment environment. This may also mean that developing countries do not attract much of the relatively footloose capital which they are not interested in. Unconvinced developing countries are not very comfortable with the existing investment-related provisions in the WTO acquis. The proposed agreement on investment, they fear, would further limit the scope for domestic control of TNCs without any balancing measures, particularly, in the context of leastdeveloped countries (LDCs) whose economic might is much less than that of many TNCs. Developing countries also point out that the proposed agreement attempts to provide protection as well as more liberal environment to foreign investors, without any concomitant efforts at ensuring responsible behaviour from them or putting home country obligations in the proposed agreement. Moreover, most countries, besides unilaterally liberalizing their policy environment, are going out of the way to provide incentives to foreign investors leading to ‘race to the bottom’ situation. Thus, if there is one reason for going for a multilateral agreement on investment, it is possibly to check the ‘incentive war’ (Stiglitz and

WTO and development

23

Charlton 2004). However, it is unlikely that this will be addressed in any such agreement. Competition policy Competition policy is now widely recognized as a useful instrument to promote development in a market-oriented economy. Moreover, the international dimensions of regulatory challenges are becoming more prominent day by day. The stronger nations are able to tackle this problem to some extent through extraterritorial application of their domestic competition law. But weaker nations are not capable of taking such measures. Therefore, there are some prima facie arguments to suggest that multilateral discipline can help the weaker nations more. However, developing countries have seen the approach of both the EU and Japan on the issue of competition policy at the WTO as a ‘MA’ push only. In response to such criticism, the EU shifted its focus from MA to hardcore cartels. However, their strong emphasis on non-discrimination as one of the core principles clearly shows that there has not been any shift in their MA agenda. It is quite clear that due to the proposed ban on hardcore cartels, the import cartels will have to be disbanded. However, one is not sure whether developing countries will be able to protect themselves from the harms caused by the export cartels and international cartels, as that will require cooperation and strong action by developed countries, which are not guaranteed in the proposed agreement. Paradoxically, the proponents have been focusing on the international cartels as a development issue while selling their proposal to developing countries. The issues related to competition policy and law are quite complex. In fact, it is recognized that even some of the developed countries do not have adequate capacity in this regard (Mavroidis and Neven 2001). Developing countries, with no or very limited experience, are not in a position to implement a competition law in an appropriate manner, whatever its form. Trade facilitation It is widely believed that there are merits in trade facilitation. The losses that businesses suffer through delays at borders, complicated and unnecessary documentation requirements are estimated to exceed, in many cases, the costs of tariffs. It is estimated that trade facilitation measures could save more than $150 billion a year (Nanda 2003). It may also be the case that developing country traders are probably more constrained than their developed country counterparts because of these unnecessary hindrances. However, it is also felt that it would place a substantial financial burden on developing countries much beyond the perceived benefits. Even if the benefits outweigh costs, it is widely believed that the development payoff might be greater if those resources were spent elsewhere. For example, to create a custom clearance infrastructure that will be as efficient as that of Singapore, even in

24

WTO and development

small developing countries, the amount of money required may well be in excess of $100 million.4 In many small countries, this figure is much higher than the money that government spends on education. Moreover, considering that the share of developing countries in world trade is just about 30 per cent,5 an overwhelming proportion of the estimated benefits of $150 billion would accrue to developed countries, while developing countries would bear a disproportionately high part of the costs. Government procurement Transparency in government procurement is indeed a development requirement, and hence, nobody is opposed to it as such, but some developing countries believe that the issue is better left with the national governments to take appropriate action. It is widely believed that a multilateral agreement on it may be the first step to push an MA agenda, otherwise why would some people be so keen when it does not seem to benefit them? Their distrust is not without reason. If one looks at the existing plurilateral agreement on government procurement (GPA) at the WTO that came into force on 1 January 1996, one can see that it is not only about transparency. It goes much beyond that. Governments are required to apply the principle of NT to the goods and services, and suppliers of other parties to the GPA and to abide by the most-favoured nation (MFN) rule, which prohibits discrimination among goods, services and suppliers of other parties (Evenett 2002). Thus, if the proponents are to be believed, then the proposed multilateral agreement has to be fundamentally different from the existing plurilateral agreement as non-discrimination (NT and MFN) lies at the core of it. It is not clear what will happen to the existing GPA if a multilateral agreement is signed. Obviously, there is enough room for suspicion that the ultimate aim of the multilateral agreement is to establish a framework similar to the existing plurilateral GPA. Moreover, as many developing countries have argued, if transparency in government procurement does not have anything to do with MA as claimed by its proponents, then it has no trade implication either. If it has no trade implications, then why should such an agreement be negotiated at the WTO, particularly when it can impose costs on developing countries whose procurement rules may be very different from the ones that are being proposed? The WTO is there to promote trade and not to promote good governance in developing countries. The question remains unanswered. Moreover, the transparency in government procurement, as per the provisions in the existing plurilateral GPA, is not just about transparency, it prescribes detailed rules about bidding procedures that have to be followed not only in government departments but also in government-owned enterprises. Efficiency in procurement not just about least possible price as very often goods and services are not standardized and ensuring the quality of goods and services becomes a difficult issue. It is important to understand that government entities

WTO and development

25

particularly the state-owned enterprises may value their prior experiences with the suppliers in making their procurement decisions.6 On the other hand, the suppliers might have created dedicated assets to serve the government entities better.7 In many developing countries, state-owned enterprises often operate because private capital does not serve those areas. But essentially they are doing business. Why should they be forced to accept competitive bidding if that goes against their business strategy or interests?

Negotiating approach at the WTO It is commonly believed that the job of the WTO is to promote trade and thereby to enhance efficiency and promote consumer welfare throughout the globe. However, this is not what typically happens in practice. The businesses in any country are better organized, resourceful and use several tactics to influence government policies. Consumers, on the other hand, are generally unorganized and lack resources to influence government policies. Business people are not known for their liking for competition and free trade. Thus, the WTO essentially works as a platform for bargaining on MA. ‘Free trade’ is not the typical outcome of this process, nor is consumer welfare (much less development) what the negotiators have chiefly in mind (Rodrik 2001). In such a situation, the agenda is essentially set by the people who have more bargaining power, i.e. larger market size. The export interest of developing countries who do not have sizeable market becomes a casualty. This explains why traditionally agriculture and textiles and clothing had been kept out of the GATT framework. The approach of individual countries at the WTO can be understood by looking at the kind of trade policies that individual countries are following. The trade regime in the United States, the largest market in the world, maintains a tariff structure that is distinctly against the developing countries’ trade interests (Box 2.1). The United States offers better deals to other developed countries than developing countries. This is not because the United States is less generous to developing countries, but because other developed countries are able to extract a better deal due to their stronger bargaining power. This is not typical of the United States only. All countries take a similar approach. The result is that the tariff structure in many industrial countries still contains rates above 100 per cent, and these tariff peaks are often concentrated in products that are of export interest to developing countries, including major agricultural products such as sugar, cereals and fish; tobacco and certain alcoholic beverages; fruits and vegetables; clothing; and footwear (Olarreaga and Ng 2002). Special and Differential Treatment (S&DT) has widely been recognized as an essential requirement at the WTO to give leeway to developing countries, to address their development needs. However, in practice, the beneficiaries of such treatment have been the developed countries and not the developing countries. Most of the S&DT provisions in favour of poor countries were just good

26

WTO and development Box 2.1 The US trade regime – favouring developed countries! The US trade regime today is a chaotic evolution of government policy and business community attitudes over the last eight decades. During the early twentieth century, American manufactures were enthusiastic lobbyists for tariff protection against their European rivals. Textiles and apparel mills, as the kings of the economy, got the best deals. Meanwhile, traditional developing country products – natural resources and consumer goods like tea and rattan-matting unavailable from American sources – have always had largely free access to the American market. In newer industries like computers, biotechnology and civil aircraft, etc., the US manufacturers were always ahead of their rivals and never sought much protection. As a result, today’s American trade regime looks like a fat man lying on its back: low at each end, high in the middle. Importers of sophisticated computers and jumbo jets pay no tariffs at all; neither do buyers of gourmet coffee or zinc. But in the middle, on clothes, US tariffs average nearly 18 per cent. Food items have even tougher obstacles and footwear is not far behind. So, as developing countries climb out of natural resources into manufacturing and export crops, they encounter band of trade protection. The results are embarrassing. To choose an egregious case, the United States now collects more tariff revenue from Cambodia than from Singapore. The US revenue tables show more such surprises. America buys about $40 billion worth of goods a year from Britain and $10 billion from Indonesia, but Indonesian exporters to the United States pay $200 million more in tariffs than their British counterparts. Likewise, business in the Philippines pay substantially more than those in France, and Bangladesh pays three times as much as Spain. Source: The Straits Times, 4 February 2002.

endeavour clauses, while those in favour of rich countries (such as in textiles and clothing, and agriculture) were binding. This again shows the clout and approach of the developed countries at the WTO. Similarly, the prevailing anomalies in the form of TRIPS, TRIMS, GATS and even the anti-dumping regime are all the results of this political process. Understanding this is essential since it underscores the important point that there is very little in the structure of multilateral trade negotiations to ensure that their outcomes are consistent with developmental goals, let alone that they be designed to further development (Rodrik 2001). In fact, pursuing mercantilist objectives, particularly by the developed world, might not be consistent with the objectives of reducing poverty and inequality in

WTO and development

27

the developing world probably because of its unintended consequences. It is well known that many developed countries are able to sell their goods and services not because they are cheaper, but most often because of their ‘esteem value’ or ‘brand image’ created through superior marketing skills though they surely come with the guarantee of quality. Absent inequality, the developed countries would not find much market for their expensive consumption goods and services in the developing world. Consider the case of India whose per capita income is about $800. If we consider a hypothetical situation where incomes are distributed equally in the country, how many Indians will buy products from ‘Gucci’ or expensive French wine or Scotch whiskey, go for a tour of Europe or for studies in US universities, or deposit their money in Swiss banks? In other words, rising inequality in developing countries may be good for mercantilist interests of the developed world even though they may not want that for its own sake. Hence, an organization like the WTO whose primary objective is to promote trade gets involved in making global rules that seriously affect policy space of developing countries, will surely limit their options in dealing with poverty and inequality. Thus, the fear that the broadening of the WTO agenda in the name of development will bring in further inequality in the system as well as in the member countries is real.

Re-shifting the paradigm Many have argued for putting development at the top of the WTO’s agenda. They have been encouraged by the so-called success of the developing countries in shaping the WTO agenda at the Doha Ministerial Conference. Page (2003), for example, notes that particularly in the last WTO Ministerial Meetings (Seattle 1999, Doha 2001) ‘developing countries have proved first that they can modify the outcome, then that they can block a settlement, and finally that they can initiate their own issues’. Undoubtedly, this can be an ideal situation. However, looking at the history of GATT/WTO and the negotiating approach that countries take at the forum, one may question whether this will ever happen. Let us now have a closer look at the so-called DDA to understand the context. The Doha Agenda includes three types of issues. The issues of the first type are to address the existing anomalies, or to mitigate the ‘side effects’. These include TRIPS and Public Health, the implementation issues, the work programmes on issues like S&DT, small economies, LDCs, trade, debt and finance, and trade and transfer of technology. The second type of issues on the agenda includes liberalization or reforms in agriculture, services, non-agricultural products, WTO rules (Anti-dumping and Subsidies), TRIPS (geographical indication (GI)) and Dispute Settlement, etc. The outcome of these could go either way but developing countries can also benefit if they are negotiated properly. The third type includes the so-called Singapore issues and environment, which essentially broaden the agenda of the WTO. The issues of the first type were raised by the developing countries. The

28

WTO and development

issues of second type were raised more or less jointly, while the issues in the third categories were thrust upon the developing countries by the developed countries. It is quite obvious that the promises the developing countries got from the rich countries were too small compared to the commitment (although conditional) that they had to make in return. Moreover, the post-Doha experience shows that developed countries have least regard for the issues that are important for developing countries. While they had no worries about the deadlines of the first two types of issues, the developed countries, especially the EU, were very keen, if not adamant, on launching negotiations on new issues. The attitude of the United States on TRIPS and public health was particularly discouraging. The importance of the issue of public health can hardly be overemphasized. Most of the great ‘takeoffs’ in economic history – such as the rapid growth of Britain during the Industrial Revolution, the takeoff of the US South in the early twentieth century, the rapid growth of Japan in the early twentieth century and the dynamic development of Southern Europe and East Asia beginning in the 1950s and 1960s – were preceded by important breakthroughs in public health, disease control and improved nutritional intake. On the other hand, there is no example in history where a country could achieve a breakthrough in growth and competitiveness with a baggage of poor health. The heavy burden of disease and its effects on productivity have certainly played a critical role in causing Africa’s chronic poor performance. A recent econometric study has shown that more than half of Africa’s growth shortfall relative to high-growth countries of East Asia could be explained statistically by disease burden, demography and geography, rather than by the more traditional variables of macroeconomic policy and political governance (Sachs 2001). Given this context, inclusion of TRIPS at the WTO was nothing but a mockery of the stated objective of the WTO of promoting sustainable development. Looking from this perspective addressing the issue of TRIPS and public health is not just an issue of mitigating side effects but of healing the wounds caused by the assault of TRIPS. Thus, even when there is no serious attempt to address the existing anomalies or the side effects, developed countries are pushing for seeking commitments on new areas. Of course, they do not forget to emphasize that these are only to promote development. In reality, however, these are meant for furthering MA, which will put substantial burden on developing countries without guaranteeing any improvement in their terms of trade. In fact, in an article in the Wall Street Journal just before the Cancun meet, Pascal Lamy, the then EU Commissioner for Trade, made a clean breast that all the new issues were essentially to ‘give effect to market opening’.8 Recent development experiences throughout the world have unequivocally shown that decentralized policy-making and empowerment of people are the keys to poverty alleviation and sustainable development (World Bank 2001a). However, the current approach of the WTO tries to reverse the process. While people are concerned about centralization of power at the national level, the WTO is advocating for centralizing policy-making power globally and disem-

WTO and development

29

powering people. This is all the more dangerous as the WTO does not have any expertise on the issues involved. Moreover, overloading the WTO could destabilize the very institution of the WTO. This may not be good for developing countries. Despite not being fair, the WTO provides the developing countries with a forum for collective bargaining. They are likely to be much worse-off if they need to negotiate bilaterally. The US–Jordan FTA is a clear example. Among other things, it imposes more restrictive intellectual property rules on Jordan than exist under the WTO. Being poor is not a crime. However, the existing situation shows that the poor countries are quite apologetic in demanding a fair treatment at the WTO. The following statement that was part of the Dhaka Declaration adopted in a LDCs’ conference held just before the Cancun Ministerial Conference is most illustrative in this regard. ‘LDCs shall not be requested under Article XVIII to undertake additional commitments on regulatory issues, which may go beyond their institutional, regulatory and administrative capacities.’ They do not even question the suitability of the kind of regulatory mechanism that developed countries are trying to impose on them. On the contrary, they beg the kindness of developed countries on the ground that they do not have institutional and administrative capacities. It is arguably the case that a regulatory regime that might be appropriate for the circumstances (economic, technological, social) will vary from country to country and over time. Looking at the existing scenario, it may not be an exaggeration to say that the WTO would do a great service to developing countries, if it would talk less about development. One may consider this approach to be negative. But ask game theorists, whether a player looks for the best that can happen to her or the worst that can happen to her? The answer is the worst! Developing countries need to be worried about the worst that can happen to them if the WTO agenda is broadened in the name of development. The situation at the WTO in this regard can be compared to the famous ‘prisoners’ dilemma’.9 Dealing with a broader range of issues at the WTO can be good for the entire world if there is enough mutual trust and cooperation can be sustained, especially if the technical and other assistance promised by developed countries indeed flow to developing countries. However, this is not possible here as the incentives (punishment) for breaking the promise are asymmetric. Developing countries will be bound to follow their commitments. But developed countries would face no punishment for breaking their promises. This is particularly so because the kind of penalty arrangement in the WTO dispute settlement mechanism that can discipline a smaller developing country but not a large developed economy.10 Putting development first at the WTO would lead to the misconceived belief that the WTO should have a proactive agenda to promote development. This would effectively mean that a model of development that the powerful countries think is appropriate would be imposed on all developing countries. It would be a far better option for developing countries to focus on MA and better terms of trade while ensuring that there are no undesirable side effects and that imple-

30

WTO and development

mentation costs are not too high. The WTO needs to look back to its original purpose of helping trade flow as freely as possible – so long as there are no undesirable side effects. Instead of broadening the agenda, the WTO must reshift its paradigm to focus on ‘trade as an instrument for promoting development’ rather than the rhetoric of ‘trade and development’.

3

Liberalization of agricultural trade Path to development or chasing a mirage?

Introduction Trade in agricultural products accounts for only about 9 per cent of global merchandise trade and only about 7 per cent of total global trade (including services). Agriculture is also an area that came into the GATT/WTO framework only during the UR of negotiations. Yet, agriculture has been the most important and contentious area that very often makes or breaks the deals in WTO negotiations as a whole. For example, the bases for concluding the UR of GATT were the bilateral agreements between the United States and the European Union (EU) – the Blair House agreements where the main issue was agriculture. In the DR of trade negotiations, agricultural negotiations have almost become synonymous with WTO negotiations. Ultimately, agriculture proved to be the dealmaker at Doha when the EU compromised its stance on agriculture subsidies. The Declaration recognizes the progress in negotiations in agriculture mandated by the UR Agreement and commits members to comprehensive negotiations aimed at substantial improvements in MA with a view to phasing out all forms of export subsidies and substantially reducing trade-distorting domestic support measures (Panagariya 2002). Many experts are of the opinion that this was a win for the developing countries. However, in reality, the EU only made its concession in exchange for stronger language on environment and the Singapore issues. The triangle of agriculture, environment and the Singapore issues, especially investment and competition policy, became the most important nexus for trade negotiation and bargaining in the final hours at Doha. The Cancun Ministerial Meeting, first after the launch of the new round in 2001, failed because of the stand-off between the EU and the newly formed G20 alliance over farm subsidies.1 It may also be noted here that a similar situation was created in an earlier Ministerial Conference at Seattle, which also failed. In the so-called July Package, however, commitment to liberalize agricultural trade could be made while dropping three of the Singapore issues, which developing countries never wanted. At the Hong Kong Ministerial, the situation was no different. A fierce tripartite battle involving the EU, the United States and the G20 was witnessed over the end-date for elimination of export subsidies and disciplining food aid.

32

Liberalization of agricultural trade

However, WTO members did not want to repeat Cancun and hence put together some tentative arrangements. In effect, the stalemate was postponed. The failure to meet the deadlines agreed at Hong Kong indicates growing divergence among members following Hong Kong Ministerial. There has, however, been a qualitative shift in the nature of the stalemate. Among the three pillars of agricultural negotiations, i.e. export subsidies, domestic support and MA, earlier the focus used to be largely on the first two pillars, subsidies of both types, while after the Hong Kong Conference, the focus is more on MA, where developing countries may have to face more obligations. This has happened because of a shift in the focus of negotiations towards special products (SPs) and special safeguard measure (SSM). The suspension of the DR of negotiations in the summer of 2006 had, however, been due to an impasse on subsidies.

Nature of agricultural production and trade To understand the political economy of agricultural trade, it is necessary to understand the global pattern of agricultural production as well. Global agriculture has shown unprecedented growth over the last five decades. As of now food output per head is about 25 per cent more than it was in 1960, despite the fact that the population has almost doubled over the same period. Much of this growth has come from growth in productivity and intensity of cultivation rather than expansions in the area of cultivation, which occurred only in Africa and Oceania. Over the same period, food prices have also come down by about 40 per cent (Wood et al. 2001). Unfortunately, despite all these, about 800 million people remain undernourished most of who ironically are associated with food production. This is because the productivity growth has come largely through the use of more inputs rather than cost-saving technology. The fall in prices thus could be achieved due to high subsidies or other types of market distortions. As can be seen from Tables 3.1a and 3.1b, the regions with high land productivity, namely Europe and East Asia, are also associated with high use of inorganic fertilizers. While Europe has the highest mechanization of agriculture as shown by the number of tractors, East Asia uses the highest quantity of labour per unit of land. This is because China is a part of this region where a large number of people are dependent on agriculture. Other countries in the region like Japan and South Korea of course have much less labour intensive agriculture. East Asia also has the highest proportion of irrigated land in total cultivated land meaning that the region also bears a high cost on irrigation. Regions with high labour productivity, namely North America and Europe, also use high dose of inputs like fertilizers and pesticides. These two regions also use nearly half of the commercially produced seeds in the world.2 Interestingly, Oceania, which has the lowest input intensity in the world except sub-Saharan Africa, shows high labour productivity only after North Africa. Oceania also happens to be among the most competitive regions in terms of costs of agricultural goods.

130.3 116.2 99.3 119.8 64.1 154.8 165.6 224.6 90.8 21.2 1,186.8

Million hectare

Cropped area ■

11.0 9.8 8.4 10.1 5.4 13.0 14.0 18.9 7.7 1.8 100.0

%

Percentage of total cropped area ■

0.02 0.28 0.15 0.11 0.45 0.98 3.58 1.57 1.47 0.05 0.85

Person per hectare

Agricultural labour ■

41 102 14 102 60 622 47 123 232 138 57

Hectare per tractor

Tractorsa ■

101.8 62.1 158.4 20.8 61.1 11.6 265.0 88.8 83.8 50.0 89.7

Kilogram per hectare

Inorganic fertilizerb ■

9.8 11.3 12.5 9.3 26.4 3.7 38.7 38.0 17.4 5.2 17.5

%

Percentage of irrigated cropland ■

40 19 102d 14e 5f – 16g – – – 23

$ per hectare

Pesticidesc

Notes Labour, fertilizer, pesticide, and tractor inputs are expressed based on hectares of cropland (annual plus permanent crops). (a) Tractors are defined here as all wheel and crawler tractors (excluding garden tractors) used in agriculture. (b) Includes only commercial inorganic fertilizers: Nitrogen (N), phosphorus (P2O5) and potassium (K2O). (c) Data for the year 1998. (d) Data for Western Europe only. (e) includes Eastern Europe as well. (f) Includes Sub-Saharan Africa. (g) Includes Southeast Asia, South Asia and Oceania.

Source: Wood et al. (2001).

North America Latin America and the Caribbean Europe Former Soviet Union West Asia/North Africa Sub-Saharan Africa East Asia South Asia Southeast Asia Oceania World

Region

Table 3.1a Regional distribution of crop area and agricultural inputs, 1995–97 average

Source: Wood et al. (2001).

North America Latin America and the Caribbean Europe Former Soviet Union West Asia/North Africa Sub-Saharan Africa East Asia South Asia Southeast Asia Oceania World

Region

99 77 104 41 48 49 189 113 58 9 786

Billion of 1989–91 $

Value of crops ■

12.60 9.80 13.23 5.22 6.11 6.23 24.05 14.38 7.38 1.15 100

%

Percentage of world total ■

760 663 1,047 342 749 317 1141 503 639 425 662

1989–91 $

Value of crops per hectare 1989–91 $

37,989 2,367 6,982 3,111 1,664 323 319 320 435 8,491 779

■

Value of crops per worker

Table 3.1b Regional distribution of value of crops, productivity and population, 1995–97 average

■

3.7 44.5 20.1 23.5 41.9 167.1 517.8 334.0 132.6 2.1 1,287.8

Million

Agricultural labour force ■

7.6 111.7 41.9 49.7 104.8 365.9 871.6 729.5 252.4 5.3 2,540.4

Million

Agricultural population ■

299.5 487.8 517.3 291.8 350.8 581.1 1,435.4 1,273.0 488.2 28.9 5,753.7

Million

Total population

Liberalization of agricultural trade

35

It is commonly believed that technological change brings down costs of production. This might have been true in industry and services, but in agriculture, the situation has been quite different. The capitalist economies, in general, have been able to avert the Marxian prediction of falling rate of profits and the consequent collapse of the system primarily due to technological change. Unfortunately, Marx could not be proved wrong as far as agriculture is concerned and farmers almost everywhere are under stress due to increasing costs and falling profits. This is because, unlike industry, farmers do not engage in R&D and do not develop their technology. Such R&D initiatives are taken by agro-business companies whose motive is not to increase the profits of the farmers but those of their own. Thus, new technology comes with a push to sell agrochemicals like fertilizers and pesticides as well as commercial seeds. Moreover, even if the new technology is cost saving to some extent, the agro-business, with their strong market power as well as the control over the technology, squeeze out the benefits denying the farmers the potential cost advantages. They are also quite disempowered with regard to the technology to be used for their farming and are most often (mis-) guided by the marketing techniques of the agro-business companies. Another kind of stress comes from the distortions in the markets for agricultural goods. The market for agricultural products is very often considered to be an example of a perfectly competitive market. This might be the case for farmers as there is large number of them. However, for the consumers, the experience is different. Farmers do not reach the consumers directly and there is a chain of intermediaries. Unfortunately, this set of intermediaries does not work in a competitive manner. Thus, the final consumers of agricultural products do not get the advantage of a competitive market – there exists a significant gap between the prices the consumers pay and the prices the primary producers receive. This kind of a situation is not restricted to particular countries, but has become a global feature. These intermediaries abuse their monopolistic dominance in the market for final products, while at the markets for primary products they abuse their monopsonistic dominance. A World Bank report estimated that the divergence between producer and consumer prices may have cost commodity-exporting countries more than $100 billion a year and suggests that imperfect competition at the intermediary level is the key factor.3 The case of the international coffee market is illustrative in this regard. According to an United Nations Conference on Trade and Development (UNCTAD) report, annual export earnings of coffee producing countries in the early 1990s were $10–12 billion and global retail sales about $30 billion. About one decade later, retail sales exceeded $70 billion, but coffee-producing countries received only $5.5 billion.4 The main reason for this divergence is that coffee distribution is a roaster-driven chain and four big roasting companies control 45 per cent of the global market. The situation is illustrated in Figure 3.1.5

36

Liberalization of agricultural trade

Consumers

Retailers

30 grocers  33% of global market

Roasters

4 companies (Philip Morris, Nestle, Proctor & Gamble and Sara Lee)  45% of global coffee market

International traders Domestic traders

4 companies (Neumann, Volcafe, ECOM, Dreyfus) ~ 39% of global coffee

Smallholder/estate

25 million farmers and workers

Figure 3.1 The global coffee bottleneck (source: Vorley (2003)).

Subsidies in agriculture: whose interest? Agriculture subsidies are given to agricultural producers in the form of direct financial support or indirect non-financial support such as government support to agricultural research programmes. The financial subsidies are broadly of two types: domestic subsidy given for production and export subsidy given for sale abroad. Industrialized countries account for 88 per cent of total domestic support payments made globally to agriculture. The total amount of agricultural subsidy provided every year by the Organization for Economic Cooperation and Development (OECD) countries like Canada, EU countries, Japan and the United States is estimated to be between $280 billion (World Bank estimates) and $300bn (Oxfam estimates). This amount is roughly six times the total development aid provided by these countries. US subsidies to its cotton-growers alone are three times its foreign aid to Africa! Total support to agriculture, according to the OECD, is even higher, at about $327 billion in 2000 (OECD 2001a). The figures quoted here are of course not beyond contest. Moreover, all these subsidies need not be trade distorting. Nevertheless, it is generally accepted that trade-distorting agricultural subsides are quite high in most developed countries. In 1995–98, WTO member countries notified export subsidies of $10 billion. Developed countries accounted for about 90 per cent of the total. Though the level of export subsidy decreased by half in 2000, it was still very high. Though export subsidies may have reduced, domestic support has been rising, thus nullifying the benefits of export subsidy cuts. For example, cotton in the United States receives no export subsidy and the export and domestic price of its cotton is the same. However, due to high domestic support, this price is less than half

Liberalization of agricultural trade

37

the cost of production! And the United States accounts for approximately half of the world’s total production subsidy for cotton. In most developed countries, the proportion of population depending on agriculture varies between 2–7 per cent. How then can such a small group of people influence state policies to such a great extent? Why, for instance, in Europe, does half of the budget of the EU go to the implementation of the so-called common agricultural policy (CAP)? It is widely believed that the farmers receive only a fraction of this massive subsidy. The lion’s share goes to the industry supplying seed, animal feed, fertilizers and pesticides and of course the food industry (UN/ESC 2004). There exist no credible estimates on how much of these subsidies are going to the farmers and how much are going to these agro-business companies. However, the high-subsidy regions, namely Western Europe, the United States, Canada and Japan, consume more than half of chemical fertilizers, pesticides and commercial seeds, though they occupy less than 20 per cent of total cropped land, is an indication. Land productivity of agriculture is higher in developed countries but they are not necessarily more profitable, because they are more input (fertilizer/pesticides) intensive. Thus, shifting of agricultural production from developed to developing countries may lead to lesser consumption of these inputs globally. For example, the estimated market value of commercial seeds in India is only about $600 million compared to $5,700 million in the United States, $5,400 in Western Europe and $2,500 million in Japan. India’s cropped area is about 173 million hectares, compared to 230 million hectare of the entire North America and 99 million hectare of the entire Europe. Obviously, if agricultural production falls in these regions due to reduction in subsidies, agro-business companies would be badly hit. This agro-business industry represents one of the biggest and most influential branches of industry, particularly in the United States and the EU. Ordinarily, any pressure group becomes stronger when they become numerically larger. However, for industrial lobbying, the smaller they are in number, the stronger they are in influence. In 1980, the UN Centre for TNCs published a study of the world food and beverage industries identifying 180 companies that dominated highly segmented markets at that time. Today, at least half of these companies retain roughly the same market power – and the UNCTC is extinct. Sixty-five agrochemical companies were competitors in the world market at the beginning of the 1980s. Six TNCs – BASF, Bayer, Dow, DuPont, Monsanto and Syngenta – now control 75–80 per cent of the global pesticides market, down from 12 corporations in 1994. DuPont and Monsanto together dominate the world seed markets for maize (65 per cent) and soya (44 per cent). Monsanto controlled 91 per cent of the global genetically modified (GM) seed market in 2001 (Action Aid 2005). It is this agro-business industry that is the major beneficiary of agricultural subsidies in developed countries and not the farmers as such.

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Liberalization of agricultural trade

Liberalized agricultural trade: who gain, who do not As a result of the UR, agriculture was brought under WTO disciplines. Import measures had to be eliminated or converted to tariffs (‘tariffied’) and then subjected to progressive reduction commitments, except for rice and some other staple foods that were subject to minimum access commitments – that is, Tariff Rate Quotas (TRQs). There was also agreement on the reduction of the level of domestic support, except for exempted green box6 subsidies and the de minimis amounts (amounts below a certain level). Developing countries were allowed more flexibility through longer implementation periods and lower reduction commitments by S&DT provisions. However, the share of developing country exports in global agricultural trade has increased only slightly over the period from 1990–91 through 2000–01, from 33 per cent to 33.6 per cent, and this growth has come from their exports to other developing countries. Even the developed countries have been able to increase their share of exports to developing countries (Table 3.2). On the other hand, many studies have shown that the implementation of the Agreement on Agriculture (AoA) resulted in faster increase of developing countries’ imports than their exports. There are numerous instances of import surges in developing countries during the implementation process of AoA. Dependence on food imports has increased amidst plummeting export earnings, leading to the type of unsustainable situation with regards to food security (FAO 2005). One-sided liberalization of agriculture, namely reduction of tariff barriers but no reduction of subsidies, slowly started resulting in negative impact on food security, livelihood and rural development of poor countries. It is estimated that if the United States and Europe removed their farm subsidies, the value of African food exports would double. According to an Oxfam study, protection of agriculture in rich countries costs the developing world 60 billion euros a year. According to a World Bank study, full elimination of agricultural subsidies in rich countries would increase global trade in agriculture by 17 per cent, and agriculture exports from low- and middle-income countries would rise by 24 per cent. As a result, total annual rural incomes in these countries would increase by about 60 billion or by roughly 6 per cent (Beghin et al. 2002). In a recent study, however, the World Bank has revised its earlier Table 3.2 Shares of developing and industrial countries in agricultural exports, 1980–81 to 2000–01 (%) Destination

Developing countries

Industrialized countries ■

1980–81 1990–91 2000–01 1980–81 1990–91 2000–01 Total 37.8 To developing countries 13.4 To industrialized countries 24.3 Source: COMPTRADE.

33.0 10.5 22.4

36.1 13.7 22.4

62.2 18.9 43.4

67.0 14.5 52.5

63.9 15.6 48.3

Liberalization of agricultural trade

39

estimates and suggests a much more modest gain (World Bank 2005b). Nevertheless, such estimates assume that developing countries do not have supply constraints and that they face only demand constraints. The fact is that many developing countries, despite being predominantly agricultural, remain net importers of food products. Some other countries, which are not net importers of food grains, hardly produce enough to feed their own population, a large part of who remain undernourished. For example, India, which is the world’s largest dairy producer, producing 84 million tonnes of milk through a cooperative network of ten million farmers in 80,000 villages, wants to export milk products to South East Asia, the Gulf region and the southern Mediterranean region. But presumably, it fails to do so as it faces stiff and unhealthy competition from subsidized European milk products (Naik 2005). However, does India produce enough milk and milk products to feed its own one billion plus population? India started exporting wheat, but in a reversal it started importing wheat once again in 2006. Many developing countries particularly in Africa do not have adequate infrastructure and institutions, and as a result, farmers are not able to reach even the domestic market (Polaski 2005). Amartya Sen (1981) has shown long ago that when famines were recurrent in India, they did not occur due to fall in overall production in the country. In those years, while there was production shortfall in some parts of the country, in some other parts, there was a surplus. It was the lack of proper transport and institutional arrangements that led to famines. Such situations are still prevalent in many countries, particularly in Africa, where there are famines and at the same time farmers are unable to sell their produce. Often this has been caused by government’s withdrawal from the distribution of food grain as no alternative mechanism was developed. Moreover, while traditional trade barriers in agriculture such as tariffs continue to decline, the use of technical and regulatory barriers is on the rise. In recent years, Sanitary and Phytosanitary (SPS) measures and Technical Barriers to Trade (TBT) have emerged as the greatest threat to poor countries’ exports (Box 3.1). By their very nature, both of these agreements may result in restrictions on trade. All governments accept the fact that some trade restrictions may be necessary and appropriate in order to ensure food safety and animal and plant health protection; however, developed countries are increasingly and arbitrarily using these measures. Developed countries are adopting stricter standards for macro-cleanliness, microbial loads, aflatoxin and pesticide residues. For instance, Japan insists on DDT residues level of 0.4 PPM on unmanufactured tobacco while the international standard is as high as 6 PPM (Jha 2001). Developing countries are especially vulnerable to regulatory changes in developed countries as they lack the resources to finance compliance with new and more restrictive SPS and TBT standards. A World Bank study estimated that implementing just three of the UR Agreements (on TRIPS, customs valuation and SPS) could cost more than a year’s development budget for the poorest countries (Finger and Schuler 2000).

40

Liberalization of agricultural trade Box 3.1 Upgrading standards: a fact sheet Product standards are a critical part of trade in the twenty-first century. These include product and sanitary and phytosanitary standards necessary for market access in agriculture. The development challenge posed by standards and border barriers are particularly important for the future trade prospects of the LDCs. Following are some bitter facts about standards: • •

•

•

The OECD estimates that standards alone represent an additional cost of between 2 and 10 per cent of final product costs. Most developing countries do not have the resources to adhere to standards. In Guatemala, for example, the total budget for standards in 2000 totalled $119,000. The World Bank’s experience with standards in the 1990s shows that investments of $305 million in Vietnam, $155 million in Turkey and $5 million in Morocco were needed in order to begin the process of modernization. In Jamaica, implementation of the SPS agreement will require a total of $7.6 million. This includes a revision of current laws and regulations to make them WTO-compliant ($200,000), establishment of the Agriculture, Health and Food Safety Authority to administer and coordinate SPS activities ($6 million), and other activities.

Source: World Bank, Global Economic Prospects and the Developing Countries 2002, 2001.

Reduction in subsidies is unlikely to bring gains to developing countries as believed by many, unless supply side constraints in these countries are addressed. This will take time. On the other hand, reduction of tariff barriers can be harmful to many developing countries as has already been seen in some countries. Developing countries, therefore, need to approach further trade liberalization in agriculture with extreme caution. They have emphasized the need for a pause in trade liberalization of agricultural products on whose production low-income and resource poor farmers depend for their basic food needs and subsistence income. In low-income countries, the agriculture sector is the largest employer, accounting for about 60 per cent of the labour force. Hence, these measures are required in conjunction with national development programmes directed at increasing production and productivity in the agriculture sector aimed at enhancing food production, maintaining and creating employment opportunities in the rural areas and protecting farmers from cheap subsidized imports. India made a strong pitch for a ‘special window’ under the WTO AoA to provide for S&DTs to ease the pressure on the farmers in facing up to the competition posed by farm produce from the developed countries. India has made one of the most comprehensive submissions to the WTO on agriculture trade liberalization. It proposed a ‘Food Security Box’ in the AoA. This, inter

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alia, would include exemption from any form of reduction commitments of all measures taken by the developing countries for poverty alleviation, rural development, rural employment and diversification of agriculture.7 These concerns were elaborated in a number of other proposals presented by a group of developing countries starting as early as the year 2000. In June 2000, during the first phase of AoA negotiations, a group of 11 developing countries,8 in their proposal, envisaged the creation of a ‘Development Box’ to address their food security and other livelihood concerns.9 In a nutshell, the thrust of all the proposals was to provide flexibility to developing countries to enhance domestic food production and to adopt other measures to protect the livelihood of their resource poor farmers, including concrete measures to address dumping and import surges. Will agricultural trade liberalization lead to destruction of agriculture in developed countries like the United States and EU as many people fear? Not likely. Developing countries will not be able to entirely flood the markets of developed countries as they have supply constraints. Moreover, most agricultural goods are bulky and prone to damage and hence they are subject to high transportation costs. In the absence of subsidies, inter-continental agricultural trade will remain within a limit. Moreover, developed country farmers will also adjust and in their quest to remain competitive, will use less inputs-intensive technology as practised in Oceania or may even go for organic farming. Though land productivity in these countries may see a declining trend, agriculture itself will not cease to exist as some developed countries claim. However, governments might have to play a proactive role in this process of adjustment by facilitating adoption of technology that can reduce costs, albeit with some reduction in land productivity as well. Less use of chemicals and fertilizers will enhance global welfare, as the agricultural technology will become more environment-friendly. Use of technology by farmers is highly influenced by the agro-business corporations. This may suit their business interests but may not be good for long-term sustainability. Thus, unsustainable practices need to be taxed rather than subsidized unless it involves very high social costs.

Agricultural growth and poverty reduction: which way? Of the 1.2 billion people of the globe who live in extreme poverty, approximately 75 per cent live and work in rural areas and about two-thirds of them draw their livelihood directly from agriculture (IFAD 2001). For many developing countries, agriculture is the only source of foreign exchange and hence agricultural trade liberalization is a pre-requisite for their development. Even in net food-importing countries, the poor people are dependent on agriculture and allied activities. It is also difficult to find examples where a country has industrialized without developing its agriculture first. As mentioned before, development of agriculture in poor countries needs more of infrastructural support and institutional reforms rather than liberalization of trade. There is no doubt that the government needs to play an important

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role in this regard. A part of the institutional reforms may be land tenancy reforms as well. As has been seen in China, Vietnam and West Bengal state of India, even limited reforms can have a significant impact on agricultural performance (UN/DESA 2006). Farmers also need support in terms of better technology. However, leaving this job for the private companies may not serve the purpose. If new and high yielding varieties of seeds can be used only with the use of more chemical fertilizers, pesticides and better irrigation facilities, then the outcome may not be good for the farmers. In fact, in many parts of Asia where agriculture is more irrigation intensive, excessive use of water has caused environmental problems and ultimately put more stress on the farmers due to scarcity of water. International agricultural research institutes must also keep this in view in their R&D efforts. Another important aspect is the market and distribution institutions. Here again, depending entirely on the private corporations may not bring any benefits for the farmers. As discussed before, agricultural markets are already dominated by a few companies exerting monopsonistic power over the farmers. In many countries, marketing and distribution channels have not even developed. In many of them, government agencies used to do the job, but while they have withdrawn, no proper alternatives have replaced them. In any case, if development of marketing and distribution channels means the same dominant TNCs spreading their tentacles in these countries, the farmers may not get any benefits. Promotion of farmers’ cooperatives can be a good way forward in this regard. The governments, however, need to play a non-interfering facilitating role. The development of the dairy sector in India (Box 3.2) is an excellent success story from where lessons can be drawn.

Issues at WTO DR This section briefly analyses the dynamics of negotiations on agriculture at the WTO particularly with reference to the July Package. This is done under three headings: export subsidies, domestic support and MA, as they are considered to be the three pillars of agricultural negotiations. Export subsidies Elimination of export subsidies on agricultural products is one of the goals of the DR. However, the issue was how soon it could be achieved (Dubey 2006a). The EU was the main stumbling block to an early elimination. In Hong Kong, however, the EU was forced to agree to a deadline of 2013, though most developing countries led by G20 wanted it to be earlier – 2010. Nevertheless, with this, the most contentious issue in export subsidies could be resolved. The EU accounts for the bulk of global export subsidies. No roadmap was, however, agreed on the phasing out of export subsidies, which, it was agreed, could begin only after the conclusion of the DR as a whole.

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Box 3.2 Indian Amul Dairy – a farmer’s success story Amul is the brand name of an Indian co-operative of small milk producers in Gujarat. Formed in 1946, it is now one of the biggest dairy producers worldwide. With 2.36 million of producers and 11,333 village societies involved, Amul has successfully replaced the old system where private milk producers dominated the market that shut out small producers and local farmers. The core of the project is the village milk co-operative, which works as follows: a village co-operative society of primary producers is formed under the guidance of the Co-operative Dairy Union (district-level cooperative owning the processing plant). A milk producer becomes a member by paying a nominal entrance fee. She/he must then agree to sell milk only to the society. The members elect a managing committee headed by a chairperson. This committee is responsible for the recruitment of staff that is in charge of the day-to-day operations of the society. Each society has a milk collection centre to which the farmers take their milk in the morning and evening. The main network of organization and logistics begin when the raw milk is collected from villagers and village societies. Then, the milk is tested according to established standards and sent to the dairy for further processing. The milk is tested again in a dairy lab, then pasteurized, clarified and standardized with the latest technological machinery and equipment. After pasteurization and clarification, the milk is taken to the market for sale. Co-operatives like Amul illustrate how the decentralization of management has promoted empowerment and the participation of the poor. Rural communities can be engaged optimally through skill development and providing employment opportunities in their villages, thereby restricting urban migration, preventing the formation of urban slums and reducing poverty conditions. Other than milk, Amul also produces high-quality chocolates, cheese, butter and other milk products giving tough competition to TNCs operating in India. Source: Chandra Shekara, P. (2000).

Unlike MA and domestic support, the degree of divergence among WTO members is relatively less on export subsidies. The agreement reached is tentative and will be confirmed only upon the completion of the modalities as well as parallel and commensurate progress in other related issues like export credits, food aid and exporting state trading enterprises. Since Hong Kong, there has been some progress on these issues, particularly export credit and state trading enterprises. The Chair’s Reference Paper on Possible Modalities of Export Competition,

44

Liberalization of agricultural trade

released on 15 June 2006, states that there is a good prospect of elimination of export subsidies. However, the biggest challenge of making it operationally effective remains. The negotiations so far have only scarcely dealt with concrete terms of phase-out. The draft modalities attached with the Reference Paper do provide a formal vehicle for that. But what it needs are the numbers, which are yet to be filled in. Domestic support Export subsidies account for only a minor part, roughly 3 per cent of the total farm support. Domestic subsidies constitute the major problem and significant progress in this area is necessary to make any real progress in agricultural negotiations. In Hong Kong, three bands for reductions in the final bound total tradedistorting subsidies, with higher linear cuts in higher bands, were agreed. It was also agreed that the base point for reduction would be the final bound rates of subsidies and not the applied rates as demanded by many. The extent of reduction was, however, still a matter of negotiation. In Hong Kong, it was agreed that those developing countries whose domestic support is below 10 per cent and hence have no commitment to reduce them, would be exempt from reductions in de minimis (minimum levels of support) as well as in the overall trade-distorting domestic support, which came as a relief to many developing countries. There was a proposal on the table for undertaking negotiations for reducing the de minimis, permitted for developed and developing countries that are exempt from reduction. Developing countries, which are entitled to a de minimis of 10 per cent of total production, opposed this move. Post-Hong Kong, members continue to struggle with the question of how to ensure that green box subsidies fulfil the ‘fundamental requirement’ that they have no, or at most minimal distorting effects on trade or production. The G20 developing countries and the Cairns Group of farm exporters have expressed scepticism about the purported absence of distorting effects, especially with regard to direct payments. They have proposed reforms aimed at minimizing any distortion. The EU, in contrast, opposes extensive changes to the green box. The review of the green box supports remains a major concern for developing countries which seek to discourage box-shifting practices of developed countries and their compliance with regard to their ‘decoupled’ payments and other green box instruments with the criteria set forth, i.e. these should not be trade distorting or be minimally trade distorting. Another contentious issue is the need for new green box provisions to accommodate development programmes of developing countries aimed at alleviating poverty, promoting agrarian reforms, etc. Equally important is the issue of additional criteria for blue box supports. However, on this, Members only repeated longstanding differences without making any progress. The United States and the EU indicated a willingness to engage with Benin, Burkina Faso, Chad and Mali, the four West African countries that have called for the ceiling on blue box cotton payments to be one-third of the overall cap. This has also been a contentious issue for long. However,

Liberalization of agricultural trade

45

Members have kept aside the persistent differences on domestic support and turned their attention to MA, on which there are more disagreements. Nevertheless, finally, this issue proved to be the bone of contention, and in a repeat of history, the disagreement over subsidies particularly due to the refusal of the United States to see reasons led to the suspension of the DR negotiations in the summer of 2006. MA As per the July 2004 framework, negotiations in this area are mandated to achieve ‘substantial improvements in market access . . .’ through a single tiered approach in tariff reduction that would be applicable to both developed and developing countries. The main divergence was on the formula to be applied for tariff reduction, with some countries like the EU and G10 (led by Japan, Switzerland and Norway) favouring the UR approach to be used within each section of the tiered formula and countries like the United States, Australia, New Zealand and Thailand favouring the Swiss formula. The UR, which sought only an average tariff reduction of 36 per cent and a minimum of 15 per cent per tariff line for developed countries, would give those with tariff peaks the flexibility to assign only minimum cuts on sensitive products but still meeting the average cut through bigger reduction in other less sensitive products. On the other hand, the Swiss formula was favourable to those with offensive or export interests because it proposed deeper tariff cuts using a mathematical formula with a coefficient of 25 that would harmonize tariff levels across countries and bring all tariffs down to less than 25 per cent. On this contentious issue of MA formula, at Hong Kong, the ministers agreed to adopt a balance between the Swiss formula and the UR approach and as a starting point used the G20’s proposal. The Hong Kong Declaration agreed on the banding approach to the reduction of tariffs. According to this approach, agricultural tariffs have been put in four bands with the provision that tariffs in the higher band will be subject to deeper cuts. Further, different coefficients for developed and developing countries may be agreed upon to provide S&DT to developing countries, though they have to be proportional. This is closer to the acceptance of a non-linear approach of the Swiss formula (Ranjan 2006). The extent of cut in each band was not agreed upon at Hong Kong, though various figures were discussed. Deeper cuts in the higher bands will no doubt bring down appreciably the agricultural tariffs of developed countries, most of which took very high tariff bindings during the UR of negotiations. But it will also involve substantial reductions in the tariff bindings of several developing countries (Dubey 2006a). Another important issue, particularly for developing countries, is the flexibility to self-designate an appropriate number of tariff lines as SPs. Developing country members will also have recourse to a SSM based on import quantities and price triggers. The precise arrangements for the SSM, however, could not be negotiated at Hong Kong. So far as SPs are concerned, the developing countries

46

Liberalization of agricultural trade

will be able to effect softer cuts (say 5 per cent or so) in their tariffs, but they are unlikely to be able to get away with no reductions at all. Under SSM, developing countries will be able to raise their tariffs in the event of a sudden surge in imports or decline in prices. Since Hong Kong, there has been no progress in this area, and it has remained one of the most divisive areas of the agriculture negotiations, as Members with high tariff barriers seek to fend off calls for cuts, while the United States and the G20 group of developing countries are asking the EU in particular to be generous with its farm tariff offer. The positions remain largely unchanged on the extent of tariff reduction and the exceptions to the cuts. However, the divisions on SPs and SSMs have become sharper. Some countries even gone to the extent of asking for the abolition of SSM, arguing that the safeguard was only intended to be a transitional mechanism and is therefore no longer needed. What is more, the issue has created divisions even among the developing countries who remained united at Cancun and Hong Kong. Developed countries, it appears, have been able to hit the fault lines that always existed in the unity of developing countries (Nanda and Kumar 2006). The latest stalemate, however, has been caused not due to disagreement over SPs and SSMs but due to the adamant refusal of the developed countries, particularly the United States to reduce domestic subsidies.

Conclusion The elimination of export subsidies is unlikely to result in any improvement in the competitive position of most developing countries in the world market in general and developed country markets in particular. While the domestic subsidies in the OECD countries amount to a whopping $300 billion plus level, the export subsidies amount to less than $10 billion. Though it may lessen the impact of cheap imports of agricultural products into developing countries only marginally. The elimination will help only those countries, like Argentina, Brazil and China, which by virtue of the efficiency of their agricultural sector, have the capacity to overcome the barrier of domestic subsidies given by major developed countries and thus place themselves in a position of close competition with these countries (Dubey 2006a). Given that there are no concrete results on reduction in domestic support, developed countries would be able to maintain their domestic subsidies at quite high levels. Developing countries, however, will not be able to provide much of domestic subsidies even if they are allowed, as they do not have enough fiscal strength to support their farmers. The relative importance of agriculture sector in the developed world is quite low and hence the non-agriculture sectors can support the agriculture sector. However, in developing countries, the relative importance of agriculture is quite high and hence non-agricultural sectors would not be able to support the agricultural sector. Hence, effectively, the battle at the WTO negotiations is largely about capturing higher shares of the developing

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countries’ markets. Precisely, this is the reason why a division has been created even among the developing countries. The attitude of developed countries on agricultural liberalization is no less harmful than TRIPS. However, a global movement against a strong patent regime could be launched, as even in the United States, consumers are not happy with it, as they are paying very high prices especially for pharmaceuticals. Consumers are obviously not unhappy with outrageous subsidies on agriculture because they are getting cheaper foods. The agro-business lobby has also been able to convince them that status quo on agriculture must be maintained, otherwise it might have dangerous consequences for the countries. Consumers of developed countries need to be sensitized that the projected fear on agricultural liberalization is unfounded. They should be informed that agricultural trade liberalization would lead to global welfare including that of their own countries. Moreover, they must also know that they might be paying lower prices for these goods but they are also paying higher taxes. It is also likely that the tax burden they bear is higher than the relief they get in terms of reduced prices of food products. For poor countries, however, liberalization of trade may not bring any benefits to farmers or help poverty reduction. What is more important is to address the supply side constraints. In fact, further reduction of tariffs even before such supply side constraints are addressed can bring enormous misery to their people. Taking care of these supply side constraints would require more involvement of the governments than is the case in most developing countries now. Otherwise, development of agriculture and reduction of poverty will remain a mirage.

4

Deepening of the GATS Need for cautious treading

Introduction Inclusion of services in the framework of GATT was one of the most controversial issues during the UR negotiations. However, finally the developing countries agreed under pressure and on the assurance that the agreement on services would allow enough flexibility to liberalize at their own pace and through four modes of supply. Four modes of supply, including movement of capital and labour, were developed as part of GATS framework agreement so that the member countries could organize and schedule their MA and NT commitments and obligations. Thus, in the context of GATS/WTO, the concept of international services ‘trade’ encompasses, in addition to traditional cross-border transactions, FDI and the movement of labour. The members are under no obligation to make commitments in all of the modes or in all the sectors. They have complete freedom to choose sectors and modes in which they want to make commitments. The members are free to make commitments in all the four modes in a particular sector, or selectively choose among them in the chosen sectors. Moreover, GATS has provided for further negotiations to liberalize beyond initial commitments. The architecture envisages ‘bargaining’ and ‘trade-offs’ within the services sectors and across modes of delivery. WTO members can negotiate reciprocal benefits in exchange for locking-in their policy reforms. Considering that services constitute the most important sector, not only in developed countries, but also in many developing countries, the inclusion of this sector was imminent, sooner or later. Share of services in GDP, on an average, is now more than 70 per cent in developed countries and more than 50 per cent in developing countries. In terms of employment, though the share of services in developed countries almost matches that of share in GDP, in developing countries, the figure is about 35 per cent. Moreover, the developments in the field of information and communication technology (IT) in recent years have expanded the range of services that can be traded internationally. Many of the services that were considered non-tradable till recently are now actively being traded though much of this started picking up since the mid-1990s, just after the signing of the GATS (Primo Braga 1996). Thus, the inclusion of services in the GATT frame-

Deepening of the GATS

49

work was not necessarily against the interest of developing countries. However, as it always happens, developing countries had little understanding on any new issues that have been brought into the GATT/WTO. As a result, the way it was framed, as we will see later, was to serve the interests of developed countries only.

GATS – nature of commitments Under GATS, members are to make specific commitments on MA (Article XVI) and NT (Article XVII) in individual sectors. The trade effects of GATS depend predominantly on the extent and nature of these commitments. Article XVI enumerates six types of limitations – including numerical and value quotas, foreign equity ceilings and restrictions on the legal form of establishment – whose use is prohibited unless they are inscribed in the schedule. Article XVII of GATS, mirroring GATT Article III:1, defines NT as treatment no less favourable than that accorded by the Member concerned to like domestic services or service suppliers. Contrasting with GATT, NT under any of the four modes of supply may also be made subject to limitations. Pursuant to Article XX:2, measures considered inconsistent with both Article XVI and Article XVII are to be scheduled in the MA column. Most schedules are divided into two parts, one horizontal and one sector-specific section. Horizontal limitations reflecting policy constraints of a general, economy-wide nature apply across all sectors listed in the schedule. The binding effects of commitments under the GATS are comparable to tariff binding under the GATT. The absence of commitments in a sector may not necessarily mean that MA or NT is denied. However, member retains the possibility to introduce any type of limitations or to ban trade altogether, at any time. Similarly, Members are free to offer more liberal conditions than those laid down in their schedules, on the condition that the basic MFN requirement be respected. Members’ specific commitments vary widely in sectoral coverage, extent of limitations to MA and NT and modes of supply coverage. In general, there is a correlation between the degree of development of the services sector and the coverage of the sectors offered. The UR commitments of both the developed and developing countries are generally considered to have been mainly status quo commitments (Hoekman 1996; Dobson and Jacquet 1998). However, they are still important as they consolidate the status quo and offer guaranteed security of access, as well as the guarantee that the policies will not be reversed in the future. It is quite difficult to make a proper assessment of the liberalization across modes of supply. Figure 4.1 gives a rough idea for overall binding as well for two groups of countries: developed and developing (including transition and least-developed) economies. It is evident that the emphasis of most commitments put forward by all countries is on commercial presence mode of supply, followed by movement of natural persons, if one considers the coverage of sector including both full and partial commitments. It is, however, noteworthy that in Mode 4, there are hardly any full commitments except by a few

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Deepening of the GATS

Percentage of countries

100

80

60

40

20

0 All

DC DT Mode 1

All

DC DT Mode 2 Full

Partial

All

DC DT Mode 3

All

DC DT Mode 4

Unbound

Figure 4.1 Structure of MA commitments by mode (source: WTO(S/C/W/99) and Maschetti (2004)). Note Calculated on the basis of a sample of 37 sectors deemed representative for various services areas. All (All Members); DC (Developed Countries); DT (Developing and Transition Economics, including Least Developed Countries).

developing countries.1 This, probably, reflects the fact that movement of natural persons is allowed in almost all sectors but they are linked to intra-corporate transferees and movement of highly skilled professionals. The bindings undertaken for Mode 2 are quite liberal. In fact, if one considers only full commitments, then this is the most liberal mode, while bindings on Mode 4 are the least liberal of all. However, the commitments in Mode 2 are hardly of any use as governments may have few instruments to prevent their nationals from moving abroad for procuring services or to influence their consumption once they have left the country. So far, only one major barrier that affects trade under Mode 2 could be identified. This relates to non-portability of health insurance that affects patients, particularly in the United States, to seek medical treatment abroad. However, this may not be due to government created barriers only, but also due to the cosy relations that the insurance providers maintain with the hospitals, as even private insurance providers are averse to allowing their policyholders to go abroad for medical treatment. Some WTO members (e.g. the United States and Bulgaria), however, have included the non-portability of public health insurances in their schedules of commitments for the health sector (Weitenberg 2003). It is interesting to note that transition economies and LDCs have tended to undertake more open commitments reflecting the fact that many of them are acceding countries that were forced to take such commitments (Marchetti 2004). Commitments made under Mode 1 seem to be least open if one considers the

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total coverage (both full and partial commitments), though this mode is comparable to Mode 3 and better than Mode 4 if one considers full commitments only. It is quite an irony that Mode 1 commitments could be the least liberal, considering that this is the only mode that involves trade in services in purely conventional sense. Strictly speaking, if commercial presence is a form of trade, then all FDI projects are also a form of trade. Mode 3 essentially means entry of investment into the WTO through the backdoor. This is quite significant because today much of FDI is taking place in the services sectors which now account for more than two-thirds of total FDI inflows (UNCTAD 2006). Until recently, most developing countries were not in a position to benefit from the commercial presence mode of supply, given the high cost of establishment in developed countries and the weaknesses of developing countries’ firms in terms of financial and human capital, technology and so on. Even now, only a few developing countries can think of taking advantage of Mode 3 liberalization. For the same reasons, developing countries are not able to make use of Mode 1 even when delivery of some services is technically feasible, as developed countries require commercial presence for providing these services. Developed countries have, however, been able to facilitate trade in services in Mode 1 through another agreement at the WTO – TRIPS can be useful in promoting IPR-related services. In fact, royalties and licence fees constituted the single largest component of services in the category of ‘other services’ in 2003. It has also been noted that developed countries were interested only in the liberalization of movement of capital in services sector, but they included Mode 4 under pressure from the developing countries (Mattoo 2001). If it is so, then one must conclude that the developing countries have been short changed. Since Mode 4 commitments are in the limited categories of intra-corporate transferees (i.e. managers, specialists, executives) and business visitors, they are essentially to facilitate movement of capital rather than movement of natural persons per se. For developing countries, these commitments have little value in the light of their connection with Mode 3 commitments and the fact that NT in most cases is left unbound. Moreover, most of the commitments in Mode 4 are subject to economic needs test (ENTs) which are quite arbitrary.

GATS and developing countries During the UR of trade negotiations, developing countries considered GATS to be against their interests. However, in the aftermath of GATS, developing countries have allegedly been able to increase their share in the global trade in services. Moreover, despite generating so much heat during the time of negotiations, the functioning of the GATS has been reasonably smooth. Services have given rise to very few trade disputes over the past ten years. Of the more than 100 cases brought before the WTO Dispute Settlement Panels, only two cases – the United States and Mexico over telecommunication services and Antigua/ Barbuda and the United States over gambling and betting services – have centred exclusively on the obligations made under the GATS (Adlung 2004).

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Thus, it has often been argued that the developing countries have benefited from the GATS without it being used against them and they are likely to benefit more from further deepening of GATS. The statistics that the share of developing countries in the world export of services rose from 18 per cent in 1990 to 24 per cent in 2005, and more importantly its linkage with GATS, should be taken with a pinch of salt. Within the developing world, growth of export has been uneven, as only Asia has seen growth in the share in exports while export shares of Africa, Latin America and the Caribbean have been stagnant. Neither the growth has been even within Asia. Moreover, most of these countries that have enhanced their exports shares are not truly developing countries. When GATT was formed, and even after many years of that, Hong Kong, Singapore, South Korea and Taiwan were all developing countries in true sense. Now they have developed but their status at the WTO remains the same. However, the fact is that both South Korea and Taiwan are compared to lower rung developed countries of Europe in per capita income, while the per capita income in Hong Kong and Singapore is higher than the European average. In fact, Hong Kong is the sixth richest country of the world in Purchasing Power Parity (PPP)-based per capita income. If these countries are excluded from the list of developing countries, their share will show a much modest increase from 12 per cent in 1990 to about 16.5 per cent in 2005. However, linking this growth to GATS is quite problematic. These data are based on Balance of Payments statistics that do not consider Mode 3, which happens to be the most important mode of service delivery among all the modes defined by GATS. In fact, non-availability of data on trade in services by modes of delivery remains a major impediment to make an assessment on the consequences of services trade liberalization through empirical investigation. Incidentally, Mode 3 is also growing in importance as some estimates indicate that its share has grown from about 38 per cent in 1997 to about 50 per cent in 2004 (Table 4.1). This is also the mode that is used predominantly by developed countries. It is difficult to estimate the share of developing countries in the services delivered through this mode, but their share in global FDI outward stock in services sector, which can be used as a proxy, was just about 3 per cent in 1990, which rose to about 10 per cent in 2004. Taking this into consideration, the growth in the share of developing countries in exports of services could be even lower. Table 4.1 Trade in services by mode of supply (percentage shares) 1997 Mode 1 Mode 2 Mode 3 Mode 4 Total

41.0 19.8 37.8 0.1 100

Sources: Karsenty (1999), Maurer (2006) and Banga (2006).

2004 35 10–15 50 1–2 100

2005 28 14 57 1 100

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Moreover, making a point-to-point comparison can also be misleading. The share of developing countries in world total export of services (excluding Mode 3) has been growing since the 1980s and reached a peak of 24.4 per cent in 1997. However, it started falling thereafter reaching a low of 21.9 per cent in 2003, rising again in 2004 and 2005. Moreover, this has also to be seen in the overall context. The share of developing countries in world export of merchandise has also grown to 31 per cent in 2004 and 36 per cent in 2005, compared to 23.4 per cent in 1990 and 27.5 per cent in 1999. This might have been due to the fact that developing countries, particularly those in Asia have been, on an average, growing faster than the developed countries.2 There are two other perspectives from which one can look at the issue – share of services in total trade of a country and the balance of services trade. The share of services in total trade had been growing steadily for developing countries till 1997 when it reached 17.4 per cent from a mere 11.8 per cent in 1980. However, it has been falling since 1998 reaching 14.5 per cent in 2003. Throughout the period, developed countries witnessed a rise in the share of services in total trade (Findlay and Sidorenko 2007). On the trade balance front, developing countries have been maintaining a deficit in trade in services since 1981, which has widened in recent years, while the developed countries have been maintaining a surplus, which has also been growing steadily (De 2006). If one takes the GATS definition of trade in services,3 both the deficit of developing countries and the surplus of developed countries would be much higher. To compare this with trade in goods, developing countries recorded deficits in some years, but of late, they have been doing better. Developed countries, however, have maintained a deficit which has been growing. This deficit of the developed countries is almost entirely due to just one country – the United States. Though there have been only two cases at the WTO Dispute Settlement Body (DSB) that pertain to GATS, both are quite important and illustrative. In the Telmex case, the Panel found that actions by service suppliers that were required by Mexico’s Federal Telecommunications Commission were inconsistent with that country’s GATS commitments under the Reference Paper. It is quite unlikely that Mexico would have taken additional commitments if it had not intended to abide by them. This illustrates the fact that countries may not always realize, when making commitments, the extent to which these will limit their future policy options. In the Internet gambling case, the United States, after losing the case at the WTO, has been making a similar plea. While Mexico accepted the WTO ruling, the United States has been trying to find ways around and even exploring the idea of withdrawing the commitment. It only shows how difficult things could be for developing countries, if a country like the United States, with probably the strongest legal backing in the world, can fail to realize the possible implications when making commitments. The fact that there have not been too many disputes at the WTO on the obligations concerning GATS could be a reflection of the fact that countries have not made too many commitments. In fact, the number of investor-state disputes at the International Centre for Settlement of Investment Disputes (ICSID)

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or Multilateral Investment Guarantee Agency (MIGA) involving developing countries and foreign investors can indicate the potentials for disputes if countries go for deeper commitments at the GATS.4 The NAFTA which has created several investor-state disputes is yet another example.

GATS and the DR GATS provides for successive rounds of negotiations as it aimed at progressively higher level of liberalization. The first such round was to start not later than five years from the date of entry into force of the Agreement, i.e. 1 January 2000. Thus, despite the inconclusive outcome of the Seattle Ministerial in 1999, a new GATS round could be launched in 2000. Though formally it was launched in March 2001 when the Council for Trade in Services adopted a two-page document setting out Guidelines and Procedures for the Services Negotiations (document S/L/93). The request-offer approach was accepted as the ‘main method of negotiations’. The Doha Declaration of November 2001 reaffirmed these guidelines as a basis for continuing the negotiations and integrated the services into the general Doha Agenda of negotiations with some changes in the target dates for the submission of initial requests and offers. The ‘July Package’, adopted by WTO members in 2004, further extended the target date for revised offers to May 2005. To get the developing countries on board, the objective of increasing participation of developing countries in services trade, in particular, the need to give ‘due consideration to the needs of small and medium-sized service suppliers, particularly to those of developing countries’ had been highlighted. It also talked about the obligation to duly respect national policy objectives and to accord appropriate flexibility in the scheduling process as well as conclusion of the negotiations on emergency safeguards5 and of the negotiations in other rulemaking areas under GATS – domestic regulation, government procurement and subsidies – prior to concluding the negotiations on specific commitments (Adlung and Roy 2005). Just prior to the Hong Kong Ministerial Conference, a strong push by certain WTO members, especially Australia, EU, Japan, Switzerland, Korea and supported by the United States to establish mandatory minimum MA commitments (benchmarks) under the new proposed mechanisms, ‘complementary methods for services negotiations’ that also called for a plurilateral approach, created a major controversy. The developing countries were asked to open up a minimum percentage of sub-sectors for participation of foreign service enterprises and providers particularly under Mode 3. Under the proposals, developing countries were allowed to commit in a lower percentage of sectors than developed countries. But since the developed countries had already made commitments in more sectors, the proposals could, by and large, affect developing countries only. Indeed, the EU even linked its agricultural tariff reduction offer to the membership’s acceptance of mandatory market opening commitments in services. In contrast, the overwhelming majority of developing countries remained fiercely

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opposed to any kind of benchmarks arguing that the proposals went against the basic principles and structure of the GATS, which enable developing countries to select the degree to which they choose to make commitments, and in which sectors. Finally, the idea of benchmarking was abandoned but plurilateral negotiations were launched after the Hong Kong Ministerial. There has been a flurry of requests after the opening of plurilateral negotiations. Although the bulk of the demandeurs are industrialized countries – such as Australia, Canada, the EU, Japan, Norway, Korea, Singapore, Taiwan and the United States – some developing countries have also participated in collective requests. Broadly speaking, the plurilateral requests identify the demandeur countries and specify that they ‘are also deemed to be recipients’ of the request that they are sponsoring (BRIDGES Weekly 22 February 2006). From the developing countries, India has taken the lead to make requests on movement of natural persons as well as Mode 1 and Mode 2.6 The Mode 4 request seeks Members to make commitments in providing effective MA highlighting that the existing commitments in Mode 4 are predominantly horizontal and by and large restricted to personnel movement in relation to commercial presence (Mode 3). Therefore, the request urges the recipients to make commitments by recognizing ‘common categories of movement both linked to as well as de-linked from commercial presence in the horizontal commitments’.7 This request is addressed to nine developed Members, namely the United States, EC, Australia, Canada, Japan, New Zealand, Switzerland, Norway and Iceland. The request lists the MA and NT limitations for each of the defined category to which the Members have been asked to schedule removal commitments and address specific MA conditions such as qualifications, period of employment, duration of stay, removal of ENTs and transparency in such tests, and removal of wage parity. Interestingly, the request on Mode 1 and Mode 2 has been made to 21 countries some of which are developing.8 Even some of the requesting members are developed countries.9 The request notes, whether or not there are actual restrictions on the ground for cross-border supply of services, the fact remains that gaps in current commitments of Members exist, which need to be plugged for better MA opportunities. The request seeks Members to make full MA and NT (new/improved) commitments in Mode 1 and Mode 2 in sectors/sub-sectors of interest where gaps in commitments do exist in Members’ schedules.10 Due to uncertainty in classification of certain services delivered electronically as either Mode 1 or Mode 2, the Members have been requested to make similar commitments for both modes of supply. However, in situations where the two types of service supply can be differentiated, different commitments are warranted in Mode 1 and Mode 2. Developed countries, as expected, concentrated on Mode 3 and the liberalization of more sectors. From the developed world, Japan participated in the highest number of plurilateral requests – 13 sectors, the plurilateral request on Mode 3 and all three requests on MFN exemptions – followed by the United States and the EU each of which participated in 12 of the sectoral requests in

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addition to joining the plurilateral request on Mode 3.11 Australia also participated in 12 sectoral requests, while Canada, Norway and New Zealand each joined nine sectoral requests. The requests do not necessarily name all of the recipients, though many of them indicate the number of Members targeted, generally ranging between 19 and 27. However, their prominent targets are major developing countries such as Argentina, Brazil, China, Egypt, India, Indonesia, Malaysia, the Philippines, South Africa and Thailand who have received most of the collective requests.

The way ahead The Article XIX:3 of GATS provides for the assessment of trade in services as an ongoing activity of the Services Council. However, there has not been any comprehensive assessment, in part, due to the dearth of trade data in services, in particular with regard to commercial presence. Yet, a new round has been launched. Since there is not much to show that developing countries can gain from Mode 3 liberalization by way of ‘trade’, the demandeurs emphasize the potential benefits that developing countries are going to reap due to liberalization of their services through improvement in efficiency.12 So the emphasis is on ‘liberalization of services’ rather than ‘liberalization of trade in services’. Efficient markets for services are important. But does opening up automatically bring efficiency? The empirical evidence on this is quite mixed. The impact of liberalization of services varies from country to country and sector to sector. For example, in Zambia, the government abolished the official purchasing monopsony in maize, but the activity became dominated by two private firms, which probably colluded to keep prices low, and which abandoned purchasing altogether in remote areas. In Zimbabwe, on the other hand, three private buyers emerged after privatization, including one owned by the farmers. Here, the abolition of the government monopoly resulted in increased competition and prices and farm incomes rose appreciably (Marchetti 2004). Similarly, the financial sector in Zambia can be considered to be one of the most liberalized in the world, but certainly not among the most efficient. This is because of extremely poor regulation of the sector in the country (Martinez 2007). In fact, most services markets are characterized by market failures which means opening up does not necessarily bring efficiency. It is important to ensure effective regulation, which is not so easy particularly when small countries, with limited resources, have to deal with big TNCs. Moreover, if the objective is only to make the services sector in developing countries more efficient, then there is no need to bring it in under a multilateral discipline. Developing countries can liberalize unilaterally, and one does not need to force them to do something that is good for them. This is particularly true as the positive impact on efficiency is not guaranteed but the liberalization of a sector under GATS is almost irreversible. So they would not have the option of changing policies if the impacts of liberalization were not positive. Interestingly, most developing countries have liberalized their services much beyond what they committed during the UR

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inviting more pressure from developed countries to bind this unilateral liberalization under the GATS. Looking at the requests and offers made by different groups of countries, it appears that it will be a long drawn process to reach an agreement, though the progress in services talks is believed to be better than the other areas of the Doha Agenda. Developing countries have been showing some flexibility in terms of their commitments under Mode 3 though they fall short of high expectations of the developed countries. However, the offers made by developed countries in Mode 4 particularly by the United States are nowhere near what some developing countries expect. In fact, the United States has made it quite clear that the developing countries should not expect much in this area. Developed countries, however, showed willingness to give some concessions on Mode 1 and Mode 2. During the UR, while the developed countries were able to pursue their interests under GATS, the trade interests of developing countries were simply ignored. Hence, more liberalization through Mode 1 and Mode 4 on the part of the developed countries is essentially a backlog of the UR. In fact, since Mode 1 and Mode 2 can be considered as trade in services in the conventional sense, their liberalization should ideally be the core of GATS. But ironically, the share of services delivered through Mode 1 has actually gone down notwithstanding much hue and cry in some developed countries on the issue of outsourcing of services. Strictly speaking, Mode 3 and Mode 4 do not belong in the WTO. However, as they are already there, it is rather impossible to get them out of the WTO. Nevertheless, it would be a challenge for developing countries to get as much concessions as possible under Mode 1 without conceding much in Mode 3 so that GATS is made a trade agreement rather than an investment agreement. There is also the risk that they may even overestimate the potential gains from services trade. Most developing countries believe that they are likely to gain from liberalization of Mode 4 as they have enormous surplus of labour. However, the fact is that they have surplus of labour only in unskilled and semiskilled categories. Many of them actually have shortages of skilled labour. But, even the most aggressive WTO member on this issue, India, does not expect liberalization of Mode 4 that will facilitate movement of unskilled and semi-skilled labour. Obviously, the movement of skilled labour can have high social costs for developing countries. To give an example, there is an acute shortage of human resources in the health sector in India with an average number of 0.59 doctors and 0.79 nurses per 1,000 people as against the global norm of 2.25 per 1,000 people (Gopakumar and Syam 2006). Obviously, the movement of health professionals out of India or even growth of medical tourism (foreign patients coming for treatment to Indian hospitals) can have high social costs. Considering that many of the services sectors are labour intensive, developing countries have high potential to gain from the expansion of trade in services. But this may not happen simply by liberalizing the services sector, as experiences of many developing countries show. This may simply mean that ownership of services sector changes hand from domestic to foreign without creating much expansion. Liberalization of Mode 1 can, on the other hand, has an

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expansionary effect on the services sector in developing countries. If the same is not possible at the WTO due to unwillingness of the developed countries, the developing countries may try it at regional level. Such a course is being tried at the Caribbean Community (CARICOM). Even Association of South East Asian Nations (ASEAN) has announced to try this. In fact, with integration of services markets, developing countries can go for common regulator as they often find it difficult to regulate at the national level. This approach is already being tried at the CARICOM with encouraging results (Sampson 2007).

5

WTO and trade facilitation Some implications1

Introduction Trade facilitation is the only Singapore issue that is on the active agenda of the WTO as it has been taken up in the so-called July Package of the Doha Work Programme,2 dropping the other three for the time being. Trade facilitation seems to be more or less acceptable to many developing countries, as it is believed to bring benefits to all. Yet, as far as trade facilitation is concerned, the important questions remain: is it only about benefits? Are the expected benefits good enough for developing countries in relation to the expected costs, especially considering their financial constraints and development priorities? Has there been any study that decisively shows that the expected benefits would outweigh the expected costs, both direct and indirect? For obvious reasons, the post-Doha debate on trade issues, till the July Package was agreed, had been dominated by the Singapore issues. However, the debate had actually been dominated by two of the four issues, namely competition policy and investment. The other two issues, transparency in government procurement and trade facilitation, were, by and large, missing from the substantive discussions. Moreover, ever since the Singapore Ministerial, some developing countries, even though continued to oppose all four Singapore issues in a vocal and steadfast manner, engaged in substantive discussions on competition and investment but not so much on the other two issues. For example, India, the most vocal and steadfast opponent of the issues, did not make any submission since Doha, until the beginning of 2004, to the Council for Trade in Goods, which has been discussing the issue of trade facilitation, even though the proponents had been quite active at the council. This lack of interest among developing countries on these issues might have been a reflection of the lack of capacity in some countries to respond to complex matters, especially on trade facilitation where measuring expected costs and benefits is extremely difficult. There are several studies to measure the expected benefits of trade facilitation but they have, in most cases, overlooked the cost implications (Nanda 2003). Some of them of course have made just a passing reference or vague indications in this regard. It may, however, be also noted that the losses that businesses suffer through

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delays at borders, complicated and unnecessary documentation requirements and lack of automation of government-mandated trade procedures are estimated to exceed in many cases the costs of tariffs. Estimates of trade transaction costs in the studies found to date range from 2 to 15 per cent of the trade transaction value. It is estimated by UNCTAD that the costs of trade transactions equal 7–10 per cent of the total value of world trade, where trade-facilitation measures could reduce the costs by one-quarter (UNCTAD 1994). The UNCTAD estimates contain both direct and indirect costs, covering private as well as public procedures and formalities. Thus, trade facilitation can save more than $150 billion a year.3 It may also be the case that developing-country traders are probably more constrained than their developed-country counterparts because of these unnecessary hindrances. Since developing-country traders are relatively small and also export or import in smaller consignments, they find the cost of documentation and other such costs disproportionately higher – such costs are very often fixed and do not vary with the size of the consignment. Against this backdrop, this chapter makes an attempt to examine the implications for developing countries of a possible trade-facilitation agreement at the WTO. The next section briefly discusses the concept of trade facilitation especially with reference to the discussions at the WTO. The third section discusses the engagement and activities of different international fora related to trade facilitation. The fourth section makes an attempt to examine the implications from a theoretical perspective, while the fifth section examines the potential benefits of improving trade-facilitation measures in developing countries. The sixth section looks at the suggested provisions of the proposed WTO agreement on trade facilitation and examines the possible implications for developing countries in the light of their existing trade-facilitation status. The seventh and last section makes some final remarks and suggests some possible approaches for developing countries in the WTO negotiations on trade facilitation.

Issues in trade facilitation There is no standard definition of trade facilitation. It has been defined both narrowly and broadly. In a narrow sense, trade-facilitation efforts simply address the logistics of moving goods through ports or moving documentation associated with cross-border trade more efficiently. The WTO, UNCTAD and the OECD have restricted the scope of their definitions to a relatively free movement of goods, and more specifically, to customs procedures and technical regulations that can impair or delay trade. According to the WTO, trade facilitation is defined as ‘the simplification and harmonization of international trade procedures’, with trade procedures being the ‘activities, practices and formalities involved in collecting, presenting, communicating and processing data required for the movement of goods in international trade’. This definition relates to a wide range of activities such as import and export procedures (such as customs or licensing procedures), trans-

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port formalities and payments, insurance and other financial requirements that are quite cumbersome and place enormous burden on traders. The scope of the discussions on trade facilitation is clear from the definition given by the WTO. Some activities covered by the WTO’s definition include transport, payments and electronic facilities as well as, and most importantly, issues related to customs and border crossing. These include: 1 2 3 4 5

documentation requirements; official procedures; automation and use of information technology; transparency, predictability and consistency; modernization of border-crossing administration.

In recent years, the definition has been broadened to include the environment in which trade transactions take place, transparency and professionalism of customs and regulatory environments, as well as harmonization of standards and conformance to international or regional regulations. The World Bank, for example, takes a broader approach to its trade-facilitation work programme, which primarily covers reforms in customs, regulatory frameworks and standards. In addition, the rapid integration of networked information technology into trade means that modern definitions of trade facilitation need to encompass a technological concept as well. These move the focus of trade-facilitation efforts ‘inside the border’ to domestic policies and institutional structures. In the prevailing WTO arrangement, trade facilitation is covered in various ways by the following articles and agreements: 1 2

GATT Articles V, VII, VIII and X; Agreements on Customs Valuation, Import Licensing, Preshipment Inspection, Rules of Origin, TBT and the Agreement on the Application of SPS Measures.

However, the Singapore and Doha Ministerials as well as the July Package have mandated that only GATT Articles V, VIII and X be considered for future multilateral negotiations. Annex D of the July Package states that negotiations ‘shall aim to clarify and improve relevant aspects of Articles V, VIII and X of the GATT 1994 with a view to further expediting the movement, release and clearance of goods, including goods in transit’. Article V relates to ‘freedom of transit’ for goods from another Member and states that all charges imposed on goods in transit must be ‘reasonable’. Article VIII covers the fees and formalities connected with the importation and exportation of goods and says that fees and formalities connected with importation and exportation must be about equal to the cost of the services rendered, so that they do not constitute a form of indirect protection, and calls for reducing the number and diversity of such fees. Article X relates to the publication and administration of trade regulations, that is, measures to ensure transparency and requires all

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trade regulations to be clearly published and fairly administered. Though the articles will be addressed independently, they are closely related and intertwined. Common features of the existing legal framework include: 1 2 3

fair and equitable administration of procedures – import licensing, preshipment inspection, rules of origin; publication of laws and regulations prior to application – all agreements; right to appeal administrative decisions – customs valuation, import licensing, preshipment inspection.

In view of the recent developments of security concerns becoming an important issue in the conduct of international trade, particularly in the aftermath of 9/11 terrorist attacks, many now consider this to be a trade-facilitation issue as well. The new security requirements being imposed by the US Customs Services and adopted by the European countries as well are a matter of major concern to exporters from most developing countries. Recently, another related issue has come to the fore as a trade barrier. Since trade requires businesspersons to travel between trading countries, handling of business visas has important implications for trade facilitation. A study conducted by The Santangelo Group, an independent research firm, on behalf of eight US international business groups, has estimated that persistent problems in government handling of visas for foreign business travellers have cost US exporters more than $30 billion in revenue and indirect costs between July 2002 and March 2004. The study, however, does not estimate the losses caused to the exporters from the rest of the world, though it has observed that the visa applicants from China, India and Russia trying to conduct business inside the United States were identified as having the greatest difficulties with timely visa processing from the US authorities.4

Trade facilitation at international fora Trade facilitation is by no means a new issue in international trade discussions. It was on the agenda in the League of Nations in 1923. At many other fora, discussions on trade facilitation have been taking place for long. These discussions have largely been driven by certain international and regional initiatives and by private sector organizations. Some international organizations involved in such initiatives include the World Customs Organization (WCO), UN Agencies such as UNCTAD and UNECE, the World Bank, OECD, IMF, the International Maritime Organization (IMO) and the International Civil Aviation Organization (ICAO). Some of the regional initiatives include Asia-Pacific Economic Cooperation (APEC), ASEAN, the FTAA, Mercosur and the EU. Perhaps the greatest lobbying efforts have originated in the private sector through the International Chamber of Commerce (ICC) and the International Transport Organization (ITO). In the context of discussions on trade facilitation at the WTO, the work being

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Box 5.1 Trade facilitation – existing WTO commitments Article V sets out the basic requirement of freedom of transit through the most convenient route and further requires that no discrimination be made on the basis of the flag of the vessel, place of origin, departure, entry, exit or destination. It also requires members not to discriminate on the basis of ownership of goods or means of transport. Further, it stipulates the obligation not to impose any unnecessary delays or restrictions on transit. It also requires members to impose reasonable fees and charges that would be non-discriminatory and limited to the cost of service provided. Article VIII dealing with administrative aspects of trade requires members to impose fees and charges in relation to import and export in a manner that it is limited to the cost of service provided. It also requires its members to recognize the need for reducing the number and diversity of fees and charges and the incidence and complexity of import and export formalities. In addition, it requires members to review its operations, upon request by others, not to impose substantial penalties for minor breaches of customs regulations or procedural requirements. Article VIII also provides an illustrative list of the types of fees and charges, formalities and requirements relating to consular transactions, statistical services, analysis and inspection, and licensing which are imposed by governmental authorities beyond customs. Article X requires members to publish all laws, regulations, judicial decisions and administrative rulings relevant to importing and exporting in a manner as to enable governments and traders to become acquainted with them. It further elaborates what the laws, regulations, judicial decisions and administrative rulings could pertain to. These include classification or valuation of products, rates of duty, taxes or other charges; requirements, restrictions or prohibitions on import or export; on transfer of payments related to imports or exports and on sale, distribution, transportation, insurance, warehousing, inspection, exhibition, processing, mixing and others related to export or import. Article X also requires members to publish all trade agreements affecting international trade policy. Article X requires members to maintain or institute judicial, arbitral or administrative tribunals or procedures for review and correction of administrative action relating to customs matters. Source: WTO, ‘The Legal Texts: The Results of the Uruguay Round of Multilateral Negotiations’, (Geneva: WTO 2002).

done by the WCO seems to be quite relevant. WCO’s Kyoto Convention provides the regulatory framework for trade facilitation. Proponents of the adoption of the Kyoto Convention at the WTO argue that a multilateral agreement already exists. In reality, there are only ten contracting parties that have ratified or acceded to the convention, namely Algeria, Australia, Canada, China, the Czech

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Republic, Japan, Latvia, Lesotho, Morocco and New Zealand, and six contracting parties that have signed it, namely the Democratic Republic of Congo, Slovakia, Sri Lanka, Switzerland, Zambia and Zimbabwe, subject to ratification as of January 2003 (Lucenti 2003). Admittedly, multilateral agreements do exist for some countries, but it is an open question as to how much compliance there actually is. The World Customs Organisation has proposed remedies that include adequate remuneration for customs officials, internal and external auditing and fair rules for appointments and promotion. But the question remains: how are these and other recommendations to be translated into effective action? Thus, though the WCO is considered to be an irreplaceable source of detailed expertise, it lacks the power to put a political head of steam behind its proposals (Cattaui 1998). As the WCO was considered ineffective to bring the desired changes due to its non-binding obligations, some WTO members, particularly the EU and its member countries, thought it would be better to address the issue at a binding forum like the WTO. They were successful in pushing the agenda as the 1996 Singapore Ministerial Declaration, besides establishing working groups to analyse issues related to investment, competition policy and transparency in government procurement, directed the Council for Trade in Goods to ‘undertake exploratory and analytical work [. . .] on the simplification of trade procedures in order to assess the scope for WTO rules in this area’. In the Doha Agenda, the work programme on trade facilitation was organized around the following three ‘core’ agenda items: 1 2 3

GATT Articles V, VIII and X, each to be addressed in consecutive meetings; trade facilitation needs and priorities of Members, particularly developing and LDCs; technical assistance and capacity building.5

In the aftermath of the inconclusive Ministerial Conference at Cancun, informal meetings at the Heads of Delegation level discussed potential approaches to the Singapore issues. Finally, in the July Package, the WTO members agreed on the basis of ‘explicit consensus’ in the General Council to formally launch negotiations on trade facilitation, while dropping the more contentious issues of investment, competition policy and transparency in government procurement from the Doha Work Programme. In post-July discussions, WTO members have agreed to deal with the clarification and improvement of the three articles mentioned in the July Package (Box 5.2). Some of the international organizations mentioned in the July Package mandate have already presented their work and findings on trade facilitation to Members. Meanwhile, even though the EU has been the key driver in bringing the trade-facilitation agenda at the WTO arena, the United States has been more active in pushing trade facilitation in international law arena particularly through bilateral trade agreements including with some developing countries/groups.

WTO and trade facilitation Box 5.2 Trade facilitation in the July Package The provisions on trade facilitation in the July Package contain ‘development language unprecedented in WTO negotiating history’. The modalities for the negotiations contain a series of unprecedented caveats for special and differential treatment (S&DT) for developing and leastdeveloped countries, such as tying the extent of their obligations under the final agreement to their capacity to implement them. Technical assistance and capacity building provisions are also more binding than they are elsewhere: if developing and least-developed countries do not receive the additional support and assistance that they need to develop infrastructure necessary to implement their commitments, they simply will not have to. Annex D of the July Package states that negotiations ‘shall aim to clarify and improve relevant aspects of Articles V, VIII and X of the GATT 1994 with a view to further expediting the movement, release and clearance of goods, including goods in transit’. Annex D includes provisions on special and differential treatment (S&DT) for developing countries and LDCs, as well as technical assistance and capacity building. The commitment on S&DT far exceeds that in other agreements in that it links new obligations to the successful delivery of technical assistance and capacity to developing countries. Para. 2 states that the principle of S&DT ‘should extend beyond the granting of traditional transition periods for implementing commitments. In particular, the extent and the timing of entering into commitments shall be related to the implementation capacities of developing and least-developed Members’. Annex D is also peppered with references to cost considerations, which may help assuage developing country and LDC concerns about facing dispute settlement proceedings for non-implementation of obligations that were beyond their means to implement. With regard to new infrastructure required to implement obligations, para. 6 says that ‘where required support and assistance for such infrastructure is not forthcoming, and where a developing or least-developed Member continues to lack the necessary capacity, implementation will not be required’, backed up by the stipulation that such members ‘would not be obliged to undertake investments in infrastructure projects beyond their means’. Infrastructure-related obligations could fall beyond the mandate of WTO technical assistance and into the realm of overseas development assistance agencies, international organizations, and institutions such as the World Bank. Recognizing the diverse nature of work related to trade facilitation, as well as the need to ensure coherent, effective and operational technical assistance, para. 8 of Annex D asks members to invite collaborative efforts from the IMF, the OECD, the WTO, UNCTAD and the World Bank. Source: WTO, ‘Doha Work Programme’, 2 August 2004 (WT/L/579); and the International Centre for Trade and Sustainable Development (ICTSD) and the International Institute for Sustainable Development (IISD), ‘Trade Facilitation’, Doha Round Briefing Series, Vol. 3, No. 6 (Geneva 2004).

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Citing this experience, the United States has argued that developing countries should not have much difficulty in accepting additional obligations under a trade-facilitation agreement.6 The EU, however, has been pushing hard for including trade facilitation along with other Singapore issues in EPAs with the African, Caribbean and Pacific (ACP) countries.7

Implications for developing countries Costs and benefits It is widely believed that there are merits in trade facilitation. However, it is also felt that it would place substantial financial burden on developing countries much beyond the perceived benefits. Even if the benefits outweigh costs, it is widely believed that the development payoff might be greater if those resources were spent elsewhere. For example, to create a custom clearance infrastructure that will be as efficient as that of Singapore, even in small developing countries, the amount of money required may well be in excess of $100mn.8 This does not account for the wherewithal that would be required to run the system over time. In many small countries, this figure is much higher than the money that governments spend on education. Obviously, such massive investments on trade facilitation would not be socially acceptable, even if the money were borrowed from an outside agency. The Doha Declaration has promised to ensure adequate technical assistance and support for capacity building in this area. But many developing countries are not impressed, let alone convinced. They believe, as the experience has shown, that the assistance may not come through, while the agreement will come into force creating a mismatch for them. Neither has the experience in this regard since the Doha Ministerial shown any indication that developed countries have stepped up their technical assistance and support for capacity building. The costs of doing business in developing countries are much higher largely because of inefficient institutions. Mostly, it is incumbent on governments to make investments in these institutions. However, most developing countries operate on tight budget constraints, and a binding commitment on trade facilitation could lead to a disproportionate diversion of limited resources from other vital institutions to customs administration. This could create a situation where domestic businesses would incur the costs of compliance that would arguably be much higher than those their foreign counterparts would bear in similar situations. Both domestic and foreign exporters suffer due to hindrances at ports. If trade-facilitation measures result from a binding WTO commitment rather than from a domestic demand, issues of interest to foreign exporters might take precedence over those of interest to domestic exporters. This is because any inconvenience to foreign exporters could cause dispute and possible bashing at the WTO but the interests of domestic exporters who could not create such problems may be ignored due to resource constraints.

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Exporters from developing countries are unlikely to see any improvement in their developed country destinations, as their existing trade-facilitation standards are likely to be in compliance with the standards agreed at the WTO. Thus, trade facilitation may effectively mean that foreign players would get more than NT with adverse consequences for domestic business. UNCTAD has not provided a detailed or country wise disaggregation of its estimates. However, it emerges from the above reasoning that an overwhelming proportion of the estimated benefits of $150 billion would accrue to developed countries, while developing countries would bear a high proportion of the costs. The existing literature on the subject predominantly argues that trade facilitation would provide substantial benefits for the world economy.9 However, one is yet to come across research that persuasively shows that trade facilitation would bring benefits higher than the costs involved, high enough to offset the loss of resources diverted from other sectors to adopt trade facilitation, especially in a developing-country context. Peru’s experience is often cited as an example of a successful tradefacilitation programme. It is argued that customs reforms in Peru have brought about a far more favourable environment for business and investment in the country within a relatively short period of time. Three developments are considered particularly to be the major achievements of the reform conducted between 1990 and 1996. One, the value of imports increased by almost 100 per cent from $4 billion to $7.5 billion. Two, collections increased from $626 million to $2,723 million despite less staffing, fewer inspections and lower duty rates. Three, customs’ contribution to national revenue collections increased from 23 per cent of total revenues to 35 per cent (Draper 2001). The reform has no doubt reduced the cargo-release time with Peruvian customs. However, it would be naïve to say that the achievements mentioned earlier amounted to real benefits for the economy. For example, one has to see the composition of the imports and the manner in which customs revenue proceedings were utilized during the period. Moreover, one cannot attribute these achievements entirely to customs reform. According to WTO (2001a), the value of imports into Peru during 1990–96 increased by almost 172 per cent from $3.47 billion to 9.47 billion. Does that mean that the benefits cited earlier are an underestimate? The value of exports from Peru over the same period, however, has increased only by about 83 per cent, from $3.23 billion to $5.90 billion. Trade deficit has increased from $240 million to $3.58 billion. In relative terms, it has increased from merely 7 per cent of exports in 1990 to 60 per cent of exports in 1996. Given these facts, there is hardly any strong basis to argue that Peru has benefited. Trade balance being a major concern for many developing countries, such a scenario may not bring comforts to them. It is thus doubtful if trade facilitation would serve development interests of the developing countries or mercantilist interests of the developed world.

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Productivity and efficiency Quite unfairly, developed countries expect customs-clearance systems in developing countries to be as efficient as their own. In 1988, output per worker in the United States was more than 35 times that per worker in Niger. In just over ten days, the average worker in the United States produced as much as an average worker in Niger produced in an entire year (Hall and Jones 1998). If we assume that customs-clearance mechanisms in both countries maintain productivity proportion with national average productivity, then, if average clearance time in the United States is five days, it will be about six months in Niger. Surely, Niger cannot afford to maintain such a high-efficiency gap in its customs administration vis-à-vis the United States, as, in that case, probably no country would trade with it. However, it would not be an exaggeration to say that if Niger has to maintain the efficiency of its customs administration on par with the United States, its relative costs of doing so would be about 35 times higher than in the United States. One may question if that is sustainable or socially desirable! Dispute settlement Some people have raised an important question. If a party found that its consignment took three days to get customs clearance in a country instead of two, would it drag the country concerned to the WTO? There is no ready answer, but if this happened then the entire WTO dispute settlement mechanism would come under severe strain. It has been proposed that there will be a cut-off clause in relation to dispute settlement on trade-facilitation matters, meaning cases relating to small consignments will not be brought to the dispute settlement panel (Shin 2001). But nobody knows what the cut-off point will be. In fact, there is a chance that the dispute settlement panel would be flooded with trade-facilitation cases if this cut-off point is low. Alternatively, if the cut-off point is set at a high level, the agreement will benefit only developed-country traders and developing countries will not be eligible to bring their complaints to the WTO owing to their smaller consignments.

Potential benefits of trade facilitation As noted earlier, there have been a number of studies estimating trade transaction costs and the potential benefits of trade-facilitation measures. OECD (2001a, 2003) summarize most of the available studies. Total costs may be seen as being composed of direct costs such as expenses relating to supplying information and documents, and indirect costs such as those arising from procedural delays. The UNCTAD (1994) estimates contain both direct and indirect costs covering private as well as public procedures and formalities where trade-facilitation measures could reduce the costs by one-quarter. EC found the costs to be in the

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range of 3.5–15 per cent based on the documentation costs in intra-EU trade (European Commission 1989). The Ministry of Economics, Trade and Industry (METI) of Japan estimated the costs for border procedure, based on a survey of Japanese manufacturing and trading companies, to be between 0.5 and 2.4 per cent (METI 1998). However, except UNCTAD (1994), all such studies covered only limited number of countries. Moreover, in most of these studies data collected are either backdated or limited. Wilson et al. (2003) is a departure in this regard as it describes the extent and quality of trade-facilitation efforts of APEC countries by using survey information on port efficiency, customs environment, regulatory environment and e-business practices. Each of these aspects is indexed through several indicators. For example, the quality of customs environment is captured through indicators for the magnitude of import fees, hidden import barriers, prevalence of improper practices and perception of corruption. Following the same methodology, though with different inputs for the four types of trade-facilitation measures, Wilson et al. (2004) come with estimates of trade-facilitation gains based on regression analysis of data from 75 countries. The study estimates the total gain in trade flow in manufacturing goods from trade-facilitation improvements in all four areas with a simulation exercise under the assumption that the below average countries are able to achieve half-way up to the global average in terms of trade-facilitation measures. Table 5.1 summarizes the results for the simulations and presents the results for the 75 countries as a whole. The combined effect of improvement in the four trade-facilitation indicators is an increase in trade among the 75 countries worth about $377 billion, representing an increase of about 9.7 per cent in total trade among these countries. About $107 billion of the total gain comes from the improvement in port efficiency and about $33 billion is due to improvement in customs environment. The gain from the improvement in regulatory environment is $83 billion, while the largest gain comes from the improvement in service sector infrastructure ($154 billion). It may be noted here that finding out the relationship between trade facilitation and trade performance empirically is quite complex and challenging. It is Table 5.1 Impact of improvement in trade facilitation on trade flows (US$ billion) Importer’s change in trade facilitation Port efficiency Customs environment Service sector infrastructure Regulatory environment Total Source: Wilson et al. (2004).

Exporter’s change in trade facilitation 84.53 (2.2%)

Total

23.40 (0.6%) 32.87 (0.8%) 36.64 (0.9%)

117.38 (3.0%)

106.93 (2.8%) 32.87 (0.8%) 154.02 (4.0%)

24.39 (0.6%)

58.86 (1.5%)

83.25 (2.1%)

117.30 (3.0%)

259.77 (6.7%)

377.06 (9.7%)

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indeed difficult to work out a methodology that is flawless. The indicators of trade facilitation used by the author are based mainly on the information available in the Global Competitiveness Report, which are based in turn on perception surveys. Perception is often very different from the reality and to a great extent is influenced by socio-cultural factors rather than facts only. For example, same practice can be considered as ‘corrupt’ in some culture but absolutely ‘normal’ in some other culture. Nevertheless, Wilson et al. (2004) can be considered as the most comprehensive and based on a methodology that seems to be better than that used in other studies. Let us now analyse the results in the light of the expected nature and scope of the proposed trade-facilitation agreement at the WTO. As noted before, the agreement is likely to cover three areas: freedom of transit, fees and formalities connected with import and export, and transparency and fairness in trade regulations and their administration. Freedom of transit is relevant only for the land-locked countries that need transit facilities through other countries. However, it is difficult to force countries through which transition will take place to improve their facilities for the sake of land-locked countries through a WTO agreement. At the most, they can be forced to offer national or non-discriminatory treatment to traders of landlocked countries. Thus, linking of freedom of transit to port efficiency, as done in Wilson et al. (2004), seems to be misplaced and no improvement can be expected in this regard due to a WTO agreement on trade facilitation. Regulatory environment pertains to all regulatory policies and institutions in a country and hence it is difficult to link this indicator with trade regulations, their transparency, fairness and administration. Moreover, customs environment also captures, to a large extent the issues of trade regulations. Furthermore, some trade-related regulations like technical barriers and SPS standards which very often work as trade barriers have not been included in the ambit of proposed trade-facilitation framework. Service sector infrastructure which could be the largest source of gain in trade flows has nothing to do with the proposed trade-facilitation agreement. Customs environment of course is directly linked with fees and formalities connected with export and import. Thus, among the four aspects of trade facilitation considered by Wilson et al. (2004), only customs environment is relevant for the proposed WTO agreement on trade facilitation. Hence, though the study predicts a total gain in trade flow of $377 billion due to improvement in trade facilitation, the proposed WTO agreement may lead to a gain of at most $32.87 billion if at all, due to its narrow scope as against a much broader scope considered in this study. Moreover, as can be seen from Table 5.1, gains in trade flow accrue to a country when customs environment improves in the importing country rather than in the exporting country. However, it is expected that developed countries, due to their already improved environment, are unlikely to improve further and hence improvement in customs environment is expected to take place in developing countries only. Developed countries will of course experience trade gains as they trade with developing countries as well. Developing countries will also

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experience trade gains to the extent they trade with other developing countries. Thus, though the costs of improvement in customs environment would fall on developing countries only, the benefits would be shared by developed countries as well. In fact, they are likely to have a greater share than many developing countries. It of course goes without saying that improvement in trade facilitation would lead to increased trade flows whatever be its nature and extent. This, however, does not necessarily mean that there would be increased welfare as well. Trade facilitation is considered to be welfare enhancing based on the premise that higher level of trade leads to higher economic growth. Wilson et al. (2003) conclude that trade facilitation will lead to higher economic growth based on the findings of Dollar and Kraay (2001), a study which has been widely quoted as an evidence that trade promotes economic growth. However, it has been pointed out that the arguments and evidence presented by Dollar and Kraay are flawed and far from convincing (Chapter 2). Thus, the argument that improved trade facilitation, by encouraging higher trade flows, would enhance economic growth and welfare, seems to have serious problems – higher trade flows do not guarantee higher growth.

WTO proposals and the expected gaps Prior to Cancun Ministerial Conference, the proposals on trade facilitation were, by and large, made by developed countries only. As most developing countries were opposed to negotiations on trade facilitation, they were not keen on discussing the issue at the WTO. Proposals on Article V were made by three Members namely EU, Korea and Canada.10 Proposals regarding Article VIII were made by Canada, Colombia, EU, Hong Kong, Japan, Korea and the United States.11 Members that submitted proposals on Article X include the EU, Japan, Korea, Canada and the United States.12 As expected, since the inconclusive Cancun Ministerial till the July Package was agreed in 2004, there was no substantive proposal on the issue. However, after the July Package, particularly since the beginning of 2005, there has been a flurry of submissions to the Negotiating Group on Trade Facilitation, many of them coming from developing countries. A closer look at the new submissions, however, reveals that the boundaries of proposals have already been defined by the submissions made before Cancun. The new submissions, by and large, provide clarifications or share experiences or suggest capacity building and technical assistance measures rather than suggesting rules. Some of course have suggested some ideas on S&DT for developing countries. However, history was created when India and the United States submitted their first ever joint proposal in the WTO negotiations calling for the establishment of a multilateral mechanism through which Members could exchange information related to customs and other trade-related procedures, in order to improve border regime efficiency.13 This is also the first time that India became so active in the discussions on trade facilitation at the WTO and may be

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due to the perception that once negotiations have started it is better for developing countries as well to engage in them so that their concerns are taken on board. The major proposals and their possible implications for developing countries are discussed here. Freedom of transit The proposals related to Article V are on simplification of procedures for transit, exceptions to the principle of non-discrimination for sensitive items, regional trade arrangements and use of international standards. As simplification of procedures for transit purposes bears a close resemblance to provisions of Article VIII, the EU has pointed out that submissions made by Members to the Council on Article VIII automatically apply to transit. In addition, the EU and Korea have stated that requirements and procedures for transit should be less onerous than those for importation. The EU has pointed out that it may not always be possible to apply the principle of non-discrimination to all types of consignments. Certain goods may be subject to special provisions. However, Members should consider the publication of the list of such ‘sensitive items’. Similarly, Korea has pointed out that in cases where there is a possibility of illegal release of transit goods (as in the case of land-locked countries), more sophisticated risk management techniques may be required. The EU has also pointed out that the existing Article V requires Members to operate national transit schemes but does not recognize the issue of transit at a regional level. The EU has pointed out that the solution to transit can be found through regional cooperation as can be witnessed in some of the existing international and regional transit instruments, such as the Transit International Routier (TIR) Convention, the European Convention on common transit, the ASEAN Framework agreement on the facilitation of goods in Transit and UN instruments relating to transit. The EU and Canada have suggested the use of international standards for transit. Canada has suggested that Members could consider the possibility of accession to various instruments relating to transit such as The Customs Convention on the International Transport of Goods under cover of TIR Carnets (TIR Convention), 1975, and The Customs Convention on the ATA Carnet for the Temporary Admission of Goods (ATA Convention), 1961. The TIR Carnet is a road transport document which allows containerized and, in some cases, bulk cargo to move through simplified and harmonized administrative formalities. The TIR Carnets are issued by the International Road Transport Union (IRU) of Geneva to associations in participating countries who act as guarantors for the duties and taxes ‘at risk’ during the journey. Each association issues TIR Carnets to approved national carriers who meet the requirements set by the IRU. For instance, every road vehicle as regards to its construction, equipment and customs sealing device have to conform to the specifications laid out in the Convention. The ATA Carnet is designed to facilitate the importation,

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irrespective of the means of transport, of goods, which are granted temporary duty-free admission (including transit, importation for home use and temporary admission). The use of international standards such as the ATA Carnets or the TIR Carnets is absent in many developing countries. For example, India, Bangladesh and Nepal do not accede to the TIR Convention or the ATA Convention. India uses the ATA Carnet, for a very limited purpose, mostly for duty-free temporary admission of imports. The requirements of the TIR Convention (in terms of specifications for vehicles and procedures) would be extremely difficult to adhere to for countries like India, Nepal and Bangladesh. At this stage, these countries would be unable to meet the rigorous requirements of the Convention, as it would require enormous resources and a fairly large time. On the face of it, it appears that the land-locked countries will gain from a deeper agreement on freedom of transit, as the present arrangement is quite inadequate. However, countries often have preferred to deal with such issues at bilateral or regional level. For example, the issue of transit has always been a key feature of the bilateral protocols and Agreements between India and Nepal (Pyakhuryal 2004). Similarly, India has an arrangement with Bangladesh on transit but vehicles from one country cannot enter another country (Sengupta and Bhagabati 2005). Transit of goods between Bhutan and Bangladesh is also allowed but only Bhutanese vehicles are allowed to enter India. Similarly, there is an arrangement for transit of goods between Nepal and Bangladesh and Bhutan through Indian territory. Thus, even the current level of commitment is not fulfilled. By virtue of Article V, India must allow Nepalese vehicles in India.14 Fees and formalities connected with importation and exportation The key proposals related to Article VIII are on the levy of fees and charges, injecting GATT principles, provisions to reduce documentation requirements, standard processing times and the use of international standards. In the submissions, EU has interpreted Article VIII:I (a)15 to imply that fees and charges levied must refer to the approximate cost of service rendered and should therefore not be charged on an ad valorem basis. This aspect had already been clarified by the Panel Report – US-Customer User Fee, which found that ad valorem fee, was not compatible with the plain meaning of the text or with the objective of the GATT. It further held that the term ‘cost of services rendered’ referred ‘to the approximate cost of customs processing for the individual entry in question’.16 In their submissions, the EU, Hong Kong and Korea have pointed out that in Article VIII Members simply ‘recognize’ but undertake no explicit obligations with respect to the need to reduce the number and diversity of the fees and charges and the need to minimize the incidence and complexity of import and export formalities. Suggestions have been made by these countries on making Article VIII more operational by imposing GATT

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principles of non-discrimination, transparency and predictability in the design, application and effect of export and import procedures and formalities on all Members. To reduce documentation requirements, suggestions made by the EU included using a single administrative data set for export and import, introduction of a single one-time presentation to one agency and the adoption of a uniform domestic customs code. The EU and Korea have suggested the use of risk assessment methods based on international standards and practices and the introduction of a system of authorized traders. Such systems would grant compliant traders simplified or other premium procedures for their import and export activities. The EC, Hong Kong, Japan and Korea suggest automation of customs and other agency procedures for simplifying export and import. The EU has suggested that Members should establish and notify standard processing times within reasonable targets and then efforts should be made to reduce them progressively. The EU, Hong Kong and Japan suggested that Members should base their import and export procedures on agreed international standards and instruments to simplifying trade procedures. The standards and instruments suggested are those developed by the WCO such as the revised Kyoto Convention as well as other WCO initiatives and instruments provided by UNCTAD, the UN regional economic commissions, the IMO and ICAO. This would in turn improve transparency and predictability, and lower costs for traders. It has also been suggested that goods may be released from the custody of customs before final payment of duties or resolution of customs matters utilizing as necessary a guarantee as surety, bond or deposit. The precedent for such a commitment, although in a narrow context, already exists in the Customs Valuation Agreement. It has been argued that this will not involve much cost except in making necessary amendments in laws and regulations and training the customs staff.17 Another suggestion is to do away with practices such as levying of consular fees or consular invoices which have become redundant. This again, it is argued, is unlikely to impose any cost.18 In many developing countries, export and import procedures continue to be quite cumbersome as documentation requirement is quite high. Electronic submission of declarations/information by traders though possible in some countries has a limited scope due to lack of proper automation, which requires substantial resources. Without such comprehensive automation, it would not be possible for these countries to reduce documentation requirements substantially or to guarantee a standard processing time or to adopt international standards. It may also be noted that countries may operate several customs stations, for example between Bangladesh and India along their long common border the same level of infrastructure may not be guaranteed. Consequently, uniform standard processing times for all customs stations may not be ensured. If countries decide to maintain fewer custom stations to maintain standards, then that may cause disadvantage to the traders. Moreover, an important component of international standards is the use of risk assessment and management techniques where physical inspection of

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imported goods is done on a computer-based system rather than on the order of customs staff. However, it seems, developing countries are unlikely to be prepared for this. For example, in the South Asian region, only India is in the process of adopting such a system though its full-scale implementation will take time, while other countries would require much more time in adopting this. Moreover, shifting to risk-based valuation system without adequate support in terms of automation and accounting expertise may lead to increased incidence of under-invoicing and hence lower revenue (Finger and Schuler 2000). Giving preferential treatment to the experienced traders, as suggested, may not be in consonance with the principles of fairness and competition and may act as an entry barrier. This may not be a small issue as, for example, it has been found in a study by Bangladesh Tariff Commission (2004) that import trade in more than 100 commodities is virtually monopolized. The same may be valid for export trade as well. Monopolization of import trade can defeat the very objective of trade liberalization, while monopolization of export trade may deny the right prices to the producers who are often poor, thus weakening the trade and development linkage. The main proposal, which is actually no different from the existing provision in Article VIII, requires members to levy fees and charges in connection with importation and exportation on the basis of cost of service provided and not on an ad valorem basis. It is doubtful if countries are strictly following this principle. Following this principle would require review and revision of existing fee structure though what constitutes a ‘reasonable’ fee would remain a tricky issue. Injecting GATT principles in customs administration should not be a difficult issue for the developing countries as they are already following such principles in the context of other WTO agreements. However, the implications of the principle of ‘least trade restrictive’ are not very clear. Publication and administration of trade regulations The key issues in the proposals are related to advance rulings, use of electronic media, enquiry points, consultative mechanism and appeals. The EU, Canada, Japan and Korea have suggested the inclusion of binding advance rulings, which they believe, would enable traders to get advance information on tariff classification and applicable duties. On the issue of the use of electronic media, however, the proposals made by the EU, Canada and Korea do not insist on making it mandatory by members, but simply recommend its usage. Suggestions on enquiry points include the establishment of enquiry points/trade desks or a single national focal point by Members for providing trade-related information, particularly on customs procedures, importation and exportation. Consultative mechanism is suggested to ensure that all stakeholders/interested parties – government and private sector bodies including importers and exporters, carriers and chambers of commerce – should get an opportunity to comment on prospective rules and procedures before they are implemented. Suggestions on appeal are to make the provisions of Article X more concrete

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including by giving traders recourse to an appeal by a separate judicial or administrative body. All trade-related information is generally published by the relevant official authorities and is made available both in print and through the electronic media. But, it is not always done with the desired speed. Relevant authorities in most countries maintain websites though they do not necessarily have all the relevant information. Moreover, the websites are not always updated on a regular basis. Interestingly, the private sector is playing an important role in making information more accessible to traders both through published material and by hosting websites (Nanda 2005). Establishment of enquiry points will require full automation of the system so that all relevant information can be accessed immediately. This will obviously require substantial resources. Similarly, at present there is no formal mechanism for consultation between interested groups in many countries. Business associations are often consulted though not on a regular basis. Establishment of such a mechanism is possible but will involve some costs. In many countries, there is adequate arrangement for appeal right up to the highest court, but the adjudicative process in most developing countries is alarmingly slow. It would be quite difficult for them to bring speed in the system. Cost implications As noted before, it is really difficult to arrive at a credible estimate of costs that will be imposed upon developing countries if a binding agreement on trade facilitation is adopted at the WTO. According to an estimate, the minimum costs of customs reforms alone will be between $10 million and $16 million in a smallsized country (Finger and Schuler 2000). However, this seems to be an underestimation. For example, Bangladesh has recently spent $9 million and has taken up a project to spend $35 million in the near future on improving trade facilitation, particularly at its Chittagong port that handles about 80 per cent of its seaborne trade. But, even after spending $44 million, Bangladesh will be nowhere near the standard that a trade-facilitation agreement at the WTO might envisage. These costs will be required to be incurred only for a one-time upgrading of the system and do not take into account the costs to be incurred to run the upgraded system as well as further upgradation. Moreover, this is only about the costs that have to be incurred by the government to improve its customs and port administration, i.e. the commitments that might have to be taken under Article VIII component of the proposed trade-facilitation agreement. If the costs that will be imposed on the private traders to adjust their own system and procedures to cope up with the new arrangement are also included, the total costs will be much more. For a bigger country like India, costs on this account are likely to exceed $1 billion. It is difficult to even guess the cost implications of the proposed commitments under the Article V, though it is likely to be slightly less than that required for Article VIII commitments. However, when one goes to the proposed commitments under Article X, the costs imposed on the countries may be

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very high. If a regional transit arrangement with international standards is to be established, governments have to spend substantial amount of money to make the appropriate arrangement. But, what are more important are the costs that the private traders would be subjected to. This is because even the vehicles used for transit by the transporters would have to be changed. Obviously, the costs associated with it will be substantial. For example, as of now, the vehicles used in road transport within the South Asian region are by and large manufactured within the region, mainly in India and Pakistan. At present, the quality of vehicles manufactured in the many developing countries falls short of Table 5.2 Expected implementation costs of different proposals Proposal

Expected costs

Comment

Article V Simplification of procedures

High

Can be made lower with sufficient transition period

Additional inspection for sensitive items Publication of list of sensitive items Regional transit arrangements International standards Article VIII Levy of user fees and charges Non-discrimination, transparency and predictability Removal of unnecessary procedures

High Medium High Very high

Medium Low High

Single administrative data set

High

One-time presentation to single agency Adoption of a uniform domestic customs code Risk assessment methods Standard processing time Abolition of consular fees

High Medium

Article X Advance rulings Use of electronic media Enquiry points Consultative mechanism Appeal Source: Author’s compilation.

Will impose high costs on traders as well

High Very high Low High High Very high Medium Medium

Can be made lower with sufficient transition period Can be made lower with sufficient transition period Can be made lower with sufficient transition period A potential area for disputes

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international standards and if the local manufacturers are not able to upgrade their technology quickly, then it will have other implications as well. Anyway, as noted before, it is indeed difficult to estimate costs associated with different components of the proposed agreement. An attempt is therefore made to get an approximate idea about such costs, though they are likely to differ from country to country. Different proposals on trade facilitation have been categorized as low, medium, high and very high depending on the expected costs associated with them (Table 5.2).

In lieu of conclusion As we have seen in the previous sections, the argument that improved trade facilitation, by encouraging higher trade flows, would enhance economic growth and welfare seems to have serious problems as higher trade flows do not guarantee higher growth. Nonetheless, no country can be considered to be selfsufficient and hence countries need to engage in trade. Developing countries, in particular, need to import a host of capital goods and raw materials required for their industrialization drive. They also need to export not just to finance their import needs but also to enjoy economies of scale as well. Given this, it is important that they are able to export and import at the least possible costs and with minimum hindrances. Trade-facilitation measures can reduce these hindrances and thus need serious consideration by all countries. It is, however, important that trade facilitation is looked at from a broader perspective rather than a narrow framework of customs administration only. Port efficiency, overall regulatory environment and service sector infrastructure are important not just for trade but for overall growth of an economy as well. In fact, the impact of improvement in these aspects of trade facilitation on trade flow may not be direct but through growth in GDP. Above all, trade facilitation is already there at the WTO and hence countries need to understand the related issues better. There exists substantial literature that argues that trade facilitation would provide significant benefits for the world economy. However, one is yet to come across research that persuasively shows that trade facilitation would bring benefits higher than the costs involved, high enough to offset the loss of resources diverted from other sectors to adopt trade facilitation, especially in a developingcountry context. The Doha Declaration promised to ensure adequate technical assistance and support for capacity building in this area. However, the experience in this regard since Doha Ministerial does not show any indication that developed countries have stepped up their technical assistance and support for such capacity building. A much talked about provision in the July Package is that technical assistance and capacity-building provisions are going to be more binding in the proposed trade-facilitation agreement than they are elsewhere. If developing and LDCs do not receive the additional support and assistance to develop infrastructure necessary to implement their commitments, they simply will not have

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to. However, it is not yet known what will be the benchmark for such assistance. How much assistance would be considered to be sufficient to fulfil their commitments remains a big question. Another important question is, whether the financial support required for implementing trade-facilitation measures would come as loans or donations. Though it is difficult to estimate, as has been noted before, the costs in most countries are likely to exceed a billion dollars. Compare this with the technical assistance budget of the WTO which was just 25 million Swiss Francs ($20 million approximately) in 2004 and most of it was spent on training programmes for developing countries’ stakeholders (WTO 2005). Obviously, the huge money required would probably come as World Bank loans that will find good scope for risk-free business with sovereign guarantee of return. How will the governments return the money to the World Bank? It is implicitly assumed that adoption of the trade-facilitation measures would enhance the volume of trade. But will they be able to export more with better or at least equal terms of trade? In most developing countries, growth in exports is limited by several supply side constraints rather than constraints at the border. Will they be able to export more if the developed countries erect more and more trade barriers through various means, even if one ignores that increased trade may not necessarily lead to growth?19 Even from the individual traders’ perspective, are they likely to find a more beneficial situation if they have to pay higher fees (user charges) and bear adjustment costs as well in the new customs administration regime? In views of these, for most developing countries, such high investments on trade facilitation may not be socially justified, even if the money is borrowed from an outside agency. In any case, the money has to be paid back by the people in the form of higher taxes later. Trade facilitation is not only about putting some infrastructure and systems in place. Getting appropriate personnel to run them is not so easy. For example, some countries in South Asia including India, which is considered to be a home of well-trained human resources, appear to be already facing this problem even with their limited trade-facilitation initiatives. Moreover, keeping the improved system running with latest technologies, which get obsolete very fast, would pose further challenge and significant costs to these countries. The costs of doing business in developing countries are much higher largely because of inefficient institutions. However, considering the development gap, it is hardly feasible to bring the efficiency levels of developing countries’ institutions at par with developed world standards. Nevertheless, developed countries expect customs-clearance systems in developing countries to be as efficient as their own. However, the developing countries operate on tight budget constraints and a binding commitment on trade facilitation could lead to a disproportionate diversion of limited resources from other vital institutions to customs administration.20 Most developing countries are not yet prepared to fulfil their commitments already made in the UR.21 Thus, taking additional obligations through a tradefacilitation agreement will cause serious problems for them. It is also a fact that

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when there is a substantial backlog of UR issues waiting to be resolved, adding new issues like trade facilitation has made the situation more complex. Thus, even though there are sections in the developing world that consider an agreement on trade facilitation to be harmless, in reality it would not be so. If the agreement is trying to facilitate trade by harmonizing documentation requirements and by avoiding complicated and unnecessary requirements, then developing countries may not object. However, if it is to ensure some standards and make some commitment on faster customs clearance that will require significant investment, developing countries need to be worried. Nevertheless, it appears from the recent trade-facilitation initiatives, particularly in the developing countries, that they are already giving disproportionately more emphasis on trade facilitation compared to overall business facilitation. Generous assistance to them for improving trade-facilitation standards, rather than global rule making, thus, appears to be more important, even if one ignores the issues of costs and benefits. Developing countries’ opposition to an agreement on trade facilitation is based primarily on their inability to shoulder more obligations and the strong likelihood of the WTO getting overburdened. It is well recognized that when there is a significant backlog of UR issues waiting to be resolved, new issues for negotiation are uncalled for. Another concern is that new rules on trade facilitation could overlap or interfere with programmes of other organizations like WCO, UNCTAD and World Bank. For developing countries, it would make better sense to make WCO more effective so that it can coordinate tradefacilitation measures throughout the world. It is also quite amazing to see that some of the proponents of a trade-facilitation agreement at the WTO, who have shown utter disregard for the WCO Kyoto Convention, are now arguing for adopting the Kyoto Convention standards at the WTO. Two additional parts of the UR Agreements are considered central to trade facilitation –TBT Agreement and the Agreement on SPS Measures (Wilson 2001). The TBT Agreement requires that member-states not promulgate technical regulations that create unnecessary obstacles to trade. The SPS Agreement requires that SPS measures promulgated by member-states be necessary to protect plant and animal life, based on scientific principles, justified by sufficient scientific evidence, and not applied in a manner which would constitute disguised trade restrictions. However, these two areas continue to create trade barriers for exports by developing countries to developed countries. Yet, the Singapore and Doha ministerial conferences have mandated that only GATT Articles V, VIII and X be considered for future multilateral negotiations on trade facilitation. Whether or not such concerns are fully justified, developing countries have little chance to oppose an agreement on trade facilitation at this stage. What this chapter has served to show is that there are other possible implications and the case for further trade facilitation in developing countries is not well established, given the remarkable differences in their levels of development. However, developing countries are a largely heterogeneous group and the formation of a

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compact coalition along a particular line appears to be difficult. One can only hope that developing countries do not end up signing an agreement that will put high costs on them while bringing little benefit, if any at all. Indications given in Table 5.2 may be useful in this regard. It may be noted that the biggest and relatively more powerful developing countries in the WTO political game, namely Brazil, China and India or some more advanced among the developing countries like Malaysia and Thailand are relatively in a better position in terms of trade facilitation and can take higher obligations. However, most other developing countries will find it difficult to fulfil their obligations that might be imposed on them by an agreement on trade facilitation. Developing countries, therefore, should be careful enough in signing an agreement on trade facilitation or may not even sign one if possible. This is probably what should ideally be done if one goes by the words and spirit of the July Package as its footnote 4 with reference to the first sentence of paragraph 1 of Annex D reads, ‘It is understood that this is without prejudice to the possible format of the final result of the negotiations and would allow consideration of various forms of outcomes’. The July Package also assures, ‘Members would not be obliged to undertake investments in infrastructure projects beyond their means’ and it is quite clear that accepting the proposed obligations will be ‘beyond the means’ for the most developing countries.

6

Competition policy at the WTO Right diagnosis but wrong prescription

Introduction The need for a multilateral approach to competition policy was recognized in the Havana Charter, which unsuccessfully tried to set up an ITO just after the Second World War. The GATT, which emerged instead, was based on the Havana Charter. Competition issues, however, remained outside the GATT framework. These issues have come up for discussion at different multilateral fora, time and again. As one consequence, the ‘Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices’ was adopted in 1980 under the auspices of UNCTAD. The issues pertaining to competition and measures to deal with RBPs were raised in the UR negotiations and finally entered the WTO arena through the Singapore Ministerial Declaration in 1996. At the Doha Ministerial Meeting, it made further progress as the need for a multilateral framework on trade and competition was recognized in the Declaration. There was tremendous pressure by the EU and some other countries to launch negotiations on the issue at the Fifth Ministerial held at Cancun in September 2003. However, many countries were sceptical about the benefits of and rationale for such an agreement. The main objection of developing countries in this regard was that they do not have adequate experience and expertise. The Cancun Ministerial eventually failed. When the talks revived again with a truncated agenda agreed in July 2004, the issue of competition policy was kept outside. But the issue is not yet dead. Not only that the option for reviving the issue at the WTO at a future date is open, competition policy is also increasingly becoming a part of trade agreements at bilateral and regional levels. One cannot overlook the fact that with the opening up of domestic markets to foreign competition, countries have become increasingly sensitive to anticompetitive practices that originate outside their own territory. TNCs have entered developing-country markets and increased their activities within these countries. The entering of TNCs can have many positive effects on developing countries’ economies. At the same time, there is a serious concern among these nations that competition could suffer because of the entry of TNCs, as their

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ability to deal with cross-border competition problems is either inadequate or non-existent (Jenny 2000). A recent study on the infamous vitamin cartel has validated this. It has found that the extent of overcharges by the cartel was relatively higher in countries without any anti-cartel enforcement (Clarke and Evenett 2002). How do competition authorities (CAs) in developing countries deal with these cross-border (international) challenges? This is clearly a difficult task. As Karel van Miert, former EU Competition Commissioner observed, national or even regional authorities are ill equipped to grapple with the problems posed by commercial behaviour occurring beyond their borders (Jones and Sufrin 2001). When CAs from highly developed countries/blocs like the EU face difficulties in handling cases with cross-border dimensions, it is clear that the authorities in developing countries face even greater and more serious problems. Against this backdrop, this chapter makes an attempt to critically look into the desirability of a multilateral framework and particularly into whether the WTO is an appropriate forum to host such a framework. It also takes a closer look at the issue of international cooperation on competition, which appears to be the only substantive remedy that has been proposed to deal with competition problems with international dimensions. This chapter looks at the relevant issues from a developing-world perspective and is divided into six sections. The next section discusses the sources and types of cross-border competition cases that affect developing countries. The third section takes a close look at the kinds of difficulties that developing countries face in tackling competition problems, including those with cross-border dimensions and tries to chart out a road map for developing an effective competition regime in developing countries and discusses the role of international cooperation therein. The fourth section discusses the existing cooperation agreements/ arrangements on competition at various levels. The fifth section examines the WTO as a forum for dealing with competition issues, particularly cooperation on competition. The sixth and last section concludes with some suggestions and recommendations.

Sources and types of cross-border competition cases The nature of cross-border anti-competitive practices is quite similar to that of those perpetrated within national borders. The only difference lies in the cross-border (international) dimensions of the anti-competitive behaviour. There are several areas where enterprise behaviour can give rise to competition concerns with international dimensions. There is no way by which one can estimate the damage that these cross-border anti-competitive practices are causing. However, one can glean a fair understanding of the nature and dimensions of the problems through the analysis of anecdotal evidence. These issues can broadly be classified into four groups:1 1 2

market power in global or export markets; barriers to import competition;

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3 4

foreign investment; IPRs.

Market power in global or export markets Anti-competitive practices under this category are international cartels, export cartels and related arrangements, international mergers or mergers with international spill-overs, abuses of dominance in overseas markets, cross-border predatory pricing and price discrimination. International cartels Recently, there has been a sharp increase in the global cartel activity. Simultaneously, enforcement agencies have swung into action and slapped multi-milliondollar fines on several companies. Nevertheless, to date, only a handful of countries have taken action to penalize transgressing companies or to recover compensation. Particularly, no developing country, except Brazil, has made any attempt to take action on these cartels.2 A World Bank study has shown that in 1997, developing countries imported $81.1 billion of goods from industries in which price-fixing conspiracies had been discovered during the 1990s. These imports represent, on an average, 6.7 per cent of imports and 1.2 per cent of GDP in developing countries (Levenstein and Suslow 2001). The vitamins cartel alone cost the developing countries nearly $3 billion in the 1990s (Clarke and Evenett 2002). There might have been several other price-fixing conspiracies that remained undiscovered. All of these cartels are constituted of producers mostly from industrialized OECD countries. Export cartels Export cartels have generally been ignored or even encouraged as their activities affect other countries. For instance, the Export Trading Company Act of 1982 establishes a procedure for the US exporters to obtain limited immunity from the US antitrust laws for export acts and collaborations, as long as they do not distort competition in the United States. Dealing with such practices through the application of the ‘effects doctrine’3 is quite common in the developed world, but developing countries have not really used such options. In India, the CA tried to deal with such cases using the ‘effects doctrine’, especially in the controversial soda ash case. The Monopolies and Restrictive Trade Practices Commission (MRTPC) granted an injunction on imports from American Natural Soda Ash Corporation (ANSAC) as a cartel, which was upheld by the Supreme Court in its interim order. ANSAC, however, preferred to lobby with the US government while filing an appeal in the Supreme Court of India. The United States Trade Representative (USTR) took up the issue with the Indian government. The Government of India, allegedly under pressure, reduced the import tariff on soda ash from 35 per cent to 20 per cent (CUTS

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2003a). In its final verdict in the case, however, the Supreme Court impugned the order and held that the Commission could not deal with the case as it was beyond its jurisdiction. M&A with international dimensions Large companies merge in the developed world and consequently their subsidiaries and associates in developing countries too end up in new combinations. This can create positions of dominance for merging firms leading to subsequent abuse. Moreover, developing countries may also be affected by M&A activities that take place outside their territory without any local presence. Because these companies operate in multiple markets, they can also adversely affect developing-country markets. Developing countries, to this date, have dealt only with the first type of cases, i.e. subsidiaries merging as a result of a merger between parent companies internationally. But even stopping the subsidiaries from merging would not serve any purpose, as both will continue to be controlled by the same parent company. Thus, the issue could possibly be dealt with appropriately only through the application of the ‘effects doctrine’ and regulating the merger in the home country. But the question is whether a developing country could enforce any such action on the parent companies in the home country. Similar actions are, however, quite common in the developed world. For example, the EU blocked the merger between GE and Honeywell, both US-based corporations. Similarly, in the Philip Morris-Rothmans case, a merger between the United States and British/South African companies was stalled by Germany. Anti-competitive practices by foreign-based dominant companies Other than collusion or combinations, the size and scope of TNCs make it possible for them to engage in a variety of anti-competitive practices. Microsoft is a case in point. The company has been hauled up for indulging in anti-competitive practices time and again in the United States and the EU. But, by and large, it has not faced such action in other jurisdictions, except in a recent case in South Korea, where, in fact, Microsoft threatened to withdraw from the country if the CA went ahead with action on it. Moreover, with the dismantling of trade barriers, markets are increasingly becoming global in nature and hence dynamics of global markets are becoming important. The global market for agricultural products is a case in point. Farmers do not reach the consumers directly and there is a chain of intermediaries. Unfortunately, this set of intermediaries does not always work in a competitive manner. Thus, the final consumers of agricultural products do not get the advantage of a competitive market. Hence, a wide gap exists between the prices the consumers pay and the prices the primary producers receive. These intermediaries abuse their monopolistic dominance in the market for final products while in the

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markets for primary products they abuse their monopsonistic dominance. It is quite obvious that, for most countries, it is not possible to deal with such problems alone. Cross-border predatory pricing Cross-border predatory pricing can also lead to market distortions. Due to some striking similarities, cross-border predatory pricing is very often equated with dumping and thus action is taken under anti-dumping legislation. However, the principle underlying anti-dumping is different from that underlying competition law in that it seeks to protect competitors and not competition. Dumping is, in fact, welfare enhancing unless it is predatory. In this context, the parallel anti-dumping and competition-law cases relating to the sale of Japanese television sets in the United States are interesting. Beginning in the 1960s, US producers sought relief from low-priced imports of Japanese television sets and other consumer electronics products, initially under anti-dumping and subsequently under competition law. As a result, the United States decided to impose anti-dumping duties on Japanese TVs in 1971. The competition-law case was finally decided by the US Supreme Court in 1986, where, in a split decision, the majority expressed the view that the market for electronics products in the United States was fundamentally incapable of being successfully monopolized through a predatory-pricing conspiracy. However, the situation in most developing countries would be quite different due to the small size of markets and low levels of market contestability. Hence, there would be more convergence between anti-dumping and anti-predation actions. But, ironically, until recently, the main users of anti-dumping laws were developed countries, though increasingly developing countries too are taking recourse to these laws (WTO 2001c). Barriers to import competition Import cartels, vertical market restraints creating import barriers, private standard setting activities and abuse of monopsonistic dominance may fall under this category. Import cartels formed by domestic importers or buyers and similar arrangements (such as boycotts of, or collective refusals to deal with, foreign competitors) may be a threat to maintaining competition in a market. In principle, a national competition law may generally be able to tackle such market-access barriers to foreign supplies and suppliers. However, import cartels whose function is solely to attempt to exercise monopsony power in order to get a better price from foreign suppliers may be viewed more favourably from a national efficiency and welfare perspective than cartels that also exercise market power domestically. But it may be difficult to make such a distinction or to separate the two types of activities. Another related concern in this regard is inadequate domestic enforcement of competition law against import cartels in markets for a country’s exports. The

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best-known example in this regard is the dispute between Japan and the United States where it was alleged that Fuji effectively prevented Kodak’s exports to the Japanese market by controlling the distribution channel. In the early 1990s, such concerns prompted a revision of US guidelines regarding international enforcement to permit application of the US antitrust laws to foreign-based activities such as import cartels that restrict US producers’ access to foreign markets. Such unilateral actions of course are not good for the global order. To date, however, the revised US guidelines have never been employed. Foreign investment FDI has now become an important way for companies to supply foreign markets. FDI may increase competition in local markets, particularly in the investments of greenfield type. However, there is a possibility that over time takeovers by foreign firms may make the markets increasingly concentrated to the extent of having one or a small number of dominant players. Moreover, even though a single instance of cross-border acquisition may seem to have no effect on competition from a narrow national market perspective, it may lead to a lessening of effective competition in the market if the acquirer has been a major exporter to the country. Such acquisitions may be aimed at regional or global consolidation by TNCs. IPRs IPRs may generate or contribute towards a position of market power. The IP holders typically engage in licensing arrangements with firms in different countries. The territorial nature of property rights in such agreements means that frequently national law enables them to be used by rights holders to prevent parallel imports. In many cases, it has also been observed that cartels were built around patent cross licensing schemes and thereby foreclosed competition. TRIPS has imposed an obligation on all countries to respect IPR. It also empowers the countries to take necessary actions if IPR is abused to give effect to anti-competitive practices. But the suggested remedy of compulsory licensing would not be available to a country that does not have domestic production capacity. The latest amendment in the TRIPS has taken care of this problem in case of medicines that have public health dimensions. However, such abuse of IPR would not be limited to medicines only and the small countries would have no remedy available. Some developing countries have relied upon special-transfer-of-technology law or regulations as a means of preventing abuses in connection with the licensing of IPRs. However, the adoption of more open and market-oriented economic policies meant that countries have abandoned or diluted these laws and regulations. Weakness of both competition and IPR regimes in most developing countries means that there are not many instances of competition cases related to IPR that have come up before CAs.

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Role of international cooperation in developing countries4 Problems encountered by CAs in handling domestic competition cases also apply to cross-border competition cases. But the latter pose some additional problems too. There are large differences among the countries on how (or whether) the cases were handled by the CAs. Whereas some authorities handled cases very seriously (regardless of whether they were successful in the end), others have not acted at all or acted only with limited interest. Although problems are caused by the special nature of such cases, sometimes the authorities’ own lack of action or interest is also an important factor. To deal with anti-competitive practices that occur at national level or ones that have international dimensions, having a strong and well-functioning competition regime is the bare minimum. This requires that CAs in developing countries must have adequate resources and a team of competition-law enforcement officials who are technically competent. Unfortunately, both are in extremely short supply in most of these countries. Developing countries usually start implementing competition laws under very unfavourable circumstances. In mature jurisdictions, competition officials operate in a stable and adequate policy environment. Their developing-country counterparts, on the other hand, do not have such an environment in place beforehand; they have to strive to create such an environment. Moreover, it should be noted that there are economies of scale and economies of learning in the implementation of competition law. In the initial stages, one would need more rather than less resources. But these initial investments fetch significant, replicable gains, once the competition-policy mechanism is firmly entrenched in the market system. One alternative frequently suggested to overcome the shortcomings of finance and skill is to adopt a regional approach to competition enforcement. Pooling of resources can indeed be beneficial in this regard. However, it must be recognized that the implementation of competition policy requires time and investment in institutions. Developing countries that have recently enacted a competition law can learn from jurisdictions that have a longer experience of implementing such laws, mostly those of developed countries. The above considerations show the importance of defining priorities and setting a plan for institution building for developing an effective competition regime in developing countries. It is useful, for analytical purposes, to identify a Table 6.1 Stages of institutional development of competition regimes I. START

Competition advocacy + Control of horizontal restraints + Checking abuse of dominance + Technical assistance

II. ENHANCEMENT

I + Merger control + Control of vertical restraints

III. ADVANCEMENT

II + Regulation + International cooperation agreements

IV. MATURITY

III + Second generation cooperation agreements + proactive competition advocacy

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sequence of evolutionary stages that could serve as a reference for comparisons among different countries (Table 6.1). The sequencing proposed is based on ideas suggested by Khemani and Dutz (1995) and Oliveira (2003). Given its limited resources, the agency should start with the actions that would most likely benefit the market. Gradually, it would introduce measures requiring more sophisticated analysis. Thus, there is a need to focus on the quality of competition-law enforcement rather than on the mere enactment of the legislation. For this, effective international cooperation in the area of competition policy must go beyond the standard forms to effectively meet the challenge of institution building.5 There are two major areas for which international cooperation is needed, and they are all of great interest for developed and developing countries: 1 2

promoting institution building and a competition culture; dealing with competition problems with international dimensions.

Cooperation has a variety of forms and meanings. The literature (e.g. Holmes et al.) identifies four basic forms or levels: 1 2 3 4

information sharing (public domain) and technical assistance (weak); a positive comity6 basis (semi-strong); positive comity and sharing of confidential information (strong); negative comity,7 mutual recognition and enforcement of laws (virtual integration).

These are ranked in terms of the level of implied participation by countries. The first two elements listed above can come under the ‘first-generation cooperation agreements’, while the elements listed thereafter can be covered in the ‘secondgeneration cooperation agreements’. The focus of international cooperation would depend upon the stage of institutional development of each national jurisdiction, as summarized in Table 6.2. At Stages I and II of Table 6.2, technical assistance seems to be more appropriate. Typically, a developing country will be the recipient and a developed country the provider. Technical assistance from countries in intermediary Table 6.2 Stages of institutional development and the cooperation agenda Stage

Cooperation agenda

Content

I and II

Technical assistance

III

Simple cooperation agreements

IV

Advanced Cooperation Agreements

Training and drafting of legislation and procedures in line with due process Cooperation in selected cases with exchange of public information Systematic cooperation with exchange of confidential information

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positions should be stimulated since the institutional environments might be similar to those at the beginning and more useful. At Stage III, when the agency has already built some internal experience, simple cooperation agreements including exchange of public information can be helpful. However, one should be realistic regarding the limited resource endowment in developing countries, which would not permit joint action in all cases. More advanced agreements, including exchange of confidential information, would require institutional maturity and greater homogeneity and integration among the participants.

The existing agreements and initiatives Bilateral and tripartite agreements The United States, the EU and Canada have signed a number of bilateral agreements with other countries to cooperate in the area of competition law. While the United States has agreements with Australia, Brazil, Canada, Germany, Israel, Japan and Mexico, the EU has such an agreement with Canada. Similarly, Canada has signed bilateral agreements with Chile and Mexico. It has also entered into a tripartite cooperation agreement with Australia and New Zealand. Similarly, there is a tripartite agreement between Denmark, Norway and Iceland. France has an agreement with Germany. China has bilateral agreements with Russia and Kazakhstan. Taiwan has such agreements with Australia and New Zealand. Papua New Guinea has an agreement with Australia. In addition, competitionrelated provisions can be found in many bilateral trade agreements as well. Regional approach A comprehensive regional approach to competition policy was first adopted by the EU and subsequently by CARICOM. While the primary objective of adopting a regional competition policy within the EU was to use it as a vehicle to further integrate the common market, the main objective of CARICOM regional competition policy is to apply competition rules in respect of cross-border anticompetitive business conduct; promote competition in the Community; and coordinate the implementation of the Community Competition Policy. Such an approach is at various stages of discussion/adoption in many other regional groupings like Mercosur (Common Market of the South), COMESA (Common Market for Eastern and Southern Africa), SADC (Southern African Development Community), EAC (East African Community) and CEMAC (Economic and Monetary Community of Central Africa). Global initiatives Over the last few years, several global initiatives have been taken up to deal with competition problems, especially those having international dimensions.

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Some are by government or government agencies while others are at nongovernmental level. None of them of course aims to deal with competitionrelated international disputes, but to promote cooperation. If cooperation and coordination could be promoted in an appropriate manner, then international competition disputes could be avoided and even resolved. The issue of control of RBPs figured on the agenda of UNCTAD II, and again at UNCTAD IV, where a decision was made for starting a work programme at the international level, which led to negotiations under the auspices of UNCTAD. In December 1980, the UN General Assembly adopted by resolution a Set of Multilaterally Equitable Agreed Principles and Rules for the Control of RBPs (popularly called ‘the Set’). The importance of the Set and UNCTAD in this area of work should not be underestimated. The 1990 review conference indicated a high degree of consensus on the contributions of the Set and on UNCTAD’s role. UNCTAD has become quite active in providing technical assistance to developing countries. The OECD has a Standing Committee on Competition Policy and Law, which has all member countries as members, other than five observers. The OECD has been regularly cooperating with a variety of non-OECD countries to provide capacity-building support. With the advent of the OECD’s Global Forum on Competition, it claims, its cooperation with non-OECD countries will extend beyond capacity building to include high-level policy dialogues to build mutual understanding, identify ‘best practices’, and provide informal advice and feedback on the entire range of competition-policy issues. The forum can also be used to promote cooperation among countries. The CAs of different countries have come together to promote the International Competition Network (ICN). ICN is intended to encourage the dissemination of competition experience and best practices, promote the advocacy role of competition agencies and seek to facilitate international cooperation. ICN has already adopted a common set of guiding principles for merger notification and review. Similar initiatives are likely to be taken in other areas of competition enforcement. This has, however, been primarily to facilitate M&A of big companies that need to pass scrutiny in multiple jurisdictions. Considering that ICN has been promoted mainly by the United States particularly in the context of its inability to get the high profile GE–Honeywell merger cleared by the EU, such a thrust is natural. It is thus doubtful if the ICN can even become a forum for cooperation on competition enforcement.

WTO as a forum for competition agreement Strong competition regimes at the national level may not be enough to tackle the cross-border anti-competitive practices. Indeed, it would be a good idea to have provisions for extra-territorial jurisdiction on the basis of the effects doctrine to legally empower CAs to deal with such cases. However, most developing countries do not have enough muscle to actually enforce such provisions. Therefore, there are some prima facie arguments to suggest that multilateral discipline can help the weaker nations too.

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In this context, the setting up of a global competition agency could possibly be the best solution, though this may turn out to be a utopian idea given the existing global geo-political situation. Thus, the international community has had to be content with the second best solution – cooperation. The proposal for an agreement on competition at the WTO has to be considered from this perspective. As mentioned at the outset, competition policy is not a new issue in the GATT/WTO framework. The issues pertaining to competition were raised in the UR negotiations too. Although no agreement on trade and competition policy was signed, the issue is very much present in many of the provisions of the existing WTO Agreements. The Agreements that refer to competition issues are: 1 2 3 4

GATS, TRIPS, TRIMS and Agreement on Implementation of Article VI of GATT 1994 (Anti-dumping Agreement).

Although the WTO Agreements touch on a number of competition issues both directly and indirectly, nothing substantial has emerged on these issues through negotiation. Consideration for a possible framework on competition policy (and investment) has been provided as a built-in agenda under the agreement on TRIMS. As far as competition policy is concerned, the original Doha Agenda was a statement of core principles on transparency, non-discrimination, procedural fairness and recognition of the ills of hardcore cartels. It also included development of flexible cooperation modalities and technical cooperation (Box 6.1). Though this part of the Doha Agenda is no longer operative as of now, typically, these provisions feature in some recent FTAs. Core principles Transparency has been one of the core principles of the GATT system since its inception. In the context of competition, transparency is likely to mean that the administration of competition regulation must be based on published laws, regulations and guidelines. This requirement might also encompass an obligation to make known all general enforcement priorities as well as exemptions and exceptions from competition laws. It is, however, important to note that a competition agency may decide to pursue an individual enforcement action confidentially without disclosing the details. The main reason is that competition-law procedures differ across countries. Thus, transparency in the competition context is not entirely clear and what constitutes a transparent competition regime may become a cause of controversy. Non-discrimination is again a fundamental tenet of the WTO. The WTO jurisprudence on non-discrimination has clarified that equality of competitive

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Box 6.1 The Doha mandate on trade and competition policy Para. 23. Recognizing the case for a multilateral framework to enhance the contribution of competition policy to international trade and development, and the need for enhanced technical assistance and capacity-building in this area as referred to in paragraph 24, we agree that negotiations will take place after the Fifth Session of the Ministerial Conference on the basis of a decision to be taken, by explicit consensus, at that Session on modalities of negotiations. Para. 24. We recognize the needs of developing and least-developed countries for enhanced support for technical assistance and capacity-building in this area, including policy analysis and development so that they may better evaluate the implications of closer multilateral cooperation for their development policies and objectives, and human and institutional development. To this end, we shall work in cooperation with other relevant intergovernmental organizations, including UNCTAD, and through appropriate regional and bilateral channels, to provide strengthened and adequately resourced assistance to respond to these needs. Para. 25. In the period until the Fifth Session, further work in the Working Group on the Interaction between Trade and Competition Policy will focus on the clarification of: core principles, including transparency, non-discrimination and procedural fairness, and provisions on hardcore cartels; modalities for voluntary cooperation; and support for progressive reinforcement of competition institutions in developing countries through capacity-building. Full account shall be taken of the needs of developing and least-developed country participants and appropriate flexibility provided to address them. Source: WTO, Doha Ministerial Declaration.

opportunity (not the outcome) underpins this concept, a perspective that is also relevant in the context of competition policy. However, developing countries feel that this (especially NT) is essentially to push the market-access agenda. They also feel that they need to retain their right to discriminate on the basis of nationality, which may be required to support their own industrial development. The existing NT obligations (as in Article III of GATT and GATS) for WTO members relate to all laws and regulations (including competition law) that affect traded goods and scheduled services. A potential competition agreement at the WTO would modify it to extend the NT obligation for competition law to non-traded goods and non-scheduled services. There might also be an issue of NT being defined by ownership of firms rather than origin of goods. It is this issue that developing countries find more problematic.

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Many of the existing WTO agreements already contain the proceduralfairness obligation. Due process does not require any given institutional structure. But in the competition context, one may presume that the decisions by CAs or courts must be well reasoned and published, and competition law must be applied in a non-discriminatory manner. However, this is another area for potential conflict. In many areas, competition cases are considered on a case-by-case basis and ‘rule of reason’ is applied where economic analysis plays an important role. But it is not uncommon for different analysts to come to different conclusions on the same case. Controversy, therefore, is inevitable. The decade of the 1990s saw a considerable change in the priority given to competition law. In 1970, there were only about 20 countries with a competition law. About 40 jurisdictions adopted some type of competition law since 1990 taking the total number of jurisdictions with such laws to above 80. Although counts vary, all point to the fact that many countries have adopted competition laws for the first time. Another point of interest is that about 75 per cent of the 40-odd jurisdictions were developing countries. A binding commitment at the WTO will distort this natural process. It may be noted that developing countries find it extremely difficult to implement competition laws due to the lack of domestic constituencies for competition. They would find it even more difficult to implement if it was forced on them by the WTO. Although the Doha Agenda proposed to cover hardcore cartels only as a mandatory substantive provision of the competition law in a member country, the principle of non-discrimination would have applied all other provisions, should a country had them. Indeed, countries that already have a competition law generally go much beyond that. Such an agreement can be a serious disincentive for developing countries that intend to enact a comprehensive competition law. Most developing countries argued that the primary objective of both the EU and Japan behind bringing the issue of competition policy is to promote further MA. The EU, however, tried placating them by shifting its focus to hardcore cartels. Many developing countries still believed that there had not been any change in the real intent. Their continued strong emphasis on non-discrimination as one of the core principles clearly showed that MA continued to be the primary objective. It may be noted that one of the primary objectives of the WTO is to promote MA for its members. However, this has to be done in a fair and balanced manner. It must be ensured that developing countries gain equally, if not more, from any push to improve MA. The market-access implications of private barriers are indeed the compelling reasons for bringing competition policy into the WTO (Fox 1999). What is required to be seen to is that a competition agreement improves the terms of trade for developing countries while not implying significant implementation costs (Hoekman and Mavroidis 2003). It may also be noted that the core principles of the WTO were adopted to deal with border measures. There is a structural problem in taking the same set of principles into possible agreements on competition or investment, as these are

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not border measures only and will have serious implications for domestic policy. For example, the concept of S&DT was brought into the WTO framework to deal with differing requirements of border measures corresponding to different levels of development. However, the same is not sufficient to take care of the varying needs of domestic practices such as competition law. Cartels and cooperation From the perspective of developing countries, prevalence of international cartels is probably the most compelling ground for going for an international agreement. But the EU, though heavily focused on this issue in their argument, was unable to come out with credible solutions. Their suggestion in this regard was ‘voluntary cooperation’ only, which was also envisaged to work on a bilateral basis. Undoubtedly, it is difficult to think of any better arrangement to tackle the problem than cooperation, and as we have examined above, international cooperation can play a significant role in fostering an effective competition regime for tackling cross-border competition problems, particularly in developing countries. However, it is quite difficult to imagine how the WTO could act as an ideal forum for promoting ‘constructive cooperation’, given that it has been functioning as a DSB that adopts an ‘adversarial approach’.8 It may be worth mentioning here that under the aborted Havana Charter, which also included competition provisions, the proposed ITO was not to adopt an adversarial approach to dispute settlement. Moreover, if cooperation is to work on a bilateral basis, then what is the point of bringing it into a multilateral forum like the WTO? A ‘blanket ban’ on cartels as proposed by the EU has also been questioned by many. Why should the WTO be interested in banning domestic cartels that do not have any significant cross-border impact? Competition per se will not necessarily ensure efficient outcomes, nor is it necessarily the case that agreements between firms in an industry that reduce competition between them are welfare reducing (Hoekman and Mavroidis 2003). In fact, it has been argued that a maximal degree of competition is not optimal and that increasing economic growth requires a mix of cooperation and competition by firms. The analysis by Amsden and Singh (1994) is noteworthy in this context. They observed that: In general, whether competition was promoted or restricted [in Japan] depended on the industry and its life cycle: in young industries, during the developmental phase, the government discouraged competition; when industries became technologically mature, competition was allowed to flourish. Later, when industries are in competitive decline, the government again discourages competition and attempts to bring about an orderly rationalisation of the industry. It is also quite clear that a ban on hardcore cartels would mean that import cartels would have to be disbanded. However, one is not sure whether

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developing countries would have been able to protect themselves from the harms caused by export cartels and international cartels, as that would require cooperation from and strong action by developed countries, something not guaranteed in an arrangement of voluntary cooperation. Ironically, the proponents always focused on international cartels while selling their proposals to developing countries. Import cartels that try to get better bargains from foreign exporters may be welfare enhancing, especially in developing countries where there is no production base in many sectors. An effective and successful cooperation arrangement can be possible only when the parties involved mutually agree to it. However, at the WTO, the mutual trust is conspicuous by its absence and one group of countries has always been trying hard to force an agreement on another group. Moreover, the past experience in cooperation on competition has predominantly been a developedworld phenomenon, although a few developing countries have entered into such agreements recently. Even within the developed world, international cooperation has worked mainly on merger control rather than cartels. It is argued that much of the evidence in cartel cases is very often collected through ‘leniency programmes’9 and hence cannot be shared with others. Armed with a cooperation agreement with the United States, Brazil decided to investigate the vitamins cartel. However, it could not proceed much as the cooperation received was far too less. In fact, it could hardly procure anything from the US authorities that was not publicly available. Thus, it was not able to prosecute the offenders, even as an estimate puts the amount of overcharges in Brazil at $183.37 million (Clarke and Evenett 2002). Dispute settlement This is one area where there was much confusion and uncertainty about a possible agreement on competition. Proponents tried to make others believe that the agreement would not come under the ambit of the WTO dispute settlement mechanism. It was proposed that there would be periodic peer reviews, which, to some extent, would bring discipline. However, doubts were expressed whether the peer review system would be effective. There was apprehension that peer review would exert significant pressure on the smaller or developing countries, while allowing the mighty developed countries to rule the roost. It was not quite clear if peer reviews would be limited to legal provisions only or include their enforcement as well. The ambiguity arose on account of the EU proposal that national competition laws would de jure need to be in conformity with the commitments that the WTO members make in the agreement and not de facto. Despite assurances from the EU, there was a feeling that once the agreement came into being, it would be difficult to ignore enforcement issues in the peer reviews or any dispute settlement mechanism. It was also questioned if such de jure–de facto distinction would make any sense. There was a view that since the core principles would be treated as binding rather than guiding in the context of a possible agreement at the WTO, it would

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automatically come under the dispute settlement mechanism. In fact, a submission by the EU indicated that binding core principles imply that ‘compliance with these principles is subject to dispute settlement’. In sum, many developing countries believed that keeping this area in the proposed agreement vague was actually a ploy by the EU to get them into the trap. If there were no dispute settlement mechanism, then the agreement would become simply irrelevant. Leaving this area in the agreement vague could create major problems in the future. It might also overburden the dispute settlement mechanism at the WTO. Existing anomalies The WTO has already brought a number of competition issues into its existing framework and more often than not these have restricted competition rather than promoted it, and consequently, put consumers at a disadvantage, particularly in developing countries. The most damaging aspect of the existing WTO framework is the inclusion of IPRs (TRIPS), which is essentially about restricting trade and competition and guaranteeing big profits for the TNCs from developed countries at the cost of consumers worldwide. TRIPS goes against the principle of trade liberalization as it facilitates longer existence of limited monopolies. The current provision of a protection period of 20 years is too long and has no economic logic. This is definitely going to promote exploitative monopolies. The introduction of product patents may imply significant social costs due to higher prices charged for patented products, especially pharmaceuticals and agro-chemicals. Indeed, TRIPS does not belong to the WTO. As a matter of fact, the case for a competition agreement is much stronger than that for TRIPS. This, however, does not imply that a competition agreement at the WTO is already overdue. The capacity of national governments to deal with the RBPs of TNCs was eroded by the agreement on TRIMS (Puri and Brusick 1989). Another area that needs a close look and a rethink from the competition angle is anti-dumping. Anti-dumping has been likened to cross-border predatory pricing, as mentioned earlier, and often actions for across-the-border predatory pricing are taken under anti-dumping laws. However, this provision of the WTO has been grossly misused by developed countries. In most cases, they are used not to protect and promote competition, but simply as a protectionist measure. Initiations of antidumping investigations have steadily increased since 1995. About one-half of all investigations initiated by developed countries between 1995 and 1999 were targeted at developing countries, while 25 per cent were targeted at other developed countries and 25 per cent at transition economies (WTO 2001b). One would, however, imagine that firms from developed countries with their bigger size would be more able to monopolize the markets of developing countries through predatory dumping, rather than small firms from developing countries doing it in developed country markets. Recently, however, things have changed a bit due to emergence of India as a major user of anti-dumping measure.

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However, India’s target has, by and large, been a single country – China. If India is taken out of the scenario, then the picture remains the same. Lack of capacity The issues related to competition policy and law are quite complex. In fact, it is recognized that even some of the developed countries do not have adequate capacity in this regard (Mavroidis and Neven 2001). Developing countries with no experience or very limited experience are not in a position to negotiate on competition policy at a forum like the WTO where the stakes are very high. Neither are many of them in a position to implement competition law in an appropriate manner, whatever its form. For many, implementation of competition law will be similar to administering a high-risk drug by a quack! Moreover, without adequate resources and capabilities, CAs would not be able to launch a comprehensive attack on prevailing anti-competitive practices and hence they need to be selective in choosing cases. However, if they make an international commitment in such a situation, they will end up choosing cases that will help foreign players rather than those helping the domestic economy. It may also be noted that even though countries like India have a long experience of competition law, this may not be relevant in today’s context or in that of a multilateral agreement. The basic objective of the competition law adopted in India in 1969 was to control monopolies where size (not even the structure) was the most important factor. However, the new law, passed in December 2002, focuses entirely on conduct, thus, in fact, jumping a step. Obviously, India does not have any experience in implementing a modern competition law. The Doha Ministerial Declaration states: We recognise the needs of developing and least-developed countries for enhanced support for technical assistance and capacity building in this area, including policy analysis and development so that they may better evaluate the implications of closer multilateral cooperation for their development policies and objectives, and human and institutional development. It also adds, ‘To this end, we shall work in cooperation with other relevant intergovernmental organisations, including UNCTAD, and through appropriate regional and bilateral channels, to provide strengthened and adequately resourced assistance to respond to these needs’ (WTO 2001a). The question is, have these needs been adequately addressed? The answer is an emphatic ‘no’. In the name of capacity building, only a few regional workshops (some of them at Geneva) have been organized by the WTO and UNCTAD. In these workshops, especially those organized by the WTO, the resource persons have mostly been from developed countries and known for their pro-competition agreement leanings. Obviously, the exercises were meant to convince the participants of the benefits of a multilateral competition agree-

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ment rather than build their capacity in policy analysis and development so that they may better evaluate the implications of a multilateral competition agreement. Some bilateral donors have provided assistance in this regard, but those have been too small compared to the huge needs. Clearly, the promise of capacity building and technical assistance made in the Doha Declaration has not been fulfilled. This broken promise alone can be a good enough reason for not starting any negotiations on the issue in the near future.

Conclusion Nobody can deny the need for a multilateral competition framework. On account of the fast pace of globalization, cooperation among national CAs would be a key to the successful frustration of anti-competitive practices, especially those of a cross-border nature. However, from the perspective of developing countries, the time is not yet ripe for a multilateral agreement at a forum like the WTO, which in any case may never be able to deal with the issues in a comprehensive manner. People also question whether an agreement at the WTO would have had the desired effectiveness even if it were signed especially in the way the EU wanted. The first reason is that there was no proposal to have binding global rules and the proposed commitment for cooperation was only voluntary. Second, even if the agreement were signed, it would have been an outcome of power politics and lacked the mutual trust among nations that is the primary requirement for meaningful cooperation to tackle cross-border competition issues. Other fora or initiatives to promote international cooperation on competition should be strengthened or launched instead of pushing for a competition agreement at the WTO. As we have seen before, there is no dearth of existing fora at multilateral level. However, there is a need to make them more effective. Given that there are a number of fora at the global level, proper coordination among them is essential. Failure to do so may create confusion and may even add to the problems surrounding competition issues with international dimensions. It may be noted that multiple fora are not necessarily bad, as, collectively, they might bring a balance in the system. Regional competition regimes will only focus on those cases in which anticompetitive practices have a regional dimension. Hence, member countries should also consider adopting a national competition law as early as possible. Developed countries and intergovernmental organizations should provide generous assistance to these countries in drafting domestic competition legislation and related implementation legislation in developing countries, and strengthen the capacity of CAs where they already exist. The members of the WTO are highly unequal, whereas the inequality among the members of a regional body is generally much less. The WTO is a power-based and mercantilist organization where the ‘key principle’ that works is ‘bargaining’, whereas regional groupings function on ‘cooperation’. It must be kept in mind that the existing agreements at the WTO, though unequal and unfair to developing and LDCs in many respects, can also protect

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their interests in many ways. However, developing countries are not able to take full advantage of such provisions due to their weak capabilities. They lack the expertise and resources to challenge trade policies and measures of industrialized countries that harm their export interests, even if those policies are in violation of the commitments at the WTO. They are also not able to defend themselves effectively against complaints due to their lack of access to expert lawyers who could argue their case. Thus, signing a multilateral agreement on competition will not serve any purpose for developing countries, even if developed countries generously take care of their interests, unless their capacity is built first. As of now, countries should promote cooperation on competition issues through bilateral means as well as regional and other multilateral fora. A limited agreement on competition, involving market-access issues, may be negotiated but only at a later date when developing countries are prepared and there is an ‘explicit consensus’. Meanwhile, the WTO should review and modify the existing agreements like TRIPS, TRIMS and anti-dumping those have anticompetitive impacts.

7

Multilateral framework on investment Much pain without gain!

Introduction Dealing with the issue of foreign investment in a comprehensive way and through international cooperation has been a major preoccupation in different fora for long. The inclusion of the issue in the aborted Havana Charter constitutes the first indication of such interest. Within the GATT, the issue was dealt with occasionally until the UR. Even the theoretical discussions on the possibility of developing a ‘GATT on investments’ had taken place as early as the 1970s. During the UR of trade negotiations, developed countries advanced the idea of framing multilateral rules to further liberalize the foreign investment regime. But developing countries were opposed to any such idea, primarily because they were unwilling to embark on multilateral negotiations on investment matters under the GATT, which is supposed to be devoted to trade matters. Eventually, developing countries settled for negotiations and agreements on four clusters of investment-related matters. The four agreements under the auspices of GATT/WTO that deal with investment-related matters are TRIMS, GATS, TRIPS and the ASCM (South Centre 1997). TRIMS explicitly and exclusively deals with negative investment incentives, such as local content requirement and export balancing. The Agreement on TRIPS has a bearing on FDI issue in that the definition of these rights and the adherence to the international standards and procedures constitutes part of the framework within which foreign investment takes place. The GATS also relates to FDI since it recognizes local presence as one of the modes of supplying. With respect to SCM, certain investment incentives lie within the definition of a subsidy. Besides, the Agreement on TRIMS has a built-in agenda under Article 9 of the agreement, wherein the Members could recommend expansion of the WTO acquis to both investment and competition policy. It was this provision that was invoked to bring the issues of investment and competition policy at the First Ministerial Conference of the WTO in Singapore in 1996. Further progress on this issue was made at the Doha Ministerial Conference as the Members agreed to decide on whether and upon what terms to launch negotiations at Cancun. However, Cancun Ministerial remained inconclusive with the issue of investment playing an important role in the collapse of the talks. After the

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Cancun fiasco, WTO discussions moved to Geneva and after about one year of protracted talks, members of the WTO agreed on a framework of negotiations. As per the framework, three of the Singapore issues, including investment, have been dropped from the DR of negotiations. This, however, does not mean that the investment issue is dead. Investment will remain dormant for the time being but its proponents may bring it back at an opportune time.

Nature of FDI flows and possible impacts An international agreement on investment, particularly with provisions for protection of foreign investment, has long been argued with the assumption that such arrangements will enhance flow of foreign investment particularly to developing countries, which they require badly to promote growth and development. It would, therefore, not be out of place to have a look at the nature of foreign investment flows and their possible impacts. During the 1990s, FDI flows throughout the world grew at unprecedented rates, particularly after 1995, when the WTO came into being, signifying a new age in the globalization process. Obviously, this phenomenon brought cheers to many who thought that the global economy was scaling new heights and high global growth and efficiencies were to follow. However, most of these flows were limited within the developed world, bypassing the developing countries

100

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4.0

2.9

1.8

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5.4

15.9

90 26.4

80

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38.4

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24.0

26.3

27.9

37.8

36.0

Percentage

70 60 50 82.3

40 30

70.7 58.2

58.2

1996

1997

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73.5

69.9

68.4

58.6

20 10 0 1998

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2004

Year Developed

Developing

Transition

Figure 7.1 Share of different groups of countries in total FDI inflow (source: UNCTAD (2005)).

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except a few like China, Brazil and Mexico. The share of developing countries in the global FDI flows came down from 38.4 per cent in 1996 to 15.9 per cent in 2000 (Figure 7.1). This was causing concerns as many economists thought that FDI flows were not reaching the places where they were most needed (Nunnenkamp 2003). The obvious suggestion was that developing countries should liberalize further. Now the question arises as to what benefits were accruing to the developed world due to these hyper flows of FDI? Unfortunately, this was not reflected in the global economic performance. In fact, the average growth rate in the developed world was much lower than that in the developing world. The world output growth for 1990–2000 averaged at 2.2 per cent with a 2.0 per cent average for the developed economies and 4.3 per cent for the developing world. Moreover, most of this growth in the developed world was taking place in the United States, while other parts of the developed world were performing quite poorly. Anyway, such high growth in FDI flow could not be sustained beyond 2000, and in 2001, FDI flow fell down by almost half. The fall continued till 2003, before gaining marginally in 2004, though the gain was due to high recovery in the developing countries, but in the developed world, the fall continued (Figure 7.2). What was being ignored is that despite such heightened FDI flow there was no growth in global gross fixed capital formation (GFCF). In fact, it registered a negative growth during 1996–99 and recovered a bit in 2000 just to get back to the level of 1996. Interestingly, despite a steep fall in the global FDI flow in the post-2000 period, global GFCF did not fall accordingly. After registering a fall of around 4.5 per cent in 2001, GFCF has grown by 9.76 per cent and 11.07 per 1,400 1,200

Developed Developing Transition Total

US$ billion

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1998

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2002

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Figure 7.2 FDI inflow in different groups of countries (source: UNCTAD (2005)).

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10,000 GFCF FDI

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7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1996

1997

1998

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Figure 7.3 Total GFCF and total FDI inflow (source: UNCTAD (2005)).

cent in 2002 and 2003, respectively (Figure 7.3).1 Thus, the high flow of FDI in the 1990s was probably more of a restructuring of ownership of global capital rather than any addition to productive capacity or growth in efficiency. If that is the case, then one need not worry with the steep fall in FDI flows, particularly when it did not affect GFCF in any way. By the end of 1990s, cross-border M&A accounted for more than 85 per cent of global FDI (Kang and Johansson 2000). To that extent, FDI was just restructuring of ownership rather than addition in productive capacity. Thus, the growth in FDI flow could have had an impact on economic growth only through increased efficiency, if at all. Unfortunately, despite tall claims on the expected efficiency gains made by the involved companies in M&A at the time of striking the deal, such gains, very often, remain elusive as shown by research in both Europe and America (Witzel 2004). The merger of AOL and Time Warner, intended to create a world-class communications and entertainment company, is a classic example of this, as within a few years it led to the biggest losses in American corporate history. Even when M&A deals succeed in boosting profits, doubts can be raised on the source of increased profitability. Though there has not been much research in this area, the limited studies indicate that, by and large, the source of higher profitability is not increased efficiency or reduced cost, but increased market power (Akhavein et al. 1996; Vennet 2002). It may be noted in this context that the nature of cross-border M&A in the 1990s is distinctly different from the earlier period as, in the 1980s, they often took place between different fields of business or industry, while in the 1990s, they took place, by and large, in the same or

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related industries (UNCTAD 1998). Given this, the massive FDI flow of the 1990s, with its predominant component being acquisition FDI has, in all probability, increased concentration in the global market across sectors without bringing in any accompanying efficiency gains. As economic theory tells us, increased concentration (and less competition) in any market, ceteris paribus, leads to reduced output. Thus, it could be possible that the increased FDI flow of the 1990s might have contributed to the global recession that followed in the 2000s. On the question of overall impact on growth and development of the host economy, as is very often argued, there is no significant difference between greenfield and acquisition FDI. According to this argument, acquisition FDI will release some capital, which will be invested elsewhere and will thus enhance the overall productive capacity in the economy. However, this is not what happens typically. The money released through an acquisition FDI project may simply get invested in the capital market, increasing prices of shares but without adding anything to the productive capacity of the economy. Similarly, FDI coming through privatization very often does not lead to additional capacity creation but fiscal profligacy of the governments. The effect of FDI will be to increase competition in the local market, when the investment is of the greenfield type. On the other hand, looking from a narrow national market perspective, a cross-border acquisition may seem to have no effect on competition, but if the acquirer has been a major exporter to the country then the acquisition may lead to the lessening of effective competition in the market. Thus, from competition angle, greenfield investment does not raise any concerns, while acquisition FDI may raise competition concerns, even from a national economy perspective. Greenfield investment not only creates additional capacity on its own, it also stimulates further investment through forward and backward linkages. Acquisition FDI, more or less, uses the already existing linkages. On the part of the TNCs, there is a natural tendency to enter a foreign market through M&A rather than by greenfield investment. This is because the risk is much lower in M&A, as they are taking over a running business. Moreover, in M&A, there is no gestation lag – they start earning from day one. Agosin and Mayer (2000) find that the effects of FDI on overall capital formation differed considerably between regions and host countries, while FDI induced additional local investment in Asian countries, crowding-out of local investment was the norm in Latin America. Kumar and Pradhan (2005) suspect that the crowding-out in Latin America may be because FDI in this region was largely in the form of M&A related to privatization programmes. Mencinger (2003) also refers to the predominance of M&A as a possible explanation for the negative relationship between growth and FDI found for Central European host countries. Acquisition FDI has traditionally been a developed world phenomenon. However, the situation changed when many developing and transition economies went for massive privatization programmes (Kang and Johansson 2000). An overwhelming proportion of Brazilian FDI came through privatization of state-owned enterprises. In fact, this was the case for most countries in

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Latin America, Eastern Europe and Africa. However, as many countries embarked on privatization programmes at around the same time, it became a buyers market, and as most of these countries did not have domestic companies capable of buying those assets, the major beneficiaries were foreign companies from the developed world who were able to grab them at cheap prices. Moreover, such acquisitions, very often, were not decided by market forces where a more efficient firm takes over less efficient firm – they were political decisions. Thus, privatization-linked acquisition FDI was likely to be less efficient compared to market-driven acquisition FDI. It has often been argued that FDI through M&A should not be discouraged as the foreign companies are very likely to bring in greenfield investment at a later date once they get a foothold in the country. However, this claim is not supported by empirical evidence. A case study of FDI in Brazil’s service sector by Michael Mortimore of the UN Economic Commission for Latin America and the Caribbean (ECLAC) shows that foreign companies brought in very little capital for modernizing and expanding. Moreover, the BNDES (National Bank of Economic and Social Development of Brazil) financed these companies at very low interest rates through a presidential decree of 24 May 1997. Further, before privatization, these companies predominantly used indigenous goods for their expansion or modernization, while post-privatization, they imported almost all requirements of capital and intermediate goods. A study revealed that between 1994 and 1997, the local production of capital goods fell overall by 10 per cent. In other words, privatization has been accompanied by a real measure of de-industrialization (Laplane and Sarti 1999). The Latin American experience is in sharp contrast with that of Asian countries. The Asian countries did not go for privatization, but they opened up the sectors previously monopolized by state-owned enterprises to private investors. This kind of a policy, though relatively less successful in terms of attracting FDI, ensured that whatever investment was received was of greenfield type (Jacobs 2004). This could happen even though the general perception among the investors is that in most of these countries, the government or the regulators favour incumbent state-owned enterprises. This is not surprising. If there were enough scope for taking over existing companies, TNCs would be reluctant to create new facilities. This should be an eye-opener to many developing countries that are contemplating privatization programmes, especially in the utilities sector, targeting foreign companies as possible buyers, with the hope that they will bring in substantial investment, sooner or later.2 On the whole, however, the experiences of the developing countries in terms of attracting FDI as well as the evidence of its impact on economic growth are anything but conclusive. In fact, there have not been enough studies to say anything conclusively on the growth effects of FDI. Empirical findings indicate that growth effects of FDI are mixed and that FDI must not be considered to be a homogenous phenomenon (Nunnenkamp 2002). Some even consider that longand short-term debt inflows would produce better results than FDI (Hausmann and Cortes 2001). Aizenman et al. (2004) find that there is no evidence of any

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‘growth bonus’ associated with increasing the financing share of foreign savings in domestic capital stock. In fact, the evidence suggests the opposite: throughout the 1990s, countries with higher self-financing ratios grew significantly faster than countries with low self-financing ratios. This result persists even after controlling growth for the quality of institutions. The financing share of foreign savings in domestic capital stock in this study is derived from the measure of self-financing which is the ratio of cumulative discounted gross national saving and gross national investment. This ratio is essentially the share of domestic capital that was financed by national saving. Obviously, this is not about foreign investment flows and more of stock of foreign capital and includes all types of foreign financing. However, this might reflect the long run impact of foreign investment.

The existing investment instruments BITs Even though development pay offs from FDI are not guaranteed, countries have been more welcoming towards FDI as it is perceived as a significant resource for development particularly in the developing world. As a result, countries are moving towards the lowering of specific standards and regulations to earn a competitive edge. Regulatory framework has been witnessing changes that make it more favourable to FDI. A trend towards a more favourable regulation towards FDI is emerging both in developing and in developed countries as Table 7.1 testifies. Nevertheless, the capital-exporting countries thought that their companies needed more protection in host countries. Hence, in the absence of a multilateral agreement, they went for BITs with the host countries. BITs are a legal instrument with which capital rich countries protect the interests of their investors against possible coups and mistreatments by foreign governments. Developing countries have also been keen to sign more and more BITs with the hope that they will give them much wanted FDI. While the first BIT was signed in 1959 Table 7.1 FDI-related regulatory changes 1996–2004 1996

1998

2000

2001

2002

2003

2004

65

60

69

71

70

82

102

114

145

150

208

248

244

271

More favourable to FDI

98

136

147

194

236

220

235

Less favourable to FDI

16

9

3

14

12

24

36

Number of countries that had introduced changes in their investment regime Number of regulatory changes of which:

Source: UNCTAD (2005).

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between Germany and Pakistan, they have become a widespread phenomenon now. The last decade has seen an explosion in the signing of BITs. According to UNCTAD, at the end of 2005, as many as 2,495 BITs were in place (UNCTAD 2006). On the one hand, BITs are expected to promote FDI towards signatory countries. On the other, potential FDI flows encourage other countries to enter BIT schemes. In particular, the popularity of BITs amongst developing countries is astounding. The peculiarity is that developing or transition countries are not only signing BITs with the developed world, but also amongst themselves. Some of these BITs are no more than a mere sign of goodwill between two countries rather than a manifestation of current or future investment ties. Still developing and transition countries have become the central counterpart in BIT agreements, with 92 per cent of such agreements signed by at least one country from these groups. Another factor contributing to the spread of BITs in developing nations lies in the competitive regime that governs the struggle for FDI. Developing countries, while collectively resisting an international investment agreement within the WTO, sign BITs to gain a competitive edge on possible competitors. Many differences exist between the earliest BITs and those of the contemporary world but a common denominator regarding a standard of provisions can be found. Most BIT models contain provisions regarding standard of treatment, standard of expropriation and compensation, standards for repatriation of investment and profits, performance requirements, settlement of disputes. Another fundamental element that defines the scope of a BIT is its definition of investment. The definition is so crucial because of the obvious central role that investment plays in determining the field of application of the various provisions contained in a BIT. Capital-exporting countries seeking to protect wide varieties of assets abroad usually resort to open-ended definitions of investment. Developing countries usually favour narrower definitions. Some countries, such as the United States, use BIT models with additional provisions that regard performance requirements and local content requirements. These provisions can be especially burdensome for developing countries because of the barriers they establish to the impact that FDI can have on local development. Regional agreements At the regional level, liberalization of the investment regime has tended to materialize in certain number of initiatives taken mostly in the 1990s. Notably the amendments to the Andean Group’s instruments on foreign investment and transfer of technology in 1991; the NAFTA of 1992 among Canada, Mexico and the United States; the Energy Charter Treaty (ECT) adopted by 50 countries contain important provisions on investment liberalization and protection. The 1994 APEC Non-Binding Investment Principles and the Pacific Basin Charter on International Investments are also important regional agreements. Similar trends can be identified in interregional agreements, such as the Cotonou Agreement between the EU and a large group of ACP states, as well as

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in the association agreements concluded after 1989 by the EU with countries of central and eastern Europe and north Africa. This trend mainly reflects the recognition by governments that large markets attract FDI. In fact, today’s regional agreements are really no longer only FTAs but, more and more, free investment agreements as well (UNCTAD 2000b). WTO agreements Among the four agreements under the auspices of GATT/WTO that deal with investment-related matters, TRIMS deals with investment issues explicitly and exclusively. Negotiations on TRIMS represented an early attempt to catch up on multilateral rules governing investment liberalization. Investment measures can be divided into two groups. The first contains laws on expropriation, nationalization, compensation and measures to restrict or prohibit access to specific sectors of the economy. These measures are potentially applicable to all private investments within a country. The second type of measures is intended to influence corporate decisions, mainly of foreign investors, though they could be applied to domestic investors as well. They can be further subdivided into positive and negative incentives according to the impact they have on the investors. The TRIMS Agreement relates to the negative incentives. The GATS provisions aim to liberalize international exchange of services based on a broad definition of trade in services and represent a partial multilateral regime on investment. It involves FDI matters since several provisions in the agreement regulate cross-border financial flows. In fact, it is one of the four modes of exporting services as defined by GATS. The cross-border marketing of goods also relies increasingly on commercial presence in foreign markets. Investments of manufacturing companies in wholesale and marketing or financerelated affiliates abroad are covered by the agreement if the establishment of such facilities aims at supplying a ‘service’ related to marketing of goods. An affiliate concerned only with the distribution of products that have been produced abroad is not covered by the agreement. In practice, however, it is difficult to make a clear-cut distinction between those foreign affiliates that really supply a service and those that do not. The TRIPS agreement has a bearing on FDI matters in that the definition of IPRs and the adherence to the international standards and procedures constitute part of the framework within which foreign investment takes place.

The impact of existing investment instruments The potential impacts of a multilateral agreement on investment (MAI) on FDI flows can be assessed to some extent by looking at the impacts of these BITs and regional agreements on investment flows over the last few years. However, until very recently, studies on the effects of BITs on FDI flows were limited and in no way conclusive. In most cases, evidence pointed towards no clear connection between the two.

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While in theory the beneficial influence of BITs on FDI flows might be quite straightforward, the empirical results of the major studies conducted so far on this issue do not arrive at the same conclusion. The studies by Hallward-Driemeier (2003), Rose-Ackerman and Tobin (2005) and Salacuse and Sullivan (2005) did not find any statistically significant correlation between FDI and BITs. However, they indicated that BITs are more effective in attracting FDI in high-risk countries than low-risk ones. The study by Neumayer and Spess (2005), being also the most comprehensive, instead, concludes that there is a significant link between BITs and increased FDI inflows. Gallagher and Birch (2006), based on the evidence from Latin America, find that signing a BIT with the United States does not have an independent effect on attracting FDI from the United States. The time frame of Neumayer and Spess (2005) may be inappropriate to capture the latest trends. In fact, the study uses data ranging from 1970 to 2001 leaving largely unaccounted for the slump in FDI between 2000 and 2004. The possible reverse causality between BITs and FDI also needs to be considered. In fact, while BITs may promote FDI flows, FDI may also promote BITs. The signing of a BIT is very often politically determined. When a country finds that a lot of FDI is sitting in another country with which it does not have an agreement, it might take initiatives to sign a BIT. Nevertheless, due to the inherent cost of a BIT scheme, as discussed later, policy makers may not find this fact comforting. Judging on the evidence produced to date, BITs seem to be an additional and smoothing factor in determining FDI flows, but they do not seem to be a necessary precondition for attracting FDI. China, which is the largest recipient of FDI, for example, is receiving FDI from all possible sources with or without BIT. On the other hand, Africa, which has entered many BIT schemes, receives a small share of FDI and a share that is shrinking. The signing of NAFTA, however, led to substantial FDI flow from the United States to Mexico. The development payoffs of such FDI flows have been quite small as they have been limited to the low value added parts of the production process only. The impact of TRIPS on the flow of foreign investment is of course not very clear. While FDI inflows may increase as a result of a more reliable legal environment and a better investment climate, lack of IPRs may also encourage FDI. A firm that wants access to a market where IPRs are not adequately enforced may have to rely on FDI to ensure control over the proprietary information. Lack of IPRs may also increase FDI in marketing activities that partially substitute for the enforceability of knowledge by establishing closer ties with consumers. However, developing countries were made to believe that it was necessary for them to attract greater flows of FDI along with advanced technology (Stewart 2000).

The development concerns An agreement on investment at the WTO, developing countries feared, would further limit the scope for domestic control of TNCs without any balancing

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measures, particularly, in the context of LDCs whose economic might is much less than that of many TNCs. The agreement would tie the hands of governments trying to channel investment flows according to their national development strategies. There is also a concern that WTO rules might effectively give foreign investors preferential treatment relative to national investors, particularly, if the rules are modelled on the NAFTA investment provisions. Another concern is that if a broad definition of investment were adopted as was suggested by the United States, the developing countries would find it difficult to regulate even portfolio capital, which can have serious implications as experiences of the Asian financial crisis of 1997 have shown. It has also been pointed out that the push for an agreement on investment at the WTO attempted to provide protection as well as more liberal environment to foreign investors, without any concomitant efforts at ensuring responsible behaviour from them or putting home country obligations in the proposed agreement. In the past, initiatives were taken up by the United Nations to establish standards of behaviour for TNCs, particularly the Code of Conduct proposed by developing countries (the Group of 77) but this effort was aborted in 1992 under pressure from developed countries, especially the United States. Obviously, the proponents of an investment agreement have shown no inclination to include investors’ behaviour or home country obligations in the proposed agreement. Moreover, most countries, besides unilaterally liberalizing their policy environment are going out of the way to provide incentives to foreign investors leading to a ‘race to the bottom’ situation. This is a process that might give advantage to some countries, but on the whole and collectively they lose. Obviously, this is a problem that cannot be tackled through bilateral initiatives and poses a perfect case for a multilateral agreement. Thus, if there is one reason for going for an MAI, it is possibly to check the ‘incentive war’ (Stiglitz and Charlton 2004). But this has not been on the WTO agenda. Like the potential benefits, the nature of costs of a multilateral agreement can also be assessed from the costs that developing countries are incurring due to the BITs that they have signed. The signing of a BIT though implies one fundamental cost: the limitation of sovereignty. In fact, the fundamental pillar from which BITs gain their credibility is the possibility for a foreign investor, with or without intervention from the home government, to call for arbitration by international organizations such as the ICC, bypassing the national courts. Such a threat is a very real one for the governments because of the possible compensation awards, the reputation damage that arbitration causes and also because rulings by international arbitrators are binding for both parties and challengeable only with great difficulty. The number of such disputes has increased significantly in the last few years, with over 200 disputes having been brought to the ICSID. ICSID, which is a member of the World Bank group, was instituted to specifically address and resolve the disputes between foreign investors and governments. Provisions regarding arbitration by the ICSID can be found in over 900 BITs and also in four recent regional trade and investment treaties (NAFTA, the ECT, the

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Cartagena FTA and the Colonia Investment Protocol of Mercosur). Other international arbitration organizations also exist, and each one is, in some ways, an expression of the different interests that gravitate about FDIs. ICC, for example, is closely linked to the business world. It is, however, not specialized in stateforeign investor disputes but more generally in international business disputes. MIGA, a member of the World Bank group, on the other hand, offers arbitration as part of general strategy to promote FDI towards regions with a combination of high political risks and low income, particularly Africa. Regional and national arbitration organizations also exist and sometimes work in conjunction with the multilateral organizations. The benchmark of 200 disputes is definitely an underestimate of the government-foreign investor litigation phenomenon, as many cases are resolved without recourse to arbitration. A process of adjustment of certain BIT clauses is occurring because of the unexpected results that international rulings have brought about. BITs in fact can have unpredicted and undesirable effects on both countries depending upon the interpretation of the provisions by arbitration tribunals. The implications that BITs are having and could have on national policy space are significant. Against Argentina 39 out of 42 claims relate to the financial crisis and the emergency laws it enacted in that period. Other vital policy space is also being challenged through different claims. This reduction of policy space can hinder greatly the attempts of the government to steer the national economy with possibly adverse effects. If these BITs and regional treaties can involve this much of costs, one can imagine the costs associated with a potential multilateral agreement at the WTO. Developing countries may want to be relatively more flexible when M&A occur among nationally owned companies. This is not only to serve narrow national interests, but it can also give stronger competition to big TNCs, thus making the global market more competitive. However, when domestic companies are taken over by already globally dominant TNCs, global market becomes less competitive. An MAI, with NT principle, however, will make it difficult for national governments to follow such discriminatory policies and will lead to more concentrated (and less competitive) global markets. Interestingly, this concern is valid for a multilateral competition agreement as well, particularly in the form that was proposed at the WTO.

Discussions at the WTO The impression emerging from the WTO Working Group discussions pertaining to the MFI proposal indicates that most countries were still struggling to understand what are the contours and the implications of the MFI on their national development and industrial policies. Nevertheless, many developing countries were not so enthusiastic about the idea of launching WTO negotiations in this area. The most vocal opposition came from the so-called like-minded group including India, Kenya, Malaysia, Tanzania, Uganda, Zambia and Zimbabwe, among others. They were rather adamant about certain issues, which are crucial

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to them, thus posing a challenge for the future of the discussions. Some of the Latin American countries, on the other hand, were quite sympathetic to the proposal, ostensibly because they believed that developing countries stand to gain from an investment agreement where they would collectively have more influence. India and Malaysia, unlike other countries that seemed ambivalent, had been steadfast in their opposition to an MFI at the WTO. According to India, investment is not a trade issue; therefore, it does not belong to the WTO. It also argued that there is no evidence that an agreement will bring more investment to developing countries, and hence, it would serve no purpose for developing countries. Moreover, India insisted that Members must discuss the movement of natural persons (labour) in any discussion on capital flows. Pakistan repeatedly stated that it was unconvinced of the need for the agreement, adding that it would weaken the bargaining position of host countries visà-vis investors. The EU and Japan tried to placate India and Malaysia as well as other developing countries by advocating an approach similar to that under the GATS. In their view, this approach would allow governments to open up areas where they want foreign investors and exclude those considered too sensitive for political, economic or developmental reasons. Most developing countries were in favour of including a narrowly defined and long-term foreign investment, i.e. FDI, in the possible MFI if there is to be one at all. The United States was not an enthusiastic supporter of an MFI as it thought that the present approach of bilateralism was working quite well for it. However, it was willing to support the EU if the proposed framework was of its liking. According to the United States, a broad-based and open-ended definition (which includes portfolio investment) and pre-establishment rights were necessary to maximize the benefits of investment liberalization and protection. Australia suggested the idea of having a narrower definition for entry (preestablishment treatment) and a broader definition for post-establishment treatment, in part for consistency with BITs. Canada, which supported an MFI as it felt that it could fill the gaps on WTO rules which only covered investment in services and not in goods, believed that the concept of investor has to be sufficiently broad and should apply to the investor while in the process of investing (before and after the point in time at which the act takes place) as well as during the life of the investment. Taiwan became controversial by suggesting that Members could consider provisions for investor-state disputes through the dispute settlement system patterned after the Independent Entity Scheme for WTO Pre-shipment Inspection disputes. Most countries including Malaysia, Hungary, New Zealand, Hong Kong and China objected to this proposal on the ground that it was beyond the Doha remit. The sentiment, however, was shared by most countries as they argued that the WTO was created for Members and not for private parties. Canada suggested that a distinction could be drawn between agreements covering some investment provisions like GATS, TRIPS and TRIMS and a new form of dispute settlement.

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India also made a submission, along with Cuba, China, Kenya, Pakistan and Zimbabwe spelling out investors’ and home governments’ obligations, which included preventing cases of corrupt corporate practices, fraud and bankruptcies. They could also be used to protect the environment, bring transparency in the corporate world and control RBPs, it argued. Box 7.1 The Doha mandate on trade and investment Para. 20. Recognizing the case for a multilateral framework to secure transparent, stable and predictable conditions for long-term cross-border investment, particularly foreign direct investment, that will contribute to the expansion of trade, and the need for enhanced technical assistance and capacity-building in this area as referred to in para. 21, we agree that negotiations will take place after the Fifth Session of the Ministerial Conference on the basis of a decision to be taken, by explicit consensus, at that session on modalities of negotiations. Para. 21. We recognize the needs of developing and least-developed countries for enhanced support for technical assistance and capacity-building in this area, including policy analysis and development so that they may better evaluate the implications of closer multilateral cooperation for their development policies and objectives, and human and institutional development. To this end, we shall work in cooperation with other relevant intergovernmental organizations, including UNCTAD, and through appropriate regional and bilateral channels, to provide strengthened and adequately resourced assistance to respond to these needs. Para. 22. In the period until the Fifth Session, further work in the Working Group on the Relationship Between Trade and Investment will focus on the clarification of scope and definition; transparency; non-discrimination; modalities for pre-establishment commitments based on a GATS-type, positive list approach; development provisions; exceptions and balance-ofpayments safeguards; consultation and the settlement of disputes between members. Any framework should reflect in a balanced manner the interests of home and host countries, and take due account of the development policies and objectives of host governments as well as their right to regulate in the public interest. The special development, trade and financial needs of developing and least-developed countries should be taken into account as an integral part of any framework, which should enable members to undertake obligations and commitments commensurate with their individual needs and circumstances. Due regard should be paid to other relevant WTO provisions. Account should be taken, as appropriate, of existing bilateral and regional arrangements on investment. Source: WTO, Doha Ministerial Declaration.

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According to the Doha Declaration, the Working Group on Trade and Investment was to work further on the clarification of the proposed elements, like scope and definition, transparency, non-discrimination, and modalities for preestablishment commitments based on a GATS-type positive-list approach. However, these remained as complex as before to many of the developing country members and other stakeholders. The Declaration also talked about possible modalities, consensus on which was essential to launch negotiations on the issue. But the issue of modalities was hardly discussed. The EU, Japan, Korea and Switzerland floated a draft note on modalities on investment agreement at the WTO just a few days before the Cancun Ministerial Conference. However, the draft hardly went beyond what had already been said in the Doha Declaration. Paragraph 2 of the draft said that paragraphs 45–51 of the Doha Declaration would apply to the negotiations meaning that the negotiations on investment had to be concluded by 1 January 2005. Moreover, paragraph 3 said the negotiating group on investment would have its first meeting within a month of the decision, and the Chair would conduct negotiations with a view to present a draft text by 30 June 2004. This meant that the negotiations and the outcome would have been linked to the Doha Work Programme and would have been a part of a single undertaking. This was quite unreasonable, as the negotiations on the Doha Work Programme started immediately after the Doha Ministerial, whereas the negotiations on investment were yet to begin. This was quite unrealistic even in absolute term as there would have barely been nine months to negotiate on such a controversial issue. Expectedly, some developing countries refused to even discuss the draft. There remained wide divergence of views as before. This can be seen from the wording of the draft Ministerial Declaration that was circulated just before the Ministerial. It envisaged two scenarios for all the four Singapore issues. In the first scenario, the Members agreed to commence negotiations on the basis of modalities set out in the annexures. In the alternative scenario, the members recognized that the situation did not provide a basis for the commencement of negotiation in these areas. However, India and some other developing countries criticized the scheme as the said annexures had not been discussed adequately and neither had they been circulated to the members. Interestingly, China also put its weight behind India on this issue. Nevertheless, the EU and its allies continued to pressurize to go ahead with all the Singapore issues including investment at Cancun. They even linked negotiations on investment with any possible concession in agriculture. Predictably, there was stiff opposition from the developing world. Under such pressure, the EU agreed to drop investment along with competition policy, another Singapore issue. But it was probably too late. The talks at Cancun had collapsed.

A potential WTO Agreement and the existing instruments As we have seen, various countries continued to address the issue at bilateral and regional levels by signing treaties containing provisions on investment

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explicitly or implicitly. It is worthwhile to look at some such agreements both inside and outside the WTO, not only because they can provide useful lessons for multilateral negotiations on investment but also because many of them may be in conflict with any agreement on investment at the WTO. Indeed, the Doha Declaration recognized this by including ‘due regard for other WTO provisions and existing bilateral and regional agreements’ in it (Box 7.1). Based on the WTO rules of NT and elimination of quantitative restrictions, the TRIMS Agreement prohibits a number of measures mentioned in an illustrative list.3 It is not clear how TRIMS would coexist with a generic agreement on investment. Would it be incorporated in the proposed agreement on investment by reference? Should its scope extend to include investment measures affecting trade in services? Or should its scope of prohibited practices be modified or further clarified? Another related question is the issue of tackling the trade and investment distortions resulting from the proliferating investment incentive activities, which are nothing but the positive measures. They are used in both developed and developing countries and can be considered to be closely associated to the imposition of performance requirements or the negative measures. The issue is partly addressed by the ASCM, as certain investment incentives fit within the definition of a subsidy and as such are prohibited (UNCTAD 2000a). However, the provisions pertaining to investment in the ASCM have not received adequate attention and deserve greater analytical scrutiny. The agenda on investment negotiations as outlined in Doha Declaration did not touch upon the issue. But silence on this front may be broken, if attempts are made to strengthen or broaden disciplines on performance requirements. It is also not clear how the provisions on the treatment of commercial presence in the GATS can exist alongside a comprehensive generic agreement on investment. The GATS involves a broad definition of investment and hence a narrower definition that most developing countries would prefer in a potential agreement might be in conflict with GATS. Similarly, an agreement without a pre-establishment commitment may lead to a conflict of principles with GATS, as it establishes both pre- and post-establishment rights (Sauve 2001). If an agreement on investment at the WTO focuses solely on measures affecting trade in goods, leaving the GATS intact, then the question arises as to what kind of impediments the agreement would address, given that an overwhelming majority of investment restrictions arise in services industries vis-à-vis manufacturing? The list of reservations lodged under the NAFTA and the aborted OECD MAI indicates that some 80–85 per cent of them arise in services. Indeed, the bulk of the discriminatory measures affecting foreign investment today is maintained in the services sector and foreign investors in manufacturing are often given better than NT. Adopting different standards of investment liberalization for goods and services may also create complicated situations, as, very often, the distinction between investment in goods and that in services may be blurred and such possibilities are increasing with the growth of technologies. BITs usually include provisions regarding the area of application, admission

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and promotion of investment, general treatment and regulations on specific issues, including expropriation, losses as a result of armed conflict and other forms of non-commercial risks, transfer, operating conditions of investment, subrogation and settlement of disputes. Less traditional provisions cover restrictions on performance requirements and transparency. Although BITs are essentially similar in nature, there are significant differences between their specific provisions. Mainly, there are two BIT models, the US model and the European model. In general, given the sort of provisions usually found in each type of BIT model, it can be said that the disciplinary provisions in the US model are of a higher level than the provisions in the European model. In the European model, which is more traditional, the host country permits FDI to enter its territory subject to its laws. This implies that the stated standards apply only at the post-investment stage (Mehta et al. 2001). The US model establishes the right of the investors to set up a business in all sectors except in those mentioned as ‘reserved’, which implies the application of NT and MFN treatment at entry and afterwards as well. In addition, this model contains treatment provisions for a series of specific and practical issues, such as performance requirements, temporary entry of investors and certain categories of personnel, and nationality of the members of the boards of directors. The US model also takes a broader definition of investment. The main reason for the success of BITs in most countries is that they usually follow the European model. They do not place any restrictions on host countries’ policies regarding admission of FDI. BITs’ provisions address the protection and equitable treatment issues of FDI after the investment has taken place in conformity with the host country’s laws and regulations (Mehta et al. 2001). Although the United States has been insisting that any agreement on investment at the WTO must take a broader definition of investment, it will be very difficult for the developing countries to accept that. As per the Doha Declaration, the proposed investment agreement was supposed to take a GATS-type positive-list approach as against the negative-list approach adopted by the US model of BIT. Hence, in terms of provisions or stringency, an agreement at the WTO, if at all, is likely to lie somewhere between the European and the US models of BIT. Thus, a WTO agreement on investment will be in conflict with both types of BITs that are in force. As per the current discussions, there is no indication that the BITs will be withdrawn in case a multilateral agreement is signed. But if they exist side by side, there will be serious complications as to which agreement may be applicable in a particular case. The extent to which and the manner in which these issues are incorporated in specific regional instruments vary considerably, as does the rigour with which they are addressed. However, there is a high chance that most of these agreements will be in conflict with a WTO agreement on investment. Of course, it may be argued that the investment agreements that were signed as part of the regional integration process will not pose so much of a problem as the regional agreement will take precedence over the multilateral agreement and

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there are institutional mechanisms at regional levels to deal with such issues. However, the same cannot be true for the BITs or the interregional agreements, as there are no institutional mechanisms to enforce these agreements. Moreover, even the regional agreements may pose problems as there might be cases where a third party that is not part of the regional bloc is involved.

Conclusion Among the four Singapore issues, investment had been the most controversial. Many developing countries are not convinced about its usefulness, as no evidence exists that an international investment agreement would increase the investment flows to developing countries. Unconvinced, developing countries are not very comfortable with the existing investment-related provisions in the WTO acquis. On the whole, the economic case for an MAI at the WTO in line with the EU proposal is quite weak. However, the basic purpose that an investment agreement is going to promote is not development but to ensure unrestricted freedom for the TNCs to operate in developing countries without providing any safeguards for misuse of their freedom. It is noteworthy in this context that an MAI was attempted at the OECD. Discussions on the MAI faltered on the issue of rights to entry and establishment. In the negotiations, France clashed with the United States over opening up its territory to the American audio-visual industry on the grounds that it would harm France’s cultural and linguistic heritage. The negotiations proceeded in quite a tense manner and the agreement died in 1999 when France pulled out after four years of negotiations. It is quite strange that when the MAI could not be adopted by OECD members who are a relatively homogenous group, a similar agreement was attempted at the WTO where membership is much more diverse. More importantly, it was done at the behest of the EU where France is a powerful member. However, it has been pointed out by many that the pushing for investment did not mean a genuine interest in an investment agreement but a Machiavellian game plan to stall any progress in liberalization in agriculture in which France has a strong interest. If that is indeed the case, then probably the proposal for an agreement on investment at the WTO will remain buried forever as the July framework agreement already envisages substantial liberalization of agriculture. Only time will tell! The proponents of a multilateral agreement emphasized that a comprehensive framework for investment within the WTO might be necessary if the issues of globalization of the world economy and liberalization of trade and FDI regimes were to be effectively tackled. Indeed, capital-exporting countries have been attempting to adopt a comprehensive multilateral framework for long. They were unsuccessful due to resistance from developing countries who believed that such rules would probably serve the interests of the rich capital-exporting countries. In this context, signing of BITs became part of the capital-exporting countries’ strategy to create a more investor-friendly legal environment in host coun-

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tries. They also got some other instruments at both regional and multilateral fora aimed at liberalizing foreign investment. Thus, significant liberalization has occurred even in the absence of a multilateral framework – a fact that is being used both by the proponents and by the opponents of a multilateral investment agreement to put forward their views. The opponents argue that since significant liberalization has occurred even in the absence of a multilateral framework, such a framework is not necessary. The proponents, however, argue that such an agreement would reduce conflicts between countries’ norms and poor allocation of resources caused by a great number of different regulations, contribute to the continuity of investmentrelated policies and promote common and more stable rules and disciplines. There might be some justification for adopting a comprehensive MFI, especially when the existing scenario is not so favourable to the developing countries, considering their levels of commitment in different bilateral and regional agreements. But adopting such an agreement, keeping the existing investment instruments both within and outside the WTO intact, is unlikely to meet its desired objectives and may even complicate the situation further. If ‘due regard for other WTO provisions and existing bilateral and regional agreements’ in the Doha Declaration is interpreted as all such provisions or agreements taking precedence over any future MAI, then there will be limited scope for its application.

8

As if TRIPS was not enough1

Introduction Following the conclusion of the TRIPS agreement in the UR of trade negotiations, the ‘international politics’ of intellectual property have mainly taken place at the WTO. However, after the global hue and cry on the issue of TRIPS and public health, particularly in the run up to the Doha Ministerial Meeting and later, it has become difficult to achieve new and higher intellectual property standards at the WTO. That does not mean efforts to create higher IPRs standards have stopped. New IPR standards continue to be set under bilateral trade agreements and the auspices of WIPO.2 The United States has been particularly active in pursuing these trade agreements with other countries and imposing TRIPS-plus conditions. Nevertheless, the EU has not been far behind. It has signed several bilateral agreements with TRIPS-plus provisions. TRIPS plus essentially means creating those rules and regulations with respect to IPRs that go beyond the minimum standards laid down in the TRIPS agreement or that take away the flexibility given in the TRIPS agreement (Drahos 2001). For example, if a bilateral agreement has a rule according to which the partner country has to allow patenting in life forms, then that can be considered a TRIPS-plus condition. This obligation is more stringent than TRIPS, which does not oblige a member to allow or recognize patenting in life forms.

Bilateral FTAs Interestingly, while it is the United States that has attracted all the attention for pushing TRIPS-plus commitments through bilateral FTAs, it is the EU that set the process. The United States started it with its FTA with Jordan in 2000, but the EU started with the bilateral Mediterranean Association Agreements (MED), the first of which was signed with Tunisia in 1995. Seven of them have been concluded. The other countries are Israel (1995), Morocco (1996), Jordan (1997), the Palestinian Authority (1997), Algeria (2001) and Lebanon (2002). The Trade, Development and Cooperation Agreement (TDCA) between the EU and South Africa was signed on 11 October 1999 and has been in force provi-

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sionally and partially, since January 2000, and fully since May 2004. The Economic Partnership, Political Coordination and Cooperation Agreement between the EU and Mexico were signed on 8 December 1997 and came into force in October 2000. The most recent FTA concluded by the EU is the one with Chile, signed in November 2002 and provisionally in effect since February 2003. Since some of its partners are not member of the WTO, the EU put TRIPS obligations in its FTAs as well. But it has also pushed parties to go beyond the requirement of the WTO TRIPS agreement. For instance, in the EU–Egypt Agreement, parties shall grant and ensure adequate and effective protection of IPRs in accordance with the prevailing international standards, including effective means of enforcing such rights. In some other agreements, however, the parties are to enforce protection of IPRs with ‘the highest international standards’: ‘The Parties shall ensure adequate and effective protection of intellectual property rights in conformity with the highest international standards.’3 It is uncertain exactly which standards these are but could relate to either WIPO standards or more restrictive standards within new treaties coming into force. Instead of including specific TRIPS-plus provisions as such, the EU FTAs ask the partner countries to accede to a number of multilateral treaties/conventions including International Union for the Protection of New Varieties of Plants (UPOV) to which they were not a party (Box 8.1). The list of multilateral conventions/instruments as mentioned above went on expanding along with time and later agreements. While some of these instruments are also in conformity with the TRIPS, some of them impose higher obligations. These are also generally negotiated and signed by developed countries and developing countries are not yet party to most of them. An example is the Budapest Treaty on the International Recognition of the Deposit of Micro-organisms for the Purposes of Patent Procedure (1977 modified in 1980). There is no reference to the Budapest Treaty in the TRIPS agreement, which has 49 members, 47 of which are from the North.4 Interestingly, while the agreements generally refer to the UPOV 1991, or both UPOV 1978 and 1991, in case of South Africa the reference is made to the UPOV 1978 only where commitments are lower compared to UPOV 1991. The major problem with the UPOV (1991), according to many experts, is that there are no provisions for benefit sharing and limited reference to farmers’ rights. It is important to recall that Article 27.3 (b) of the TRIPS agreement gives the member countries of the WTO complete freedom in protecting its plant varieties either through an internationally recognized patent protection system or through a sui generis system. Thus, these FTAs take away the flexibility that the TRIPS agreement provides to WTO members by imposing a ‘TRIPS plus’ measure. An interesting provision related to UPOV 1991, found in the EU–Algeria Agreement, is that the accession to this convention may be replaced by the implementation of an adequate and effective sui generis system of protection of plant varieties if both parties agree. Similarly, the United States also obliged its partners to join several other international treaties on IPR including UPOV, Budapest Treaty, etc. However,

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Box 8.1 TRIPS-plus commitments in EU FTAs In the EU–Mediterranean Agreements, generally, the following multilateral treaties/conventions are specifically mentioned. • • • • • • • • •

Paris Convention for the protection of industrial property (Stockholm Act 1967 and amended in 1979). Berne Convention for the Protection of Literary and Artistic Works (revised at Paris in 1971 and amended in 1979). Nice Agreement concerning the International Classification of Goods and Services for the purposes of the Registration of Marks (Geneva, 1977, amended in 1979). Patent Cooperation Treaty (Washington, 1970, amended in 1979 and modified in 1984). Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure (1977, modified in 1980). Protocol to the Madrid Agreement concerning the international registration of marks (Madrid, 1989). Trademark Law Treaty (Geneva, 1994). International Convention for the Protection of New Varieties of Plants (UPOV) (Geneva Act of 1991). Agreement on Trade-related Aspects of Intellectual Property, Annex 1C to the Agreement establishing the World Trade Organization (TRIPS, Marrakesh 1994).

The South African Agreement also finds mention of: • •

International Convention for the Protection of Performers, Producers of Phonogram and Broadcasting Organizations (Rome 1961); WIPO Copyright Treaty (WCT), 1996.

The EU–Chile Agreements go further ahead to include the following: • • • • •

World Intellectual Property Organization Performances and Phonograms Treaty (Geneva, 1996); The 1971 Strasbourg Agreement Concerning the International Patent Classification (Strasbourg 1971, amended in 1979); Convention for the Protection of Producers of Phonograms against the Unauthorized Reproduction of their Phonograms (Geneva 1971); Locarno Agreement establishing an International Classification for Industrial Designs (Locarno Union 1968, amended in 1979); The Vienna Agreement establishing an International Classification of Figurative Elements of Marks (Vienna 1973, amended in 1985).

Source: Author’s compilation.

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the United States went much beyond them and included many specific provisions to tighten the IPR protection regime in the partner countries. The notable countries (or group of countries) with which the United States has signed FTA with TRIPS-plus provisions are Jordan, Vietnam, Singapore, Chile, Morocco, Australia, Bahrain and DR-Central American Free Trade Agreement (DRCAFTA).5 One TRIPS-plus provision is related to the term of patent. The FTAs oblige partners to give extension of patent term for delays caused by regulatory approval process, while no such obligation is there in TRIPS. A more important issue is probably the patentability of life forms. Though the exact provisions vary across partner countries, all FTAs are stronger on the issue compared to TRIPS, which exclude life forms from patentability. While some of the FTAs have no general exclusion from patentability of life forms, some put explicit obligation to provide patent protection for plants and animals, some of them can exclude animals but not plants. Most of the FTAs also put obligations to provide data exclusivity for five years or more, which is not an explicit TRIPS obligation. Another TRIPS-plus provision found in some of the FTAs relates to parallel imports in view of which patent-holders may limit parallel imports through licensing contracts, for pharmaceutical products in some FTAs but for all products in others. Some of the FTAs have made issuing of compulsory license more difficult. One important, dimension of TRIPS-plus commitments, as noted by some experts is that TRIPS does not grant any exemption from MFN obligation in the presence of RTAs, as does GATT under Article 24. Hence, additional commitments offered to one WTO member in the area of IPR must be offered to all WTO members. According to the noted IPR expert, Carlos Correa (2004), if a country grants more advantageous conditions to members of a RTA (established after the formation of the WTO), such conditions should be extended automatically and unconditionally to all the WTO member countries. Similarly, Peter Drahos (2001) views, the broad effect of MFN is to equalize the granting of benefits and favours amongst all the countries to which the MFN principle applies. Even if, for the sake of argument, it is accepted that exemptions can be made in case of RTA partners, it may not have any practical significance, as companies are free to apply for IPRs anywhere in the world. For example, if it is the United States that is the only country to have extracted TRIPS-plus obligations from its partners, companies from outside the United States or its partners countries can get their patents registered in the United States or any of its partner countries and take advantage of TRIPS-plus commitments in all such countries. Thus, companies from across the world may migrate to the United States as far as patent registration is concerned. So, in effect, countries that accept higher IPR standards by being a partner of the United States in an FTA would be forced to grant the same standards to all IPR-holders across the world.

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The WTO–WIPO linkage In the context of WIPO, the new initiative, known as the Patent Agenda, launched in September 2001, may greatly influence the shape of the international intellectual property system. WIPO is one of the specialized agencies of the United Nations system of organizations, with 180 nations as member-states. WIPO’s principal objective is to promote the protection of intellectual property throughout the world through cooperation among states and, where appropriate, in collaboration with other international organizations. It administers 23 international treaties dealing with various aspects of intellectual property protection. The WIPO patent system has been based on two main treaties, namely the Paris Convention for the Protection of Industrial Property (Paris Convention)6 and the Patent Cooperation Treaty (PCT). The Paris Convention, considered the cornerstone of the existing international patent system, established substantive standards in various areas of intellectual property including patents, while the PCT established procedural standards. In addition to these two treaties, the Budapest Treaty on the Deposit of Micro-organisms established a system for the international recognition of deposits of micro-organisms in specified institutions for the purposes of patent disclosure. Though WIPO was considered an important institution during the 1980s, due to the lack of uniform standards and a strong enforcement mechanism, key industry players in the United States, persuaded their government that WIPO had failed to secure appropriate levels of intellectual property protection in other countries. They lobbied to bring the issue of IPR protection within the GATT system (Drahos 2002). An obvious advantage of GATT vis-à-vis WIPO was the possibility of applying trade sanctions on countries found as non-compliant. Developing countries, as expected, resisted the proposal of negotiating on IPR in the UR. However, the United States, supported by the EU, succeeded in its efforts through bilateral dealings and the threat of unilateral retaliatory measures such as under Section 301 of the US Trade and Tariffs Act, as well as promises of concessions in agriculture, textiles and clothing. The TRIPS agreement introduced the concept of minimum standards for IPRs in diverse areas and placed heavy obligations on national governments. However, there are some ‘flexibilities’ available for the design and implementation of the patent regime at the national level. Much of this flexibility now faces the possibility of being eroded or suppressed under the new WIPO Patent Agenda. Though WIPO is much weaker as a forum compared with the WTO, it is not a toothless organization. In an arbitration case where an arbitral award is decided by the arbitrator/arbitration tribunal of WIPO, if that award is rendered in a country that is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘New York Convention’), it may be enforced relatively easily in any of the more than 120 signatory countries to the convention. Moreover, once higher standards were adopted at WIPO, pressure would

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build up at the WTO for further increases in intellectual property standards for all its members, under Article 71 of TRIPS. It should not be forgotten that much of the substantive provisions of TRIPS are drawn from WIPO. Due to the existing international geopolitical situation, it would be extremely difficult to raise IPR standards at the WTO. Hence, the United States – the prime driver of higher IPR standards – thought it prudent to adopt a two-stage procedure: to raise standards first at WIPO and then export these higher standards to WTO. This is part of the gamelan where the United States has been preparing the ground for higher IPR standards globally through several bilateral agreements, as well as other means like asking China, or even LDCs like Nepal and Cambodia, to join the UPOV Convention as a condition for accession to WTO.7 The discussions and negotiations at WIPO are therefore extremely important for developing countries, as they set the agenda for the development and harmonization of intellectual property standards at the multilateral level.

The WIPO patent agenda The WIPO Patent Agenda was presented to and approved by the WIPO Assembly, the Paris Union Assembly and the PCT Assembly in September 2001. The patent agenda activities are taking place under three main processes in WIPO. These are: 1 2 3

the move to promote the ratification of the Patent Law Treaty (PLT); the effort to reform the PCT; the ongoing negotiations on the draft Substantive Patent Law Treaty (SPLT).

These processes are ultimately oriented to create an international legal framework for a universal patent. The three main pillars of the patent agenda are briefly described below.8 PLT. The PLT, adopted in Geneva on 1 June 2000, mainly aims to harmonize the procedures for applying for obtaining and maintaining patents by means of a set of standardized formal requirements for national and regional patent offices. The PLT is not yet in force and only four countries have ratified and/or acceded to it, while 53 others and the European Patent Organization (EPO) have signed the treaty.9 The PLT provisions attempt to reduce the risk of errors by patent offices, as well as the time and costs of procedures for patent applicants, thereby facilitating the acquisition of patent rights internationally. The PLT provides a clear linkage to the PCT for current and any future patent law harmonization (Nolff 2001). Reforms of PCT. The PCT was concluded in 1970, amended in 1979 and further modified in 1984, with the aim of providing a single system under which patent applicants could file one international application that would be valid in all the contracting states designated by the applicant. While certain stages are

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still reserved for national and/or regional patent offices, the system allows for international publication, an international prior art search and even an international preliminary examination if the applicant so desires. The PCT system is seen as a great success upon which a truly international patent system can evolve. It has been built upon and has respected differences in substantive patent law. There are only three mandatory PCT obligations (Nolff 2001). These are: 1 2

3

A regularly filed PCT application must have the effect of a regularly filed national application. A PCT application cannot be processed by national authorities before the expiry of a certain time limit, unless expressly requested by the PCT applicant. A PCT contracting state cannot require, subject to certain exceptions, compliance relating to the form or contents of a PCT application, which differs from the requirement provided by the PCT.

The process of reforming the PCT started in 2000 with the United States championing it. The reform of the PCT is geared towards introducing amendments to the treaty to simplify and streamline procedures while at the same time aligning it to the new PLT standards. The changes that are anticipated relate to coordination of international searches and international preliminary examination and time limits for entering the national phase. The objectives of the reform, as presented by its proponents, include: 1 2 3

to streamline and simplify procedures for patent applicants;10 to reduce the duplication of examination tasks and remedy the overload of patent offices due to increase in patent applications; to reduce the cost of filing for patent applicants and facilitate the acquisition of the same patent in a large number of countries.

The initiative to reform the PCT has found substantial support from both developed and developing countries, but there is no consensus on several aspects of the reform, including its scope.11 Colombia, in particular, is opposed to the grand objective of the reform, that is, the grant of ‘international patents’. Some others have emphasized that the reform should not only take into account the interests of applicants but also those of third parties. SPLT. The current negotiations on SPLT taking place in the WIPO standing committee on the law of patents (SCP) are aimed at drawing up initial, but uniform and largely complete, patent law standards relating to issues of prior art, novelty, utility and inventiveness, requirements for proper disclosure, drafting and interpretation of claims, grounds for refusal of an application and for revocation and invalidation of a patent. The draft treaty, as prepared by the WIPO secretariat, covered the substantive issues. Some of these issues were dealt with by the TRIPS agreement, notably the rights conferred by the patent, term of

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patents and the reversal of burden of proof, while many of the rest are now part of the agenda of the SCP on its work on the SPLT. The SPLT differs from the PLT, the PCT and the TRIPS in several aspects. Unlike the PCT and the PLT, it seeks to prescribe substantive standards to determine what an invention is, how the patentability is to be established and what the scope of patent protection will be. It goes beyond TRIPS, which indicates the requirements for patentability (novelty, inventive step or non-obviousness, and industrial applicability or usefulness)12 but fails to define such concepts or what an ‘invention’ is, and which also is devoid of rules on the scope and interpretation of patent claims, essential to establish the scope of protection. However, from the perspective of developing countries, the SPLT is, as discussed below, potentially the most troublesome building block of the international patent system envisaged in the WIPO agenda. If this system were adopted, it would establish new binding international standards in critical areas of patent law, which until now have been left to national governments. Discussions on the SPLT have not progressed much. However, the participation of developing countries has been quite limited. Yet, some controversies have already arisen. Some of the main controversial issues are discussed below. Defining patentability requirements. The draft SPLT – which contains specific definitions on what is eligible for protection, on the requirements of patentability and on the concept of ‘prior art’ – would create the basis for a universal concept of patentability. The proposed SPLT rules will in all likelihood lead to, among other things, the disappearance of the freedom to determine patentability for biological materials, including genes. For instance, under the US laws, an isolated and purified form of a natural product can be patented, while the Brazilian patent law (1996) stipulates that no patents shall be granted with respect to living beings or ‘biological materials found in nature’, even if isolated, including the ‘genome or germplasm’ of any living being. Thus, if the draft SPLT were adopted, the room currently used to limit the patenting of biological materials may disappear. Technical character of inventions. As per current multilateral arrangements, for an invention to be patentable, it should show a ‘technical character’. However, the United States and its allies argued that ‘requiring a technical character was unnecessarily limiting the innovations in new fields of endeavour, such as information technology and biotechnology’, and that the term ‘in all fields of technology’, which appeared in Article 27.1 of the TRIPS agreement was not mandating any requirement relating to technical character. The US proposal aims to export to the rest of the world its policy of patentability of software, business methods and research tools. Software is patentable as such in the United States. In Diamond vs Diehr and Diamond vs Bradley (both decided in 1981), the US Supreme Court applied a liberal rule that permitted the patenting of software algorithms. The US patent and trademark office followed up by expanding the definition, by issuing software patenting guidelines of patentable subject matter.13 However, in European countries and

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elsewhere, software as such is not deemed an ‘invention’ due to lack of industrial applicability.14 Business methods include those applied to business activities such as buying and selling, marketing techniques, financial schemes and strategies, generally supported on computer software and networks. The State Street Bank vs Signature Financial Group case also opened the way for the controversial patenting of business methods. However, the broad definition of ‘invention’, allowing the patentability of business methods, is controversial even in the United States. ‘Research tools’ are methods or substances used to undertake research in specific fields. Genes are an example of research tools used to identify possible therapeutic molecules or therapies, and patents on genes are likely to restrict their use as research tools. It is feared that the progress of science may be slowed down, particularly in developing countries, because of the need to obtain multiple licences as well as the escalation of research costs due to licence fees. Exclusions from patentability. Another important issue raised by some developing countries was the need to incorporate in the draft treaty Articles 27.2 and 27.3 of the TRIPS agreement,15 and to include a general provision allowing exceptions to patentability, which would be necessary for the protection of public health and environment. The United States and the biotechnology industry, in particular in relation to plants and animals, opposed this proposal by arguing that the TRIPS agreement ‘provides for minimum requirements under the WTO’ and that the SPLT, in contrast, would aim at establishing ‘best practices at the international level’. It is quite clear that if the US proposal is accepted, the national policy space of other countries will be curbed further. Infringement and doctrine of equivalence. The issue of the ‘theory of equivalence’ to be applied16 has been outside the TRIPS agreement standards and left entirely to national law. Thus, it is national legislation that defines when products or processes that are not literally described in a claim may be deemed ‘equivalent’ and therefore considered as infringing on patent rights. The approach adopted in this regard should provide adequate protection for the inventor’s interests while leaving more room for third party innovations in the field covered by the patent. It is crucial for developing countries to have as much room as possible for inventing around patented inventions, a view shared by many in developed countries as well, where some experts believe that a narrow doctrine of equivalence would more likely promote innovation. Adopting a global approach in this area is fraught with danger and is also a further encroachment on the national policy space. One of the most controversial provisions of the draft is the one that would prohibit member countries from imposing any further conditions to obtain a patent other than those specifically provided for in the treaty. Such a requirement would tie the hands of national governments in limiting or remedying the misappropriation of genetic resources and traditional knowledge, as they would not be able to ask for more complete information on the ‘prior art’. The negotiation process at the SCP showed wide disparity in the involvement

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and preparation of developing countries compared with that of developed countries, and many NGOs representing corporations’ and patent lawyers’ interests but none representing the views of consumers or developing countries. In a study, Drahos concluded that due to the continued use of webs of coercion by the United States and EU, developing countries still have comparatively little influence in international intellectual property standard setting (Drahos 2002). It may be mentioned that the NGOs mentioned here are not those organizations representing public interest. All of them are essentially industry associations or lawyers’ associations representing business interests.17 Curiously, despite their ‘observer capacity’, these NGOs participated in the debates on the same footing as governments, making proposals or ‘reservations’, supporting or opposing the positions of some governments.18

The development agenda Unfortunately, despite lessons learnt from the TRIPS negotiations under the UR, developing countries were not quick enough to respond appropriately to the new WIPO initiative. Although their participation in the TRIPS council debate on the mandatory review of the agreement is showing some signs of maturity, their participation in the agenda formulation and subsequent negotiation under the WIPO system has not been up to the mark. With their improved understanding on issues they can very well block negotiations (of the WIPO Patent Agenda) in the areas that go against their national interests (such as those taking away TRIPS flexibilities) and can incorporate elements that are favourable to them. Finally, Argentina, Brazil and Bolivia took a lead and developed and submitted alternative proposal in this regard in October 2004 that came to be known as the development agenda.19 The group of countries that took the lead came to be known as the Group on Friends of Development.20 Other developing countries joined them with their inputs and support. The agenda included measures to ensure that development is at the heart of all WIPO programmes and activities and that WIPO contributes to the fulfilment of the Millennium Development Goals. Broadly, they included the adoption of a high-level declaration on intellectual property and development; amending the WIPO Convention; the inclusion of provisions on technology transfer, competition, etc. in treaties under negotiation; establishing technical assistance programmes based on particular principles and objectives; and establishing a working group on the development agenda. A particular focus of the agenda has been to not impose higher standards of IPR protection and to promote ways in which WIPO can help safeguard sovereign interests of countries and promote indigenous science and technology-based development. As expected, the agenda faced stiff opposition from developed countries particularly the United States who argued that a development focus in the activities of the WIPO essentially involved enhanced technical assistance to strengthen their laws related to IPRs and their enforcement. Developing countries, however, challenged this view and argued that, too strong an IPR

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protection regime retards domestic industries in developing countries, compromises access to vital products such as life-saving drugs and prevents developing countries from realizing their potential in scientific and technological innovation. The developed countries got lead in an informal consultation called by the WIPO in Casablanca in February 2005, which came out with a statement that the treaty should be put on a fast track and the issues raised by developing countries should be dealt with separately. The statement was severely criticized by the Group on Friends of Development and other developing countries and the next WIPO General Assembly that took place in October 2005 witnessed a stormy session. The Assembly finally agreed to establish a provisional committee to take forward the work on the development agenda and report back to the 2006 General Assembly, while on SPLT, the Assembly agreed to hold an informal open forum in Geneva in the first quarter of 2006. This was followed by the creation of the Provisional Committee on Proposals related to a WIPO Development Agenda (PCDA) which has been discussing the 111 proposals that have been made since October 2004, when the ‘development agenda’ for the organization was first submitted. Notable progress has been made since then as the members have already agreed to some of the proposals, the remaining proposals were more divisive than the 40 that have been resolved. Most notably, the Members approved proposals asking WIPO to expand the scope of its activities aimed at bridging the digital divide, to promote technology transfer and to ‘take appropriate measures’ to help developing countries take advantage of the various flexibilities that exist in international agreements. They also agreed on a proposal that called for WIPO ‘to approach intellectual property enforcement in the context of broader societal interests and especially development-oriented concerns’, in accordance with the stipulation in WTO rules that: the protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare.

The issues at the WTO Doha agenda As mandated by the original agreement, TRIPS is also under review under the DR, though in some respect, this part of the agenda followed a different path. In the area of TRIPS, the most important issue has been how to enable countries without pharmaceutical manufacturing capacity to take advantage of the compulsory licensing provision in the case of a public emergency, as a compulsory licence is issued only to domestic companies. Other items on the agenda are:

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extension in coverage of GIs for goods other than wines and spirits; clarification of the relationship between TRIPS and the Convention on Biological Diversity; appropriate mechanisms for the protection of traditional knowledge and folklore.

The proposed solution to compulsory licensing and lack of pharmaceutical manufacturing capacity in TRIPS was partly implemented on 30 August 2003. The deadline for the development of a permanent amendment to TRIPS was extended to 31 March 2005, but this date was missed. Discussions at the last scheduled TRIPS Council, in October 2005, failed to reach an agreement. The TRIPS Council did take a decision on an amendment to TRIPS on the issue of compulsory licensing just before the Hong Kong Ministerial. No progress was made on other issues concerning TRIPS. The decision to amend TRIPS has been adopted. However, no progress has been made in other areas like GIs or the issue of the relationship between TRIPS and the Convention on Biological Diversity.

Conclusion The TRIPS agreement has already introduced the principle of minimum intellectual property standards. Thus, any subsequent bilateral or multilateral intellectual property agreement can only necessarily create higher standards. Thus, the patent agenda can now only aim at higher standards and towards more harmonization. It essentially aims at introducing new standards that would exclude the flexibility available under the TRIPS agreement. However, preserving flexibility in framing national patent laws is a necessary but not sufficient condition to allow countries to adapt patent standards to their own needs and circumstances, as far as permitted under existing international obligations. There is growing recognition that the regulation of patents and other IPRs cannot be reasonably made with a unique, universal standard. Different socioeconomic conditions and levels of development require different intellectual property systems (CIPR 2002). A recent World Bank report shows that the patent system may entail considerable short-term costs for developing countries, mainly due to administrative costs and problems with higher prices for medicines and key technological inputs, while ‘long-term benefits seem uncertain and costly to achieve in many nations, particularly for the poorest countries’ (World Bank 2001a). Moreover, higher standards of patent protection are unlikely to have a positive effect on local innovation, except in those few countries (and sectors) that have reached a certain level of technological development and have the capacity to finance substantial R&D. History shows that even some well-developed OECD countries used a softer approach towards IPR protection until a threshold level of technological advancement was achieved. For instance, pharmaceutical products were excluded from patent protection in Germany till 1968, in Switzerland till 1977,

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Italy till 1978, Spain and Portugal till 1992, and Finland till 1995. In countries with a longer history of pharmaceutical product patents, such as Canada, France and the United Kingdom, compulsory licensing provisions were quite liberal (Chang 2002). India’s pharmaceuticals sector is yet another example of benefiting from more relaxed patent regime (Nanda and Lodha 2002). But the TRIPS agreement largely denies developing countries the opportunity to adjust and evolve their IPR systems as they develop. This will be more so if the WIPO Patent Agenda were adopted. Hence, while the immediate objective of the United States and other proponents of the PCT reform is to streamline the procedures and reduce duplication and costs, the final objective is to be able to grant a global patent. The adoption of such a system would also only mean that most national patent offices would become superfluous. Considering the power and tactics of countries like the United States in pushing the second round of harmonization process under the WIPO Patent Agenda, newer and higher standards of IPR protection under WTO aegis cannot be ruled out. Developing countries have just started and LDCs are yet to implement TRIPS, and its actual impact is yet to be felt or assessed. Indeed, there are sufficient reasons to believe that post-2005, most of these countries will find it difficult to live up to the TRIPS commitments, and the threat of trade sanctions will be ever-present. They are not in a position to absorb yet another shock. Fortunately, the unity of developing countries on the development agenda has been a positive development and they have been able to register some success points on the development agenda. However, it is still to be seen how this development agenda can in the future blunt the edge of the SPLT that is being negotiated in parallel.

9

WTO and environment Think locally, act globally?1

Introduction Think globally, act locally – was the slogan adopted by Rene Dubos as an advisor to the United Nations Conference on the Human Environment in 1972. It refers to the argument that global environmental problems can turn into action only by considering ecological, economic and cultural differences of our local surroundings. Dubos believed that there needed to be a creation of a World Order in which ‘natural and social units maintain or recapture their identity, yet interplay with each other through a rich system of communications’. He held to his thoughts on acting locally and felt that issues involving the environment must be dealt with in their ‘unique physical, climatic, and cultural contexts’ (Eblen and Eblen 1994). The idea was turned on its head when some developed countries started restricting imports from other countries, mostly developing ones, on environmental ground, not only because it simply ignored the local contexts in the country of origin but also because the cause of environment was being used to restrict imports to pursue mercantilist objectives. The issue first came to the limelight in 1971 when the GATT Secretariat expressed concerns on the implications of environmental policies on international trade through its document titled, Industrial Pollution Control and International Trade. It was feared that environmental policies would become a form of protectionism. Over time, however, the fear became more prevalent among developing countries as some developed countries became more enthusiastic in using environmental policies to restrict trade. Developing countries, hence, were quite opposed to linking environment with trade. Nevertheless, environment and multilateral trading systems were linked in 1994 through the Marrakesh Agreement, placing sustainable development among the objectives of the WTO. Ironically, while it was the developing countries that raised the issue at the GATT essentially to discourage the use of environmental policies to restrict trade, the current WTO agenda on trade and environment is being pursued by the developed world essentially to legitimize the use of environmental polices to restrict imports. It is argued that trade openness in the presence of inter-country differences in the stringency of environmental regulations will lead to a ‘race-to-the-bottom’

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and polluting activities will shift to developing countries that are generally slack in environmental regulations. However, the empirical evidence in support of such a hypothesis is still lacking. In fact, as can be seen from Table 9.1 that shows increase in FDI stock (which can be a proxy for migration of economic activities) in polluting industries in different groups of countries, developing countries are not attracting polluting industries. Compared to developed countries, developing countries have received less of FDI in polluting industries as a proportion of total FDI over the period 1990–2003. It is also noteworthy that among the six polluting industries considered here, developing countries have attracted relatively more FDI only in mining, quarrying and petroleum where FDI is location specific and guided by availability of minerals rather than environmental regulations. The share of FDI in the six polluting industries in total FDI has fallen significantly globally, but the fall has been much sharper in developing countries. This is also in line with a study that tried to see if Mexico was specializing in polluting and injurious industries as a consequence of NAFTA and did not find any significant evidence for such a hypothesis (Rabindran 2001). It is also argued that trade has a potential to promote development which will contribute to environmental conservation. Therefore, trade can be a promising economic activity for sustainable development. This is based on the so-called Environmental Kuznets Curve argument by which, in the beginning of economic development, little weight is given to environmental concerns, raising pollution Table 9.1 Growth in FDI stock in select polluting industries Industry

Increase in FDI stock between 1990 and 2004 (per cent)

Mining, quarrying and petroleum Coke, petroleum products and nuclear fuel Chemicals and chemical products Rubber and plastic products Non-metallic mineral products Metals and metal products Overall growth in six industries

IC

DC

W

188 130 571 326 406 382 334

793 761 176 307 331 136 327

269 169 464 324 399 326 339

Year 1990 IC Total inward FDI stock in six industries ($bn) Total inward FDI stock ($bn) Share of six industries in total FDI (%)

DC

375 83 1,442 320 26 26

■ W

Year 2004 IC

DC

W

458 1,253 271 1,552 1,762 7,299 1,990 9,364 26 17 14 16

Source: UNCTAD, World Investment Report, 2006. Note IC = Industrialized (developed) countries; DC = Developing countries; W =World.

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along with industrialization, but after a threshold, when basic physical needs are met, interest in a clean environment rises, reversing the trend (Harbaugh et al. 2002). However, trade itself can be damaging to the environment due to transportation of goods as shipping causes pollution. This can be quite significant as one EU estimate says that ships are set to emit more greenhouse gases than all land sources combined by 2020, unless some measures are taken (European Commission 2005). The existing WTO framework, to some extent, can also be a dampener in nations’ efforts towards the protection of environment. If national governments provide subsidies to its companies to adopt cleaner technologies then that can be challenged under the WTO rules on subsidies. Second, adoption of cleaner technology, particularly in developing countries, may be discouraged due to the global IPR regime introduced by TRIPS which can make such technologies more expensive and beyond their reach.

The WTO proposals Environment finally became a part of the mainstream agenda of the WTO as the Doha Ministerial Conference agreed to launch negotiations on the relationship between existing WTO rules and specific trade obligations set out in Multilateral Environmental Agreements (MEAs). The negotiations are expected to address how WTO rules are to apply to WTO members that are parties to environmental agreements, in particular to clarify the relationship between trade measures taken under the environmental agreements and the WTO rules (WTO 2001a). The other items in the area of trade and environment were (WTO 2001a): 1 2 3

examining the issue of granting observer status to multilateral environment bodies; reduction or elimination of tariff and NTBs to environmental goods and services; fisheries subsidies.

Side by side, environment has already found its way in many trade agreements that have been signed bilaterally or at regional levels. There has also been use of trade measures on environment grounds some of which went to WTO dispute settlement process (e.g. the Shrimp–Turtle case). However, so far no measure affecting trade taken under an environmental agreement has been challenged in the GATT–WTO system.2 As can be seen above, the WTO has adopted a minimal agenda on trade and environment. This is, in most part, due to resistance of the developing countries. However, when a minimal agenda is agreed upon, there is a chance that the proponents will focus on the issues that are of particular interest to them. Moreover, economists tend to regard the ‘environment’ as a commodity and analyse environmental effects in terms of ‘pollution’ (WWF 2006). Given this, the WTO agenda has become more for promoting MA and for the developed countries

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even in that, rather than promoting sustainable development, or even protecting the environment. This is also reflected in the way negotiations on trade and environment at the WTO have progressed so far. Negotiations on the relationship between WTO rules and MEAs were largely bogged down by procedural issues. Discussions on environmental measures and MA, eco-labelling and paragraph 51 (integrating sustainable development into the Round as a whole) also virtually came to a standstill. Only the negotiations on environmental goods saw some movement. However, the negotiations are far from final even in this area.3

What went wrong The trade and environment agenda at the WTO as it stands now cannot be considered to be a global or an environmental agenda as it has been framed from the perspective of the developed world. As a result, many issues that are truly global or are important from developing countries’ perspective remain outside it. Some of the developed trading nations have already provided their lists of environmental goods that can be considered for reduced tariff rates. As one would expect, in most of these goods, developing countries hardly have any export capabilities. The global environment industry is valued at more than $650 billion. The developed countries account for about 84 per cent of the market. The industry took off in the developed world in the 1970s and grew significantly in the 1980s following the enforcement of stringent environmental standards and regulations. By 1990s, however, the industrial country markets started showing signs of maturity and growth rates declined. Now, the countries in Central and Eastern Europe, Latin America and the Asia-Pacific region, particularly China and India, are showing vibrant growth in the environmental markets. The largest environmental corporations in the world are, however, all from the developed world, particularly from just five countries of Germany, France, the United Kingdom, the United States and Japan. These companies typically provide integrated services and products. The industry is highly concentrated particularly when one considers the segments within the industry (Sawhney 2006). Moreover, many of these goods have multiple uses and once imported, they need not be used exclusively for environmental purposes. To tackle such problems, India has suggested a project-based approach wherein goods would be eligible for lower duty rates only if they are used for environmental purposes. However, this has been facing stiff opposition from the developed world. There could be another problem with the list-based approach. What if a product is listed now as environment-friendly but later it is realized that it is not so benign? Or what if a new product is invented which is more environment-friendly and in view of that a country wants to discourage the use of the product in the existing list? If a list were agreed on now, it would be difficult to change it, as this will require the consent of all the members. This also exposes the fact that the MA concerns predominate concerns for environment protection. When it comes to environmental services, the industry is defined in a broad

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manner. Services such as water utilities and waste water disposal are considered to be environmental services and hence it is argued that such services should be liberalized. But what is the guarantee that liberalization of such services will ensure that water is not drawn from the nature in an unsustainable manner or that waste water is not discharged into rivers untreated unless there is appropriate regulation in place? The primary argument for including the issue of environment at the WTO has been the so-called ‘race-to-the-bottom’ hypothesis. According to this, the enterprises operating out of developing countries get an unfair advantage due to lower environmental standards. They include even TNCs who are originally from the developed world but have production facilities in developing countries. It has also been argued that due to this phenomenon, TNCs will move their production facilities from developed countries to developing countries. This implies that even the TNCs who have much easier access to environmental technologies need not care to adopt them to minimize costs, unless there are regulations. If this were so, then how would the reduction of duty on environmental goods or the liberalization of environmental services help? On the other hand, if there were regulations for environmental standards, would not the enterprises be forced to adopt environment-friendly measures irrespective of duties on environmental goods or the degree of liberalization of environmental services? So the question arises, what would it take to make it a truly global trade and environment agenda? Following are some of the issues that can be highlighted in this regard.

The existing anomalies TRIPS There is widespread apprehension that TRIPS is a threat to the Convention on Biological Diversity, an international treaty adopted at the Earth Summit at Rio de Janeiro in 1992 to conserve biodiversity including genes, species and ecosystems and to promote their sustainable use as well as fair and equitable sharing of benefits arising from their uses (Adhikari 2005). The only explicit reference to the environment in the TRIPS agreement is in Article 27.2 where some of the conditions for exclusions from patentability are noted. Governments can refuse patent applications that threaten human, animal or plant life or health, or risk serious damage to the environment. However, there is a clear qualifier in Article 27.2, that products cannot be excluded from patentability merely because they have not yet been approved by national health and safety regulatory procedures. Most developing countries would find it difficult to use this provision due to their lack of capabilities in the area of science and technology. Moreover, there is no guarantee that a country will consider the issue of preservation of biodiversity in another country. Further, preservation of biodiversity can be a costly affair and the absence of benefit sharing mechanisms in TRIPS can be a threat to biodiversity as most of

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world’s biodiversity is found in developing countries, while the exploiters of these resources are likely to be in developed countries due to their better scientific and technological capabilities. Article 16 of the Convention on BioDiversity (CBD), however, clearly indicates IPRs are not to undermine the working of the Convention (Cullet 2003). However, the stronger dispute settlement mechanism at the WTO might just ensure that TRIPS concerns might take precedence over CBD concerns. The fact that the United States has not ratified the CBD but is a powerful member of the WTO does not augur well for the CBD. There is another way that TRIPS can be a dampener for the protection of the environment. Protection of the environment would require access to new technologies, which are generally made more expensive by TRIPS. This is particularly important in developing countries which are richer in biodiversity and where environment is often more fragile. However, this issue is being addressed only through MA in environmental goods and services. This may not be of much help, as such goods and services could be quite expensive for developing countries even if there is no duty. The United States is the world’s largest producer of environmental technologies and occupy about 33 per cent share of the international market. The other major suppliers are EU, particularly Germany and Japan. The Office of Environmental Industries of the United States proudly claims that the developing nations simply do not have the technologies. If TRIPS could severely restrict access to medicine endangering public health in developing countries, as it is universally accepted now, there is no reason to believe that it would not restrict access to environmental technologies. It would be useful to explore the idea of according the protection of environment the same status as that of protecting the public health in the context of TRIPS. Agricultural subsidies Though fisheries subsidies have been included as an item in the WTO trade and environment agenda, the issue of agricultural subsidies has not been looked at from the same perspective even though it has implications for environment. High subsidies promote use of energy, chemical fertilizers and pesticides, which can create problems for the environment. The high-subsidy regions, namely Western Europe, the United States, Canada and Japan, consume more than half of chemical fertilizers, pesticides and commercial seeds though they occupy less than 20 per cent of total cropped land (Chapter 3). In fact, the EU, which is the most enthusiastic proponent of the environment agenda at the WTO, consumes almost half of the pesticides consumed globally despite occupying less than 10 per cent of cropped land. No wonder, the EU had to adopt stringent measures on pesticide residues in food items. However, removal of pesticides from food products by using advanced technology does not help protecting the environment. Land productivity of agriculture is higher in developed countries but they are not necessarily more profitable because they also use more inputs (fertilizers/

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pesticides). But even within the developed world, Australia and New Zealand are quite competitive in agriculture who use comparatively much use less inputs and agriculture is not subsidized in these two countries. Hence, it is quite possible, in the absence of subsidies, most developed countries may shift to kind of technology used in Oceania, which can make agriculture more environmentfriendly. Moreover, agricultural subsidies might be causing unnecessary inter-continental trade in bulky goods with adverse impacts on the environment due to excessive shipping. Thus, removal of subsidies, by discouraging trade in bulky goods and associated excessive shipping, will reduce the environmental pollution.4 Rules on subsidies It is well recognized that promotion of environment-friendly production and practices may not be commercially viable and hence might require subsidies. However, it is not clear if such subsidies will be actionable under the WTO ASCM. Similarly, concerns can be raised also in case a country intends to tax environment-unfriendly products. In fact, the WTO dispute settlement system has already dealt with such environmental taxes imposed by the United States on automobiles to create an incentive to purchase fuel-efficient cars. This measure was challenged by the EU, as the most cars affected by it were European, claiming that the measure was inconsistent with the WTO provisions on ‘national treatment on internal taxation and regulation’ (Article III.2 of GATT). The panel, however, found that the measure was non-discriminatory even if it affected the European cars more.

The missing link To be on a global agenda, an issue must have global implications. In the context of environment, the issue that qualifies most from this perspective is probably that of climate change. The Kyoto Protocol is hence of immense significance. The Kyoto Protocol is an agreement made under the United Nations Framework Convention on Climate Change (UNFCCC). Countries that ratify this protocol commit to reduce their emissions of carbon dioxide and five other greenhouse gases, or engage in emissions trading if they maintain or increase emissions of these gases. There are potential conflicts between climate change mitigation measures under the Kyoto Protocol and the system of trade rules under the WTO. Such issues might be clarified under the ongoing negotiations at the WTO. Nevertheless, a peculiar situation would be created as the United States, that is responsible for more than one-third of global greenhouse gas emissions, would not be a part of it. When Kyoto was agreed, the United States signed and committed to reducing its emissions by 7 per cent below its 1990 levels by 2012. President George W Bush said in March 2001 that the United States would not ratify Kyoto because he thought it would damage the US economy and because it did

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not yet require developing countries, particularly the fast-growing nations, such as China and India, to cut their emissions.5 China and India, despite their huge population, emit less greenhouse gases than the United States. In per capita terms, while Chinese emission is almost one-sixth, Indian emission is less than one-twelfth of the US level. The Indian emission level is among the lowest even among the developing countries and it ranks hundred-and-fortieth globally (Baumert et al. 2005). Moreover, it is also not true that developing countries like China and India do not have any commitments under the Kyoto Protocol. The climate convention requires all countries, including developing countries, to establish programmes to address greenhouse gas emissions and to report on progress. Many developing countries – including China, India, Mexico, Brazil and Argentina – have made progress in reducing the greenhouse gas emission rates from their economies through improved transport, forestry and other policies though climate change mitigation has not been the direct concern (Chandler et al. 2002). While US carbon dioxide emissions continue to rise. The refusal by the United States to ratify the Kyoto Protocol has also created an anomalous situation, as the United States is quite enthusiastic about MA in environmental goods and services, which to a large extent linked with the emission reduction commitments under the protocol. Both the United States and Australia would have access to markets for environmental goods and services partly created by the Kyoto Protocol commitments by other nations.

Other concerns Though the proposal for a multilateral agreement on investment at the WTO has been dropped for the time being, the relevant provisions are found in many BITs, more than 2,000 of which are in existence now (UNCTAD 2005). Such provisions can also be found in several bilateral and RTAs. The way the issue of investment protection has been dealt with in some of these agreements can be a threat to the environment. Most developing countries have relatively lower regulatory standards for environment. However, as they develop, they need to upgrade them, which they will find difficult if adoption of higher environmental standards is considered a form of expropriation. Investment obligations contained in Chapter 11 of the NAFTA are illustrative in this regard. This chapter allows corporations or individuals to sue the participating governments for compensation when actions taken by those governments have adversely affected their investments. This chapter has been invoked in cases where governments have passed laws or regulations with an intent to protect their constituents, including environment that also impact a corporation’s profits. For example, in a case, Metalclad, an American corporation, was awarded $15.6 million from Mexico after a Mexican municipality refused a construction permit for the hazardous waste landfill Metalclad intended to construct. The NAFTA panel found that the municipality did not have the authority to ban construction on the basis of the alleged environmental concerns. This chapter has been criticized by many in all the three countries of NAFTA

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for not taking into account important public interest considerations, including environmental concerns (Kurtz 2002). Such provisions in bilateral and regional agreements can be a threat to the environment and there can be a global arrangement to mitigate such threats.

Conclusion The discussions above indicate that the WTO agenda on trade and environment lacks a global and environmental perspective as it focuses more on MA of environmental goods and services rather than the protection of the environment. It also expects some countries, particularly the developing countries, to share the burden disproportionately. This may be partly due to the lack of serious engagement of developing countries in the discussions on trade and environment at the WTO, particularly in the initial years. It is also because of their lack of capacity to forcefully articulate their concerns. Since environment is already in the WTO agenda, despite their strong resistance, they should rather be aggressive on this to highlight their concerns. Developing countries may insist on linking MA on environmental goods and services not only to technical and financial assistance from developed countries but also to ratification of the Kyoto Protocol and CBD by the United States who would be the major beneficiary of the MA commitments. They should not accept an agreement on environment at the WTO merely to give better MA to environmental goods and services that originate from developed countries, unless it addresses the genuine environmental concerns that affect the entire globe, particularly their own countries. Though some issues related to trade and environment have been highlighted here, they may not be comprehensive. Developing countries need to engage in further research to identify such issues. However, to make that happen, the first thing that is required to be done is to change the perspective in the discourse on trade and environment both at the WTO and in other trade fora.

10 Resisting the expansion Experiences and possible implications

Introduction Developing countries, in general, have been against the inclusion of new issues at the WTO. These include environment and labour standards, as well as the Singapore issues. However, the WTO Ministerial Meeting held at Doha in November 2001 made substantial progress in pushing these issues further. Many of the countries remained sceptical about the benefits and rationale of such agreements. During the Cancun Ministerial Meeting, these issues, particularly the Singapore issues, played a significant role – many believe that the Ministerial failed because of the adamant insistence of the EU to start negotiations on these issues, which most developing countries opposed. There are others who feel that the real intention of the EU was to block any progress on agriculture and hence they linked it to these issues, especially investment which was unacceptable to most developing countries.1 During the Cancun Ministerial Conference, a situation was created for developing countries where they had to choose between some progresses in the ‘development agenda’ along with binding commitment on Singapore issues or nothing at all. The choice was between the devil and the deep sea. They chose the known devil rather than the unknown deep sea. Agreeing to the Singapore issues would have meant making commitments on issues whose implications were not yet known to them. It may be noted here that a similar situation was created in an earlier Ministerial Conference at Seattle which also failed and it is widely believed that the failure was mainly due to other two new issues, environment and labour standards, though there are others who believe that the face off between the United States and the EU over the issue of agriculture played a bigger role. Concerns were expressed in the aftermath of the failed Ministerial Conference at Cancun that the poor countries will suffer more in the ensuing international trade order that was likely to see a spurt in bilateral and RTAs and increasing marginalization of the WTO. Such an impression was created more by the developed countries who declared their intentions of going for bilateral and regional preferential trade agreements (PTAs). This created some panic among some of the developing countries, which wondered if they did the right thing at Cancun.

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The stakes at Cancun To understand the context, it is imperative to carefully look at what had been lost and what might have been the possible fallout of the collapsed ministerial that put a brake in the DR of negotiations. Developed countries hastened to observe that since it was a Development Round, developing countries had lost an opportunity. The so-called DDA (WTO 2001a), as discussed before, included three types of issues. The issues of the first type aimed to address the existing anomalies, or to mitigate the ‘side effects’ caused by the existing WTO agreements, which were essentially to address the concerns of developing countries. These include TRIPS and Public Health, the implementation issues, the work programmes on issues like S&DT, small economies, LDCs, trade, debt and finance, trade and transfer of technology, etc. The second type of issues on the agenda included liberalization or reforms in agriculture, services, nonagricultural products, WTO rules (Anti-dumping and Subsidies), TRIPS (GI) and dispute settlement, etc. The outcome of these could be mutually beneficial if they were negotiated properly. The third type included the Singapore issues and environment, which would broaden the agenda of the WTO and were generally opposed by developing countries. However, the experience during the intervening period between the Doha and Cancun Ministerial Conferences had already shown that developed countries have the least regard for the issues that are important for developing countries. While they had no worries about the deadlines of the first two types of issues, developed countries, especially the EU, were adamant on launching negotiations on new issues. Except the issue of TRIPS and public health, progress made in all other areas had been quite disappointing. Hence, the immediate concern that the unsuccessful Ministerial at Cancun could slowdown the Doha work programme, in real terms, meant that the compromise reached on TRIPS and public health could take some more time to implement. It may also be noted that the compromise did not really mean any substantial ‘sacrifice’ for the United States. The issue was of supplying medicines to some poor countries that do not have domestic manufacturing capabilities and hence were not able to resort to compulsory licensing in a public health crisis situation. However, the purchasing power of these countries is so low that the big pharmaceutical companies cannot really reap much profit in the absence of the compromise. It is this understanding that led the United States to come down from its earlier position. In other words, the pharmaceutical companies did not really lose much by way of the ‘concessions’ on the issue of TRIPS and public health. Given these circumstances, a successful Ministerial, especially the way the EU and the United States wanted, would have meant that developing countries would have made substantial commitments and compromises in exchange of minor concessions.

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From Cancun to Hong Kong and beyond: the emerging concerns The few months following Cancun saw the intensification of the blame-game. Developing countries like Brazil, China and India who played a significant role at Cancun became the targets of developed countries trying their best to break the solidarity of developing countries. This was quite clear from the statement of the then US Trade Representative, Robert Zoellick, Some larger developing countries spent too much time with tactics of inflexibility and inflammatory rhetoric before getting down to negotiate. Unfortunately, and this was the real shame, many smaller developing countries that followed this lead couldn’t make the turn that some of the other bigger developing countries were ready to negotiate. And as a result, all walked away empty handed.2 Developed countries, particularly the United States, also aggressively pushed for more RTAs/PTAs, not necessarily for their own sake, but to break developing country alliances. They tried to rope in some of them with unilateral concessions, which they might even withdraw in future at an opportune time. To quote an earlier example, at Doha, EU managed to buy the support of the ACP countries by providing them preferential MA to launch a new round of trade negotiations (Ranjan 2005). However, later experiences have shown that the EU wanted substantial concessions from ACP countries for any further preferential MA and the new round of trade negotiations is yet to make any headway. Developed countries made serious attempts to break the G20, which became a significant force to challenge the developed countries’ monopoly in setting the WTO agenda. This was evident just after the Cancun Ministerial when many small Latin American countries deserted the G20. Countries like Guatemala, Peru, Ecuador, Colombia and Costa Rica left the G20 in the weeks following the Cancun Ministerial. The exit of these countries from the G20 was in response to threats that their continued membership with the G20 would jeopardize their trading arrangements with the United States. Another attempt to break the G20 was made in early 2004 when EU made an offer on agriculture to the Mercosur countries with which it is negotiating an FTA. This offer was mainly targeted to tempt Brazil to break away from the G20, though it did not work (Ranjan 2005). Nevertheless, G20 could hold on together as none of the core member of the group could be lured away. Following Cancun, after a series of informal ‘green room’-style consultations, a breakthrough was achieved in the General Council on 21 October 2003, where Members indicated some willingness to continue DR talks in Geneva on a number of key areas – including the Singapore issues. Informal meetings at the Heads of Delegation level discussed potential approaches to the Singapore issues. A willingness to discuss only trade facilitation emerged by the first week of December 2003 as Bangladesh, on behalf of the LDC group, supported by 15

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other developing countries including China and India, submitted a communication on the Singapore issues requesting that investment, competition and transparency in government procurement be dropped.3 The debate remained largely unchanged until April 2004, when a ‘coregroup’ of developing countries and LDCs said that they were prepared to discuss trade facilitation, but only for the purpose of clarifying substantive modalities for negotiations. In addition to insisting that negotiations must be based on ‘explicit consensus’, they called for the remaining Singapore issues to be dropped altogether from the WTO work programme and expressed a desire to see prior movement in issues such as agriculture before starting discussions on trade facilitation. Finally, in the July Package, the WTO members agreed on the basis of ‘explicit consensus’ in the General Council to formally launch negotiations on trade facilitation, while dropping the more contentious issues of investment, competition policy and transparency in government procurement from the Doha Work Programme. Meanwhile, even though the EU has been the key driver in bringing in new issues at the WTO arena, the United States has been more successful in pushing them in the international law arena particularly through bilateral trade agreements including with some developing countries/groups. The EU, however, has been pushing hard for including all the Singapore issues, which they term as ‘development issues’ in EPAs with the ACP countries.4 If they succeed, then a large number of developing countries will come under binding obligations on the Singapore issues. In the run-up to Hong Kong Ministerial Conference, however, agriculture became the key issue, and the remaining new issues, namely environment and trade facilitation, took a backseat. While there was not much discussion on trade facilitation, in the area of trade and environment, only the negotiations on reduction or elimination of tariff and NTBs to environmental goods and services saw some movement. In Hong Kong also, there were serious efforts by the United States and the EU to break the unity of developing countries. On the contrary, it got further strengthened. They have also become much more mature in negotiations. In retrospect, it is quite obvious that their unity at Cancun has paid dividends. It may not be an exaggeration to say that even if they had agreed to accept an expanded agenda in Cancun, they were quite unlikely to get a better deal in traditional areas than they got in the July Package. Moreover, in the earlier days, developing countries spent most of their energy in opposing the expansion of the WTO agenda and hence could not focus on traditional areas of trade negotiations. Now, they are much more focused and providing significant inputs into negotiations and have become more proactive. For example, when countries were at loggerhead on the tariff reduction formula for industrial goods, a group of developing countries came out with a new formula that was acceptable to all the groups of countries. Gone are the days when a few developed countries, more particularly, the

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United States and the EU would set the global trade agenda. The basis for concluding the UR of GATT was the bilateral agreements between the United States and the EU – the Blair House agreements – rather than true multilateral negotiations. Thus, though there are still distortions, the WTO process has become more democratic. The price of democracy is often delayed decisions. Developing countries have also mastered the art of persisting in negotiations. Thus, it is expected that the DR would be a long drawn-out process.

How serious are the concerns? Concerns that the lack of adequate progress at the WTO would lead to the creation of more RTAs as well as signing of more and more bilateral FTAs were expressed even after the failure of the Seattle Ministerial. Such concerns would come to light whenever there is a glitch at the WTO. Jagdish Bhagwati, for example, is concerned that the situation may turn into a ‘spaghetti bowl’ – a messy maze of preferences due to RTAs or PTAs formed among/between countries, each having bilaterals with other and different countries, each agreement having different rules of origin5 for different sectors and so on (Bhagwati 2002). However, the worst fear may not come true. The spread of bilateral and regional agreements may not be as pervasive as one thinks. The signing of these agreements has been quite independent of the progress at the WTO. As can be seen from Figure 10.1, there has been a spurt in signing of RTAs in 1990s. But the later half of the decade, i.e. the immediate years after the UR was completed, 35 30

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Figure 10.1 Spread of RTAs (source: World Bank (2005a)). Notes a EU-25 counted as a single country. b EU-15 counted as a single country.

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has been most prolific. This has happened despite the fact that the UR has been the most comprehensive and far-reaching round in the history multilateral trading arrangement. It would thus be inappropriate to link the spread of RTAs to the trade liberalization (or lack of it) under the WTO. The United States, for example, has recently signed FTAs with some countries including Jordan, Bahrain, Singapore, Australia and some Central American countries. It is also negotiating such agreements with some other countries. Moreover, the United States is now engaged in negotiations with 33 other countries of the Americas and the Caribbean to create the FTAA, intended to be the most far-reaching RTA in history. Neither would a successful Ministerial at Cancun nor a faster progress now mean that the United States would drop all such initiatives. The United States and the EU might have become more aggressive in signing bilateral and regional agreements, but movement along these lines will also not be easy. Indeed, the Unites States has shown keen inclination towards bilateral agreements – it finds it easier to shape the agreement in its favour in a bilateral setting where the parties to such agreements are much weaker, as compared with the WTO where it has to face the collective bargaining power of the weaker countries. The question that arises now is to what extent the United States, the EU or other developed countries will be able to get into bilateral deals with other countries that really matter to them? It is quite difficult to imagine that the emerging market economies or important developing countries like India, Brazil, China and Malaysia will sign bilateral FTAs with the developed countries, especially the United States who is always insistent on a particular type of agreement. The opposition to the proposed US–Thailand FTA from several quarters also indicates that it would not be so easy for the Thai government to proceed with it. In fact, even the United States knows it pretty well as the following statement by Ambassador Zoellick testifies: We would like to pursue FTAs with the largest markets around the world, including the European Union and Japan among others. But right now, those countries are not willing to move forward. As a result, we are pursuing for the liberalization of their markets through the WTO. At the same time, as another facet of competitive liberalization, we hope our progress on other FTAs will encourage those important markets to reconsider their stance.6 The FTA that it has signed with Jordan is entirely shaped by the United States and hence includes measures for investment liberalization as well as provisions on environment and labour standards. It also imposes more restrictive intellectual property rules than those under the WTO. Most developing countries would find it politically difficult to accept such an agreement with the United States. This is because the positive aspects of globalization have now started showing their impact – the globalization of knowledge and information has ensured that the awareness on these issues is much greater in developing countries now than even a few years back.

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One of the major deficiencies of the bilateral agreements is that, unlike the WTO, they do not have a dispute settlement mechanism. Developing countries will, therefore, find it difficult to enforce such agreements from their side, making them much less attractive to them. Developed country traders will make their way in getting measures like anti-dumping duties or NTBs imposed on products coming from countries with an FTA which developing country traders will find difficult to check. From developing countries’ perspective, this will further reduce the attractiveness of bilateral agreements with developed countries. Moreover, one of the major problems with developed countries like the United States and EU is the issue of agricultural subsidies, which cannot be sorted out, in a bilateral deal. Subsidies, unlike tariffs and except export subsidies, cannot be country specific. Obviously, the developed countries will not agree to eliminate or reduce subsidies on agriculture through bilateral deals. This, however, would make bilateral deals a bit preferred alternative to developed countries indulging in high agricultural subsidies. Thus, they may have to be content with signing bilateral agreements that will not bring any substantial gains. The US government cannot impress its traders with a ‘fantastic’ agreement with Jordan or Bahrain – many of them will probably not even be able to locate these countries on the map. Similarly, the additional gain that the United States can expect from its agreement with Singapore is marginal, since Singapore is already one of the most open economies in the world. Singapore had hardly anything to offer to any country in a bilateral agreement! The United States, therefore, insisted on getting more concessions in nontrade areas like TRIPS-plus commitments, more liberal investment environment, competition law and so on and succeeded to a great extent. Other developed countries that may wish to go for such bilateral agreements with major developing countries may also find themselves in similar situation. However, developing countries need to be cautious in signing any bilateral trade deal with developed countries, particularly the United States.7 Not only because they might end up conceding substantial concessions but also because the kind of MA they expect might just be elusive. For example, the United States is signing bilateral deals with many countries giving preferential MA under their so-called policy of ‘competitive liberalization’, essentially to open markets of other countries. When a similar kind of MA is given to so many countries, the value of the ‘preference’ itself gets substantially diluted. In any case, what the United States offers to others in return is quite negligible. The following remark of Ambassador Zoellick is noteworthy in this regard: ‘American openness is high and our trade barriers are low, so when we negotiate free trade agreements with our counterparts we almost always open other markets more than we must change our own.’8 Regional agreements are, of course, a different ballgame. They are not just FTAs, but generally go much beyond that. This may be good for the participating countries as normally they share a common history, geography or even culture and have much to gain from such regional cooperation. Economists have referred to this phenomenon as the so-called ‘flying geese’ pattern of develop-

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ment. Though maybe oversimplified, this vision of industrial development across countries and over time describes adequately the interaction between trade and FDI as a process of relocating production across national boundaries, which creates two-way or triangular trade flows among participating countries. They may not be necessarily bad for others as well. For example, an Indian trader may find it easier to export to a number of African countries when they are part of a common market than when they are not integrated and maintain different rules. Admittedly, the net effect of a RTA depends on the relative importance of trade-diverting and trade-creating effects.9 Earlier studies have shown that due to strong trade-diversion effects, RTAs have tended to worsen the welfare of member countries and even worsen worldwide efficiency (Bhagwati et al. 1999). However, a more recent study involving seven South–South RTAs (ASEAN Free Trade Area (AFTA), Andean Community, CARICOM, COMESA, Economic Community of West African States (ECOWAS), Mercosur and SADC) has shown that with the exception of the Andean Community and Mercosur, which seemed to have reduced trade with non-members, the other South–South RTAs are not only trade-creating but also trade-expanding, increasing overall trade, even with third countries, sometimes quite significantly (Cernat 2003). This is not surprising. When countries at a similar stage of development come together and dismantle trade barriers, the related negative effects, especially deindustrialization may be less pronounced or at least they will be spread over the participating countries rather than making clear losers and gainers. At the same time, the existing firms get a bigger market to enhance their efficiency. Enhanced economic activities in the group countries may lead to expanding trade with countries outside the group as well. However, such regional integration needs to be conducted in an orderly manner and should indeed not lead to a situation that Bhagwati calls a spaghetti bowl. The present trend of signing bilateral deals without conducting any serious assessment is not going to help. It may also be remembered that the ‘flying geese’ model of development is not going to work if a few sparrows join a group of geese! Nevertheless, if a giant trade grouping like FTAA really comes up, it may be a cause of concern for many countries, not only developing but developed as well. However, it would not be so easy to launch the FTAA. The proposed FTAA also contains provisions on competition policy, government procurement, MA and dispute settlement. This, together with the inclusion of services and investment, could remove the ability of all national governments to create or maintain local or national laws, standards and regulations to protect the health, safety and well being of their citizens and the environment they share (Barlow 2001). Once again, globalization of knowledge and information will make it difficult for this initiative to take off the way the United States wants it. Many Latin American and Caribbean countries will find it difficult to convince their domestic constituencies about the ‘virtues’ of the FTAA package after vehemently opposing the Singapore issues at Cancun. The statement by the Barbados Trade Minister A. Millier, just after Cancun, ‘We know which world we are

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living in but we cannot jeopardize the millions of poor farmers and we cannot jeopardize their interests’, is possibly a pointer to that direction.10 One does wonder, if the EU progressed this much, then why it should be so difficult for other regional groupings including the FTAA? To get an answer to this, one has to look at the history of the EU. The member countries of the EU share a common history and culture, geographical location and similar development level.11 The situation is quite different for the countries that are negotiating the FTAA. Even if some countries have always been more powerful than others, there was never any hegemony of one country in the EU, whereas the United States is explicitly trying to establish its hegemony over the western hemisphere through the FTAA. Furthermore, during the initial years (and still today), not only did a significant amount of resource transfer take place from the advanced countries to the laggards within the EU, but there was also an elaborate S&DT arrangement where the richer countries made palpable sacrifices. However, sacrifice is possibly a dirty word for the United States who is approaching the FTAA purely from a mercantilist angle. It took about five decades for the EU to reach this stage, and the United States wants similar progress through the FTAA at one stroke. The EU, however, seems to be ignoring its own history while approaching the issue of accession of the Central and East European countries to the EU or dealing with the issue of ‘development of developing countries’ at the WTO. For example, the so-called Singapore issues have been inspired by the experience of their own regional integration at the EU. However, they have ignored the speed of adjustment. Just even a few years back, some members of the EU did not have a national competition regime, even though all of them were developed countries. Despite that, the EU imposed a competition law on its new members and wanted to impose a competition law even to LCDs through a WTO agreement. Given its approach, the EU may also find it difficult to further deepen its relationship with the ACP countries.12 Some post-Hong Kong developments, however, brought back the fears once again. It is quite obvious that the peace bought with the July Package, and maintained through the Hong Kong Ministerial Conference, is quite fragile. While after Cancun, it was only the United States that showed keenness to go for bilateral FTAs, and they went ahead without much success, now the EU seems to be taking more interest. What is more interesting is that, after the suspension of talks in July 2006, India was the first country to announce such an intention.13 Brazil has also expressed interest in reviving the talks on FTAA as well as on the EU–Mercosur inter-regional agreement. India has already announced its intentions to negotiate an FTA with the EU though such a proposal has been on a parallel track and may not be linked with the progress or lack of it at the WTO. This is, however, quite significant, as all these proposed FTAs are likely to have all the Singapore issues as well as IPR standards higher than those under TRIPS, and India has been the voice of the developing world in opposition to these issues at the WTO. In fact, while the Singapore issues at the WTO included only the transparency aspects of government procurement, the FTAs

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are likely to include MA aspects of it as well. Thus, it is quite surprising that after opposing these issues so strongly at the WTO, they are quite prepared to accept even greater obligations (TRIPS-plus obligations have not been in the WTO agenda) through FTAs. Has the situation changed so much just over two years that they can accept such additional obligations? Or is it that they can expect better concessions in other areas to offset these additional burdens? Neither of them seems to be valid. In fact, what these developing countries may get through bilateral deals with the developed countries/blocs like the United States and the EU could be even worse not only than what they could get at the WTO but also what they refused to accept in July 2006 when the talks were suspended.14 This is because, on the one hand, these FTAs will not address the issue of agricultural subsidy, on the other hand developing countries will have to accept all the Singapore issues as well as TRIPS-plus standards. In all other areas, the outcome of the FTAs is likely to be similar to those of the WTO. They can, of course, seek consolation in that the additional MA concessions offered to them through bilateral deals will be offered only to them and not to all other WTO members giving a competitive edge to their exporters. However, it would be quite naïve to expect this and, in fact, this is where the danger lies. The United States and the EU are not going to be monogamous partners. If India signs an agreement with the EU, the chances of Mercosur signing a similar agreement with the EU or FTAA becoming a reality would be much higher. Even ACP countries might rush to sign what they have been resisting from the EU. Other developing countries and groups like the ASEAN may also follow the suit. The outcome would be that there would be no such competitive edge for any of these developing countries and the developed countries would, de facto, gain much more than what they could at the WTO. Why then is there such a mad rush among the developing countries to go for FTAs with developed countries? One argument that is often put forward is that there is high complementarity between trade baskets, and hence they are more beneficial compared to FTAs between developing countries that have similar trade structures. Experiences, however, show that even without the so-called lack of trade complementarity the FTAs can provide significant boost to trade (Cernat 2003). The issue of threat from countries producing similar goods should not be overplayed. This is quite peculiar – trade liberalization is generally pushed on the premise that it will lead to competition and efficiency, but here trade liberalization is apparently being encouraged such that there is no competition! In fact, it may be argued that competition between developing countries through trade liberalization can ensure larger markets, which can promote efficiency, and innovation as the negative consequences can be manageable as the level playing field is automatically ensured. It is true that developing countries generally produce low-technology/lowvalue goods and services, while developed countries produce high-technology/high-value goods and services. This may be interpreted to mean that the obvious complementarity precludes the threat of de-industrialization. However, one should ponder why the rich countries are rich and the poor countries are poor.

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Do people in those countries work harder? No. The basic reason is that they produce high-technology/high-value goods and services. Hence, developing countries need to graduate to high-technology/high-value goods and services, if they want to develop. If they base their production structures on complementarity with the developed world, they may compromise their future development prospects, even if it does not harm their industry now. This is because it would be difficult for developing country producers to enter the premium segments of the markets. Hence, a sensible policy would be to protect high-technology/highvalue industries as they enter into them and remove the protection gradually (Reinert 2003). It seems that developing countries have accepted that more trade is both a necessary and a sufficient condition for promoting development, and that they need to pursue whatever they can to promote trade. Such an approach without an objective assessment can be dangerous. There are other possible reasons for increased enthusiasm of developing countries in FTA negotiations. Maybe countries, over the years, have created negotiating infrastructure, and when the negotiations at the WTO are stalled, they tend to create jobs for themselves to justify their existence and open new fronts of FTA negotiations. It could also be for political reasons as the EU and India hurriedly announced the launching of negotiations on an FTA in their annual political ritual called the EU–India summit. It is also possible that the profits for a powerful few become more determining than the losses of the insignificant many, as has been alleged by many NGOs and others in the context of the EU–Mercosur FTA. Maybe all of these factors are active at the same time. However, looking at the experiences of FTAA, EU–Mercosur and EU–ACP countries negotiations, getting all these FTAs will not be so easy.

In lieu of conclusion As discussed in the previous sections, given the situation in Cancun, developing countries had hardly anything to gain but a lot to lose from a ‘successful’ Ministerial Conference that might have expanded the WTO ambit substantially. An unbalanced and unfair draft declaration pushed the developing countries to the wall without any space for manoeuvrability. Developing countries already gave substantial concessions in terms of TRIPS, TRIMS and GATS to get agriculture and textile and clothing into the GATT/WTO framework during the UR of negotiations. Hence, linking investment with reduction in agriculture subsidies as a quid pro quo, as demanded by the EU, was considered by many developing countries to be quite outrageous and amounted to selling one good twice (Amorim 2003). The failure at Cancun as well as the post-Cancun developments has lessons for both developed and developing countries in more than one way. The lesson that developing countries learnt was that they could make a difference collectively. At Doha, developed countries were finally able to push their own agenda essentially because unity among the developing countries was not strong enough. Thus, for developing countries, Cancun was just a beginning.

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Developed countries should accept the fact that they cannot take developing countries for granted. They thought that Cancun could be a repetition of Doha. But they ignored that developing countries had been encouraged by the ‘perceived success’ of the developing countries in shaping the WTO agenda at the Doha Ministerial Conference.15 It is arguably the case that a regulatory regime that might be appropriate for the circumstances (economic, technological, social) will vary from country to country and over time. Hence, the WTO should not be encouraged to put more and more regulatory restrictions on its members. Moreover, overloading it could destabilize the very institution of the WTO, which may not be good for anyone. This is not to say that there should never be any expansion of the trade agenda. In fact, viewed from a normative perspective, some of the proposals made by developed countries may look desirable. But, developing countries may not be able to afford them. Hence, developed countries should not be allowed to impose them on developing countries unilaterally. In fact, concerns of developing countries should be given more weight, as their stake is much higher. If you are planning for a party where all participants have to pay, the ability of the least able participants has to be the common denominator, unless the more able of them are willing to take on a higher share of the burden. Joining the party by the least able participant with equal contribution will mean going without food for the next few days. The developed countries seem to plan for a grand party where all are expected to pay ‘equally’. The big question before the developing countries is – should they join it?

11 Evolving a trade regime for development Some considerations

Introduction What we see as the DR now would have been called ‘Singapore Round’ had the developed countries had their way at the Singapore Ministerial Conference. Not only that, a possible Singapore Round would have had a much broader agenda not just compared to the truncated Doha agenda adopted in July 2004, but also compared to the original Doha agenda, minus the TRIPS and public health component of it. What later came to be known as the Singapore issues were actually meant for negotiations, but as the developing countries opposed them strongly, they were taken for studies only. The same was true for labour and environment. It may, however, be noted that the agenda on environment that became a part of the DR is much smaller than what its proponents envisaged at the time of the Singapore ministerial. Thus, developed countries wanted to launch another ambitious round of trade negotiations even before the full implementation of the UR of agreements that started taking effects only with the beginning of 1995. Since the implementation of the UR agreements has been staggered, at the time of Singapore ministerial in 1996, there was no way one could feel the impacts of the UR. It was not uncommon to launch a new round within such a short period of time, particularly during the initial years of GATT, Tokyo Round was launched in 1973, six years after the conclusion of Kennedy Round in 1967, while UR was launched in 1986, seven years after the conclusion of the Tokyo Round. This was particularly strange as the UR was the most comprehensive round in terms of trade liberalization. Not only did the UR made the deepest cuts in tariff barriers, it was also the first time that so many new areas were brought into the GATT/WTO ambit. The logical basis for the launch of another round at Singapore, or even at Doha, as comprehensive as the UR, was, therefore, highly questionable. Nevertheless, a new round was launched after about five years in 2001, and the only positive side of it was that by then, the adverse impact of TRIPS on public health became a global issue of concern and hence there was an attempt to address it in the new round.

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Estimating the benefits UR represented the most sweeping changes in the history of global trade rules and obviously there were high promises and expectations. In the early 1990s, there were several studies that predicted that the world income and the income of all the three country categories developed, developing and transitional economies were expected to increase after full implementation of the agreement. These studies were made by individual researchers as well as some institutions like World Bank, OECD and GATT Secretariat.1 The estimated range of worldwide gain after implementation of the agreement extended from $140 billion to $274.1 billion. For developing countries, income potentially was estimated to grow by $36 billion to $89.1 billion, according to these studies. However, after more than a decade after the UR started taking effects, one does not find any enthusiasm to evaluate the impacts of the round. This is understandable. Instead getting into a higher growth trajectory, the global economy actually slowed down. Hence, there was no way one could show that the UR has benefited the global economy. Further liberalization of trade, however, continues to be advocated. The focus is now on the high growth economies particularly China and India and it is argued that these economies are growing rapidly due to trade liberalization. But, what is typically ignored is the fact that they have been growing at high rates even before the liberalization of trade. Second, even today they are among the highly protected economies. China had to accept deeper tariff cuts while entering the WTO. But the level of protection in India remains among the top few in the world. Even when one looks at the difference between the protections applied on imports and the average duty faced by exports, India remains among the top. The World Economic Outlook 2007 also highlights the fact that the high growth economies have been increasing their share of trade in GDP and cites this as an evidence of trade liberalization being good for growth. However, what is ignored is the fact that the causality could be the other way round. These economies might be increasing their share of trade because of their high growth and associated increase in productivity. Moreover, as has been argued elsewhere in this book, share of trade in GDP is an inappropriate measure of trade openness. There have been a fairly good number of studies since the launch of the DR to assess its potential benefits. Studies conducted in the early 2000s estimated such benefits in terms of higher global GDP ranging from $250 billion to $1000 billion.2 It is indeed quite intriguing that despite being grossly wrong in their predictions in the past, trade economists have been so enthusiastic in making further predictions using similar methodologies. The fact is that, economists, till date, do not have the appropriate tools to make such predictions with confidence. The main empirical tool for this work is the multi-country computable general equilibrium (CGE) model – a sophisticated and complex tool of analysis that appears as a ‘black box’ from which results are difficult to understand. Moreover, the model works on the premise that the global economy will

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achieve a ‘general equilibrium’ as the economic agents will adjust their decision based on the excess demand or supply existing in several markets. With sophisticated software packages, economists are able to find the equilibrium values within seconds by effecting thousands of iterations. However, in reality, the economic agents will take several years to make such adjustments in their decisions and the global economy may never reach the ‘general equilibrium’. Another noteworthy fact is that the trade economists are becoming increasingly conservative in their assessments of the potential benefits of trade liberalization. The average estimate of the increase in world welfare falls from 1.7 per cent in 1999 to 1.5 per cent in 2002, 0.3 per cent in 2004, 0.5 per cent in 2005 and even lower in 2006 (Bouët 2006). Apparently, this is primarily because the researchers have been improving their methodologies. One wonders, given this trend, if trade economists will soon be predicting a decrease in world welfare with trade liberalization!

Increasing integration but falling growth Undoubtedly, GATT was a historical necessity. Prior to GATT countries were engaged in a protectionist war, which Joan Robinson termed as the ‘beggar thy neighbour policy’. Hence, there was a need to put countries under some discipline, and GATT has been touted successful, as it has been able to bring such discipline. Post-GATT years, particularly the two succeeding decades, were also good for the global economy. It may, however, be noted that in those years countries by and large followed Keynesian policies. But if the objective of GATT is considered to be opening up of economies and global integration, then it has definitely been a big success. Throughout the post-GATT years, growth of global trade has surpassed the growth of global GDP. As a result, share of global trade in global GDP has increased throughout the period (Table 11.1). If one considers the increase of trade in services as it grew from almost negligible in 1950 to about 10.5 per cent of global GDP in 2005. Add to that the growth of FDI particularly since the 1980s, which crossed one trillion dollars in 2000. Another aspect of integration can be assessed from the membership of the GATT/WTO. In 1948, the share of GATT members in global trade was just about 60 per cent, today the WTO members account for about 95 per cent of the global trade (Van den Bossche 2005). Going by the mainstream trade Table 11.1 Some indicators of global integration

Merchandise trade as a percentage of GDP Services trade as a percentage of GDP Outward FDI stock as a percentage of GDP Share of GATT/WTO members in global trade Source: Author’s calculation from various sources.

1950

1980

1990

2000

2005

7.9 – – 62.1

17.3 2.1 5.8 77.7

15.3 5.2 8.6 85.5

20.3 7.3 20.6 92.1

23.4 10.5 23.9 94.4

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9 Trend Growth rate

8 7

Percentage

6 5 4 3 2 1

57 19 60 19 63 19 66 19 69 19 72 19 75 19 78 19 81 19 84 19 87 19 90 19 93 19 96 19 99 20 02 20 05

54

19

19

19

51

0

Year

Figure 11.1 Actual and trend growth rates of global GDP (source: WTO (2006)).

researchers’ arguments, the period would have been an era of increasing efficiency and global growth. Unfortunately, throughout the period, the growth rate of the global economy has shown a declining trend (Figure 11.1). One wonders if trade liberalization has been achieved just for the sake of it. It has often been recognized that greater global integration though would improve global efficiency and increase global welfare, it might create losers and winners in the process. Critics of global integration have pointed out that the proposition that all countries will gain from trade a la comparative advantage is based on the premise that factors of production can easily shift from one use to another and that full employment would be maintained – both assumptions are not true in reality. Second, aligning production mix with comparative advantage will mean developing countries continue to produce and export primary products – a prospect not conducive to development in these countries. Moreover, even if the global economy gains, the distribution of those gains between countries depends on demand and supply conditions that determine the terms of trade (i.e. the relative price of imports and exports), and these conditions can change. In fact, it was found in the empirical work of Hans Singer (1950) and Raul Prebisch (1963) that the prices of primary commodities continuously declined relative to manufactured goods. This possibility was recognized even by Harry Johnson (1954, 1955) and Jagdish Bhagwati (1958). But in today’s world such adverse terms of trade need not be limited to primary commodities only. This can happen in any other good, particularly when the technology of a product becomes standardized (Reinert 2003). It is also well recognized that developing countries, in general, start producing a good only when the technology is matured and start exporting the same when it is

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standardized (Vernon 1966, 1979). This is the reason that even though many developing countries increased their manufactured exports, they did not gain much from this. This, however, does not mean that the use of frontier technology would automatically ensure the gains. What is important is who owns the technology and collects the associated rents. Agriculture is a classic example. Though farmers may use the latest technology, they have no control over it and the agro-business companies extract the entire rent out of such technology. This may be true not just for technology rent but for other intellectual property rent as well. Thus, when reputed apparel brands are outsourcing their garments to China or other developing countries, gains for these developing countries are marginal because even though labour income shifts to developing countries, the huge rental income is retained in the developed world. This is the reason that despite significantly increasing their exports in high technology manufactured goods, developing countries have not been able to increase their income shares (Chapter 2). The issue of technology has been brought to the fore by Samuelson (2004).3 Samuelson’s concern, developed in the context of the debate over international outsourcing and trade with China, is that increases in productivity due to adoption of better technology of foreign trading partners may diminish the United States’s share of the gains from trade. Even Gomory and Baumol (2000) argued that technological leadership plays an important role in the distribution of gains from trade. They argue that comparative advantage in the modern world is created and not endowed. Earlier, trade was driven by the search for exotic spices and raw materials. So climate and natural resource endowments significantly determined the pattern of comparative advantage. In today’s economy, comparative advantage is driven by technology, which is not necessarily exogenous as often assumed by economists. Samuelson thus argues that free trade is not always good particularly when trading partners adopt new improved technologies. Should one not then accept the fact that developing countries, by and large, have always been loser in the free trade game as technological progress has generally occurred in the developed world? However, there have been deviations from this trend even before. This is how Japan and other Asian countries like Korea and Taiwan developed. But the impact of their growth on the developed world went unnoticed. The sheer size of Chinese economy ensures that the impact of its high growth is difficult to ignore. One would therefore conclude that the developing countries in general have been perpetual loser in free trade due to both adverse terms of trade and technological changes in developed countries. By and large, the critics have focused their attention on the fact that there can be losers and the possibility of poor nations remaining the poor is real. The basic premise that the global economy would be better off has not faced any serious theoretical challenge. But, the experience of the global economy shows that even that can be questioned. One may thus argue that increasing global integration might have led to this declining growth rates. It may also be argued that without such integration the global economy could have done worse. It is,

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however, practically impossible to examine the question empirically as that would require the counterfactual – what would have happened in the absence of the integration. There is another aspect of the dynamic evolution of comparative advantage that is still ignored. This is the adverse impact of trade liberalization on competition, which, in turn, affects efficiency and output. The comparative advantage theory predicts gains from trade based on lower opportunity costs and gains from specialization. In modern trade literature, however, openness to trade is justified on the ground that it will increase competitive pressure on the domestic firms and will improve efficiency. Improved efficiency and growth are not necessarily positively linked. If all inefficient firms in a country are closed down, the overall efficiency in the economy will go up but not economic growth. In fact, the short-term impact of opening up of trade is likely to improve both efficiency and growth. This is because the relevant market becomes more competitive. As economic theory tells us, increased competition in any market, ceteris paribus, leads to increased output, while reduced competition (increased concentration) leads to reduced output. However, if the domestic firms are unable to withstand competition and close down, the degree of competition falls along with the output to serve that market. This is a phenomenon that, in Proudhon’s words, can be described as ‘competition kills competition’ (Proudhon 1888). In a small protected market, the degree of competition may be low. But after opening up of the economy, competition though increases in the short run, may fall in the medium and long term, even if the degree of competition in the ‘global economy’ is reasonably high.4 This is because the erstwhile protected national market does not get seamlessly integrated to the ‘global market’ because not all global players would be interested in serving all the markets. There could be a situation when there may be several global players in a particular industry but there will be several ‘relevant markets’ with only a few players, leading to a smaller output to serve all these markets, which, in turn, would mean smaller global output. It is also interesting to note in this context that ‘persistence of profitability’ studies have shown that the degree of competition can be higher in developing countries than in developed countries (Glen et al. 2001, 2002).5 There has been another kind of studies that showed that there is greater turnover as well as entry and exit of firms in developing country markets than for developed countries (Tybout 2000). This also indicates that developing countries have higher competition in their markets. This is quite interesting as it is generally accepted that developed countries have lower trade barriers6 and hence likely to have more intense competition. Glen et al. (2002) argue that this is plausible because while in developed countries, large corporations create barriers through advertising, patents, trademarks, etc., in developing countries, lower level of economic integration makes it easier to enter the market. This process has been accentuated by the increasing flow of foreign investment with its M&A component increasing steadily. Unfortunately, despite tall

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claims on the expected efficiency gains made by the involved companies in M&A at the time of striking the deal, such gains, very often, remain elusive as shown by research in both Europe and America (Witzel 2004). Even when M&A deals succeed in boosting profits, doubts can be raised on the source of increased profitability. Though there has not been much research in this area, the limited studies indicate that, by and large, the source of higher profitability is not increased efficiency or reduced cost, but increased market power (Akhavein et al. 1996; Vennet 2002). So, the increased FDI flow of the 1990s, with its predominant component being acquisition FDI has, in all probability, increased concentration in the global market across sectors without bringing in any accompanying efficiency gains and contributing to falling global growth.

Exploring the options It may be true that even the developed countries did not gain much as high growth has been elusive to most of them. The costs of stagnation are much higher in developing countries. People in the developed world continue to maintain a decent life even if their economies stagnate. In developing countries, stagnation means, people continue to live in abject poverty most often in increasing number as population continues to grow. Needless to say, in many countries that experienced prolonged economic decline, the situation was worse. What is clear by now is that the kind of trade policy regime that is being followed is not working and there is a need to explore alternatives. The most useful exercise in this context would be to go back to the history of developed countries – look at their development experiences. Protection has now become a dirty word among the mainstream economists. But historically most nations that are developed today have used this in some measure when they were developing (Chang 2002). It is true that the importsubstituting industrialization policy based on protectionism did not work in most countries of Africa and Latin America where it was tried. However, what is generally ignored is the fact that the export led growth strategy of Asian countries was also not based on free trade. Protection cannot work in small markets as it limits the scope of reaping economies of scale and competition that is essential to promote efficiency. The beauty of the Korean industrialization strategy was that it did not protect its industries much but promoted them including with subsidies. Also interesting was the fact that subsidies were provided in such a way that they encouraged competition (Box 11.1). The economic policies adopted by Korea and Taiwan were in fact a combination of import-substituting and export-promoting strategies. A classic example is the case of the Korean automobile industry which in 1995 exported more than one million units, while import penetration (share of imports in domestic car market) was less than 1 per cent. They created a system in which export performance would be rewarded with a licence to import, a strategy that Paul Krugman has termed ‘import protection as export promotion’ (Krugman 1984). Though tariffs were not very high, import licences were as only granted if the

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firm wishing to import could demonstrate that the input was not domestically available on reasonable terms. This ensured that necessary imported inputs were available at reasonable costs in contrast to many other countries following high tariff regime indiscriminately, often turning the effective rate of protection negative. With initial resistance, the orthodox trade theorists eventually accepted the fact that the East Asian miracle was not a result of free trade. However, they argued that the government intervened in such a way that its interventions cancelled out each other effectively creating ‘simulated free markets’ (Berger 1979; Bhagwati 1988). Theoretically, it is difficult to justify such an argument. In fact, using both import protection and export subsidies is a double distortion. Nevertheless, some neo-classical economists have accepted, as a second best option, that export promotion may offset the negative impact of protection on competitiveness, and hence export subsidies may be used also to create a trade or export-push economy, rather than simply a neutral regime (Bustelo 1996). Technology, which plays an important role in trade, can be another reason for deviation from free trade as argued even by Samuelson (2004). Orthodox economists, however, still do not believe that it is necessary (Dixit and Grossman 2005). For them, some intervention in the area of technology development will just serve the purpose. But, technology is not exogenous and can be influenced by policy. Moreover, technology development cannot occur in vacuum. It needs some industrial base, which might require some degree of protection. Even government intervention in the form of development of technology may go against the spirit of free trade as there could be a possibility that the government may choose sectors other than what comparative advantage may guide. With the role of technology factored in, the case for strategic trade policy becomes even stronger (Palley 2006). In short, developing countries need to adopt strategic trade policies rather than pursuing the agenda of free trade.7 Against this backdrop, developing countries may consider the following options. Going regional Now if smaller countries of today want to develop their industries by providing some protection at the same time encouraging competition and efficiency, then the only way they can do it is through regional integration. The Korean and Taiwanese models are unlikely to be as effective today. When they were promoting exports, most other developing countries were following import-substituting policies and were not interested in the global export market. Today, all developing countries are competing for exports and the first movers are getting an advantage. Most countries will find it difficult to compete with China until China becomes much more developed pushing up its labour costs and making it less competitive. But as of today, developing countries are running the risk of adverse terms of trade for the products that they are exporting. One prominent such area is likely to be textile and clothing. The recent Chinese acceptance of restriction on their exports of textile and clothing products needs to be viewed in

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Box 11.1 The development experience of South Koreaa In 1961, General Park Chung Hee overthrew the popularly elected regime of Prime Minister Chang Myon. A nationalist, Park wanted to transform South Korea from a backward agricultural nation into a modern industrial nation. Park’s government was the beneficiary of the Syngman Rhee administration’s decision to use foreign aid from the United States during the 1950s to build an infrastructure that included a nationwide network of primary and secondary schools, modern roads and a modern communications network. The result was that by 1961, South Korea had a welleducated young work force and a modern infrastructure that provided Park with a solid foundation for economic growth. The Park administration decided that the central government must play the key role in economic development because no other South Korean institution had the capacity or resources to direct such drastic change in a short time. The resulting economic system incorporated elements of both state capitalism and free enterprise. The economy was dominated by a group of chaebols, large private conglomerates, and also was supported by a significant number of public corporations in such areas as iron and steel, utilities, communications, fertilizers, chemicals and other heavy industries. The government’s direct control over all institutional credit was established by nationalizing the banks and merging the agricultural cooperative movement with the agricultural bank. The government guided private industry through a series of export and production targets utilizing the control of credit, informal means of pressure and persuasion, and traditional monetary and fiscal policies. The Economic Planning Board was created in 1961 and became the nerve centre of the government’s plan to promote economic development. The early economic plans emphasized agriculture and infrastructure, the latter were closely tied to construction. Later, the emphasis shifted consecutively to light industry, electronics and heavy and chemical industries. Using these strategies, an export-driven economy developed. The government combined a policy of import substitution with the export-led approach. Policy planners selected a group of strategic industries to back, including electronics, shipbuilding and automobiles. New industries were nurtured by making the importation of such goods difficult. When the new industry was on its feet, the government worked to create good conditions for its export. Incentives for exports included a reduction of corporate and private income taxes for exporters, tariff exemptions for raw materials imported for export production, business tax exemptions and accelerated depreciation allowances. Since the early 1960s, South Korea has achieved an incredible record of growth and integration into the high-tech modern world economy. Four decades ago, GDP per capita was comparable with levels in the poorer

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countries of Africa and Asia. In 2004, South Korea joined the trilliondollar club of world economies. Today its GDP per capita is equal to the lesser economies of the EU. This success through the late 1980s was achieved by a system of close government/business ties, including directed credit, import restrictions, sponsorship of specific industries and a strong labour effort. The government promoted the import of raw materials and technology at the expense of consumer goods and encouraged savings and investment over consumption. Sources: www.economywatch.com; www.cia.gov/cia/publications/factbook/ (Accessed 20 October 2006). Note a There are different stories and views about Korean experience, but what have been given in the Box are mainly some facts. In fact, the last paragraph in the Box appears in several documents and websites including those of several UN agencies and even the CIA Fact Book. Even The Economist once commented, ‘It took a national crisis (of 1997) for South Korea to turn from an inward-looking nation to one that embraced foreign capital, change and competition.’ (Asian Finance: The Weakest Link, The Economist, February 6, 2003).

this context. With the economic reforms in 1978, China took a turn for labour intensive industries. But since the beginning of the new millennium, China has been experiencing faster growth in capital and technology intensive industries (Lardy 2007). This is more likely to be by design than by accident. Thus, China would have probably put a voluntary restraint on the exports of textile and clothing to ensure that their entrepreneurs do not concentrate only on this sector but get into other challenging industries as well. Such a move will also force the Chinese textile manufacturers to concentrate on quality rather than price alone. It seems that in one smart move they did what they wanted to do on their own but made it appear like a substantial concession to the United States and EU! Going regional, however, does not mean going for any FTA (often termed as RTA) that comes on the way. An FTA between a developed and a developing country is unlikely to help. This is what the Europeans have been doing. Contiguous developing countries particularly when they are small must come together. As has been noted elsewhere in the book, empirical studies indicate that such regional integration in the developing world can be beneficial not only for the countries in the region but also for the rest of the world. Bringing flexibility within the WTO structure Binding rules are needed to avoid ‘beggar thy neighbour’ kind of protectionist war, at the same time, the rules must be flexible enough to provide moderate levels of protection. It can be possible even within the overall binding commitments made by the WTO members. A scheme can be considered for the developing and LDCs whereby they would be obliged to be within a limit of average tariff, but may be allowed to have different tariff levels for different goods. As

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of now such binding commitments are applicable to every good they import. To take care of the interest of the exporting countries, the members may commit themselves not to increase tariffs beyond certain levels within a year. In fact, such flexibility can be ensured even within the existing WTO framework through proper implementation of Article XVIII of GATT, which recognizes the need for additional flexibility with regard to GATT obligations for the developing countries. While Article XVIII:B allows developing countries to impose trade restrictions for balance of payment reasons, the Article XVIII:C procedure allows both broader measures and violations of the NT obligations in order to promote domestic infant industries. However, such provisions have rarely been used and developing countries cite the complicated procedure, particularly the requirements of compensation for affected countries as the reason.8 Indeed, if developing countries were able enough to provide such compensations, they would probably not need to use this flexibility. India asked for a comprehensive review of this provision to make it ‘user friendly’, as outlined in its submission in the run-up to the 1999 Ministerial Conference in Seattle.9 A demand for review of this provision has been made more recently as well, which some developing countries argue, falls under the mandate of ‘implementation issues’ agreed upon by Members at the Doha Ministerial Conference.10 However, as one would expect, there has hardly been any progress on this. This is not to argue that developing countries should give protection to any industry ignoring their endowments of labour, capital or technology altogether. Any industrial policy has to be adopted keeping these in mind. At the initial stages of development, it would be important to concentrate on labour intensive industries but gradually they need to climb up the technology ladder. Even a country with vast endowments of labour may not be able to export labour intensive products in the international market as we see today in the context of many African countries. Hence, the need for an active industrial policy coupled with strategic trade policy. It is not recommended that they must follow the Korean, Taiwanese or Chinese model, but they need to evolve their own model to suit the local situations. What is important is that the global trade architecture should allow adequate flexibility to national governments or regional blocs to adopt such a model. Dealing with NTBs It is now well recognized that further reduction in tariffs, particularly in industrial goods, would not make much of a difference (Baldwin 2000; Rodrik 1997). Any such reduction, by and large, will have to come from developing countries as there is not much scope for developed countries to reduce tariffs and so further liberalization of tariffs will benefit only the developed countries. But it would be better to leave this amount of flexibility in the hands of developing countries. However, the fact that developed countries’ tariffs on industrial goods being low does not mean that developing countries have easy MA to developed country markets.

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The new age trade barriers are essentially NTBs and it is well recognized that developing countries hardly use them but they are the sufferers of such barriers. They are not in a position to use such barriers because if they adopt higher standards for foreign goods they have to adopt the same standards for their domestic producers as well in keeping with their non-discrimination commitment at the WTO. But if they do that their domestic industry would be in deep trouble. It would be naïve to expect either that developed countries would dilute their standards substantially to accommodate the export interests of the developing countries or that developing countries can catch up with the developed world standards in the near future. Nevertheless, there is significant scope to strike a middle ground bringing some relief to developing country exporters. Addressing side effects As of now WTO should be more concerned about the adverse impacts it might have been causing to its members particularly the developing and the LDCs rather than expanding its agenda. In fact, this is something that was agreed during the UR but ignored. Some attempts have been made to address the impact of TRIPS on public health. But TRIPS can have adverse impacts not only on public health but also in several other areas like environment and generally on development. Similarly, other agreements at the WTO, as discussed before, have been adversely impacting development and policy flexibility of developing countries. The two agreements that might require special attention in this regard are TRIMS and GATS. There are some other measures that would be required at the national and regional level to address some of the side effects. Most important among them is a competition policy, including regulatory mechanisms for the industries that are prone to market failures. Enforcement of competition policy will require an appropriate assessment of the relevant market from regional and global perspective rather than narrowly defining the relevant market to be the national geographical market. Experiences of developing countries have shown that most developing countries find it difficult to enforce competition or regulation not only because of capacity and resource constraints but also because of power imbalance vis-à-vis the big TNCs. Evolving a competition or regulatory framework at the regional level as part of regional integration as proposed here would go a long way to tackle this challenge. Interestingly, in their famous book, Saving Capitalism from the Capitalists, Raghuram Rajan and Luigi Zingales (2003) have strongly recommended limiting the concentration of ownership of productive assets, but they also suggest keeping the borders of the economy open to support free trade and maintain a high level of competitive pressure on incumbent firms. But free trade and investment regimes actually can increase the concentration of ownership of productive assets and reduce competition. Countries need to ensure that their markets always remain the battleground for competition, and regional integration with a fair degree of outside competition seems to be the way forward.

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What is there for MA Coming back to the subject of expanding the trade agenda by bringing new issues, it would be difficult to take a single position for all possible issues. Convergence of regulatory regimes in some sense could be good thing as long as countries need to deal with each other. But should all of them be linked to global trade rules? Should they be pursued even if the costs are too high when developing countries have many more competing needs? Of course not! But developing countries, while evaluating the merits and demerits of including them in the trade agenda, need to assess how they will affect their MA in developed countries. This is what developed countries always look for from a trade agreement. The developing countries also need to look at this as the central component of their trade policy and strategies. At the regional level, however, particularly when the countries concerned are at similar stages of development, it may be possible for them to understand each other’s concerns better and deal with the issues in a cooperative mode with a development-oriented approach, as against at the global level where countries negotiate on issues in a competitive mode and with a mercantilist approach. It is also easier to achieve convergence on regulatory policies and practices when countries are at similar stages of development. In essence, deep integration may be considered at the regional level, but at the global level it would be better to keep within the limits of shallow integration. In recent times, there has been much talk about ‘aid for trade’. Though this is recognition of the fact that trade liberalization has not worked for most poor countries, developing countries should not expect much from such rhetoric. It is true that trade-related capacity building particularly through the WTO has not really made any impact because of their gross inadequacy. But even if developing countries receive more aid for trade in the coming years, such increase will essentially be diversions of aid from other uses like health, education, poverty reduction and environment (Dubey 2006a). After all, most developed countries have not fulfilled their promises made in the Copenhagen Summit and official development assistance (ODA) has declined over the years. Worse, such promises may be used to convince developing countries to accept difficult commitments. Promises, in any case, are unlikely to be fulfilled but they will be bound to fulfil their commitments. Developing countries, therefore, should not look for anything from the WTO except MA!

Notes

1 Introduction 1 Though many developing countries wanted agriculture to be brought under the multilateral framework, the demand for the same was spearheaded by a group of 16 countries known as the Cairns Group. The members of the group are mostly developing countries but there are three developed countries as well. In fact, during the UR, the leadership of the group was in the hands of a developed country – Australia. The other members of the group are Argentina, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Indonesia, Malaysia, New Zealand, Paraguay, Philippines, South Africa, Thailand and Uruguay. 2 WTO and development: it is all about mercantilist game 1 There were three declarations. Apart from the Doha Ministerial Declaration, there were two separate declarations, one on implementation issues and the other one on TRIPS and public health. 2 Cited in Mehta (2003). 3 Rory McCarthy, ‘Football Ban Sends Child Workers into Worse Jobs’, Guardian, 25 April 2001. 4 According to an estimate by Finger and Schuler (2000), the minimum costs of customs reforms alone will be about $40 million in most developing countries. 5 This includes share of countries like South Korea, Taiwan and Hong Kong who can now be considered as developed country. 6 In any bidding going for the lowest-cost offer might save costs in the procurement itself but may involve some uncertainty and transaction costs. Kenneth Arrow (1969) argued that the existence of vertical integration implies that there can be situations where costs of transactions can be substantial. 7 For a detailed analysis of how dependence of suppliers with dedicated assets influences market outcomes, see Williamson (1975). 8 Pascal Lamy, ‘It’s All About Development’, Wall Street Journal, 17 July 2003. 9 See Kreps (1992) for a simple illustration of ‘prisoners’ dilemma’. 10 The penalty under the WTO dispute settlement is sanction-based. However, for example, if the United States imposes sanction on garment exporters of Sri Lanka, it might be disastrous for them but any sanction imposed by Sri Lanka on the US exporters can hardly have any impact. In fact, Sri Lanka may not afford to sanction imports from the United States, as they may be important machineries or other essential goods and services. WTO being a mercantilist body could consider restricting export of country could be a good punishment for a country.

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3 Liberalization of agricultural trade: path to development or chasing a mirage? 1 G20 is a coalition of developing countries on agriculture and the members are Argentina, Bolivia, Brazil, Chile, China, Cuba, Egypt, India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, Philippines, South Africa, Thailand, Tanzania, Uruguay, Venezuela and Zimbabwe. 2 Calculated from the data available with International Seed Federation (www.worldseed.org) (accessed 25 June 2006). 3 Morriset J., Unfair Trade? Empirical Evidence in World Commodity Markets over the Past 25 Years. Foreign Investment Advisory Services, 1997 (www.worldbank.org/ html/dec/Publications/Workpapers/WPS1800series/wps1815/wps1815.pdf) (accessed 20 June 2006). 4 ‘Commodities, Markets and Rural Development’, Roundtable Meeting organized by UNCTAD, 30 April 2003, New York (www.un.org/esa/coordination/ecosoc/ hl2003/RT7%20summary.pdf) (accessed 10 April 2006). 5 Adopted from Bill Vorley, ‘Food, Inc.: Corporate Concentration from Farm to Consumer’, UK Food Group, 2003, London (www.ukfg.org.uk/docs/UKFG-FoodincNov03.pdf) (accessed 25 March 2007). 6 In WTO terminology, subsidies in general are identified by ‘boxes’ which are given the colours of traffic lights: green (permitted), amber (slow down, i.e. be reduced) and red (forbidden). The Agriculture Agreement has no red box, although domestic support exceeding the reduction commitment levels in the amber box is prohibited. Any support that would normally be in the amber box is placed in the blue box if the support also requires farmers to limit production. The green box covers expenditures such as government programmes for research, infrastructure and building public food stocks, as well as specific kinds of direct payments to farmers, which are supposed to be de-linked from production. The amber box contains measures to support prices or subsidies directly related to production quantities. The blue box covers grants that are partially de-linked from production requirements. 7 India’s submission to WTO, 11 December 2000 (G/AG/NG/W/89). 8 They are Cuba, Dominican Republic, Honduras, Pakistan, Haiti, Nicaragua, Kenya, Uganda, Zimbabwe, Sri Lanka and El Salvador. 9 WTO Document G/NG/W/13. 4 Deepening of the GATS: need for cautious treading 1 In fact, these commitments are mostly by a few LDCs. 2 The latest growth in the share of developing countries has partly been due to a high rise in oil prices that benefited some of the developing countries. 3 As noted before, these estimates do not take into account the services delivered through Mode 3. 4 This issue is discussed in more detail in Chapter 7. 5 15 March 2002 (meanwhile extended without a specific end-date). 6 The other requesting members are Argentina, Brazil, Chile, China, Colombia, Dominican Republic, Egypt, Guatemala, Mexico, Morocco, Pakistan, Peru, Thailand and Uruguay. 7 See WTO Document TN/S/W/31 (www.wto.org) (accessed 15 April 2007). 8 The recipient members are the United States, EC, Canada, Japan, Korea, China, Malaysia, Philippines, Indonesia, Brazil, Argentina, Egypt, South Africa, Peru, Colombia, Uruguay, Brunei Darussalam, United Arab Emirates, Australia, Norway and Thailand. 9 The requesting members are Chile, Hong Kong China, India, Mexico, New Zealand, Pakistan, Switzerland, Singapore, Taiwan, Penghu, Kinmen and Matsu.

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10 A list of such sectors/sub-sectors has also been circulated with the request. List of sectors/sub-sectors where specific commitments in Modes 1 and 2 are sought broadly cover professional services; computer and related services (at two-digit level); real estate services; rental/leasing services without operators; other business services; telecommunication services; distributional services; environmental services; financial services; all insurance and insurance-related services; banking and other financial services; tourism and travel-related services; recreational, cultural and sporting services; and services auxiliary to all modes of transport. 11 The EU parted way with the United States by not joining the request on audiovisual services, in part due to sensitivities from France about the ‘cultural exception’ and the requests related to education, health and water for human consumption. On the other hand, the United States refrained from joining the request on air transport services and on maritime transport services, which benefits from a much-criticized, longstanding exemption under WTO rules. 12 For example, see Hoekman (2000), World Bank (2001b), McGuire (2002) and Lücke and Spinanger (2004). 5 WTO and trade facilitation: some implications 1 This chapter draws heavily from an article with the same title originally published in the Economic & Political Weekly, Vol. 38, No. 26, 2003; and another article titled, ‘Trade Facilitation: The Flip Side’, originally published in Centad (ed.), South Asian Yearbook of Trade and Development: Mainstreaming Development in Trade Negotiations – Run Up to Hong Kong, Centad, New Delhi, 2005. 2 WTO, ‘Doha Work Programme: Decision Adopted by the General Council of the WTO on 1 August 2004’, 2 August 2004 (WT/L/579). 3 Calculated and approximated on the basis of volume of global trade as reported in WTO (2001a). 4 The Santangelo Group, ‘Do Visa Delays Hurt US Business? – Survey Results and Analysis’, 2 June 2004 (www.nftc.org/default/visasurveyresults%20final.pdf) (accessed 25 July 2005). 5 WTO, ‘Overview of Trade Facilitation Work in 2002’ (G/C/W/363). 6 WTO, ‘APEC Workshop on the WTO Trade Facilitation Negotiations: Summary Report’, Communication from Australia and Malaysia, 18 March 2005 (TN/TF/ W/27). 7 A group of 77 countries from ACP regions. 8 According to an estimate by Finger and Schuler (2000), the minimum costs of customs reforms alone will be about $40 million in most developing countries. 9 See OECD (2001a) for a survey of such literature. 10 WTO, Communications from the EU (G/C/W/422), Korea (G/C/W/423) and Canada (G/C/W/424). 11 WTO, Communications from Canada (G/C/W/397), Colombia (G/C/W/425), the EU (G/C/W/394), Hong Kong (G/C/W/398), Japan (G/C/W/401), Korea (G/C/W/403) and the United States (G/C/W/425). 12 WTO, Communications from the EU (G/C/W/363), Japan (G/C/W/376), Korea (G/C/W/377), Canada (G/C/W/379) and the United States (G/C/W/384). 13 WTO, Communications from India and the United States (TN/TF/W/57). 14 ‘There shall be freedom of transit through the territory of each contracting party, via the routes most convenient for international transit, for traffic in transit to or from the territory of other contracting parties. No distinction shall be made which is based on the flag of vessels, the place of origin, departure, entry, exit or destination, or on any circumstances relating to the ownership of goods, of vessels or of other means of transport.’ 15 ‘All fees and charges of whatever character (other than import and export duties and

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20

21

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other than taxes within the purview of Article III) imposed by contracting parties on or in connection with importation or exportation shall be limited in amount to the approximate cost of services rendered and shall not represent an indirect protection to domestic products or a taxation of imports or exports for fiscal purposes.’ GATT, ‘United States Customs User Fee’, Report by the Panel adopted on 2 February 1988 (L/6264–35S/245). WTO, Communications from Australia and Canada, 16 March 2005 (TN/TF/W/19); Communications from the United States, 18 March 2005 (TN/TF/W/21). WTO, Communications from the European Communities and Australia, 17 March 2005 (TN/TF/W/23); Communications from Uganda and the United States, 18 March 2005 (TN/TF/W/22). NTBs are increasing rapidly, particularly in developed countries. In the EU, some 75 per cent of the value of intra-EU trade in goods are subject to technical regulations, while estimated 60 per cent or more of exports to the United States are subject to mandatory health, safety and related trade registration system (Patrick A. Messerlin and Jamel Zarrouk, ‘Trade Facilitation: Technical Regulation and Customs Procedures’, WTO–World Bank Conference on Developing Countries in a Millennium Round, 20–21 September 1999, Geneva). For example, The Global Competitiveness Report of the World Economic Forum considers 46 factor conditions that affect national business environment. Customs administration does not get a separate mention though it could be a small part of ‘hidden trade barriers’ and ‘favouritism in decisions of government officials’, two of these 46 factors. However, port infrastructure quality is one of these factors. For example, with their limited police force, if need to enforce IPRs as per TRIPS obligations, they might not be able to perform many other duties that they are supposed to do. Enforcing IPR in a developed country is not a problem as with their much higher income people there can pay the royalty charged by the IPR holders. However, in developing countries, people find it difficult to pay leading to greater violation of IPR laws.

6 Competition policy at the WTO: right diagnosis but wrong prescription 1 This categorization is borrowed from ‘Special Study on Trade and Competition Policy’ as included in Chapter 4 of WTO Annual Report for 1997. 2 South Korea has also successfully busted some cartels. However, for the purpose of this chapter, it is not considered as a developing country even though it is recognized as one as per the WTO classification. South Korea is now a member of the OECD and can reasonably be called a developed country. 3 As declared by the US Supreme Court in the famous Alcoa case (United States v. Aluminium Co. of America, 148 F.2nd 416, 1945), ‘any state may impose liabilities, even upon persons not within its allegiance, for the conduct outside its borders that has consequences within its borders which the state reprehends’. This principle has come to be known as ‘effects doctrine’. 4 Discussions in this section and the succeeding one draw heavily from CUTS (2003b), a briefing paper on ‘The Role of International Cooperation in Building an Effective Competition Regimes in Developing Countries’, written by the present author. 5 It may be noted here that generating actual cooperation on a desired scale may not be so easy even if cooperation agreements are signed particularly when an offending company is based in one country while the victim is another country and a situation of conflict of interests is created. Two countries may have a natural incentive to cooperate when both are victims while the offender is based in a third country. 6 According to OECD (1999a), positive comity means, ‘the principle that a country should (i) give full and sympathetic consideration to another country’s request that it

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open or expand a law enforcement proceeding in order to remedy conduct in its territory that is substantially and adversely affecting another country’s interest and (ii) take whatever remedial action it deems appropriate on a voluntary basis and in considering its ‘legitimate interests’. 7 Negative comity means, ‘that each party will at all stage in its enforcement activities, take into account the important interests of the other party’. 8 A procedural approach, such as in the Anglo-American legal system, involving active and unhindered parties contesting with each other to put forth a case before an independent decision-maker. 9 Under leniency programme if one of the conspirators come forward to provide significant information leading to prosecution, it is treated with leniency. 7 Multilateral framework on investment: much pain without gain! 1 The opposite movement of FDI and GFCF is difficult to explain but may indicate that there are crowding out effects. 2 For example, the Steering Group on Foreign Investment constituted by the Planning Commission of India (2002) had recommended that government should go for faster privatization and woo the foreign investors in the process. 3 For details, see Annex to Agreement on TRIMS (www.wto.org) (accessed 1 March 2007). 8 As if TRIPS was not enough 1 This chapter draws heavily from an article, ‘The WIPO Patent Agenda: As If TRIPS Was Not Enough’, Economic & Political Weekly, Vol. 39, No. 39 (2004), 4310–4314. 2 For instance, the adoption, in 1996, of the WIPO ‘Copyright Treaty’ and the ‘Performances and Phonograms Treaty’ in 1996. 3 Agreement on Trade, Development and Cooperation between EC and South Africa (1999), Article 46.1 Economic Partnership, Political Coordination and Cooperation Agreement between EC and Mexico (2000), Article 12.1. 4 Budapest Treaty obliges countries to recognize the physical deposit of a sample of a microorganism as disclosure of an invention for the purpose of patent protection. Full disclosure of an invention is a basic feature of any patent system, yet life forms are too complex to fully describe. Under Budapest, deposit fulfils the requirement for disclosure. 5 A brief but reasonably comprehensive account of TRIPS-plus obligations in US FTAs can be found in Carsten Fink and Patrick Reichenmiller (2005). 6 The Convention, adopted in 1883, has since been revised six times, in 1900, 1911, 1925, 1934, 1958 and 1967, and amended once in 1979. 7 International Union for the Protection of New Plant Varieties (UPOV) entails higher obligation than that under TRIPS. The recent WTO entrants, China, Kyrgyzstan and Cambodia had to join UPOV, whereas Nepal somehow managed to join the WTO without joining UPOV. 8 The process may include other elements, for example, the revision of the Budapest Treaty on the Deposit of Micro-organisms for the purpose of patent protection (GRAIN 2002). 9 See current status of ratification and/or accession to the PLT (www.wipo.int/ treaties/documents/english/word/u-page33.doc) (accessed 21 June 2005). 10 In its proposal, the United States stated that ‘from the perspective of potential users, the PCT is often criticized as being overly complex and unforgiving’. See (PCT/R/1/2). 11 Spain, for example, noted that the reform ‘should not encompass changes of a substantive nature’ (PCT/R/1/26, paragraph 30). Some countries expressed agreement

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14

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only with regard to streamlining and simplifying the current system (see, e.g. South Korea’s intervention, paragraph 35). See Article 27.1 of TRIPS. In a case with similar implications, State Street Bank vs Signature Financial Group (1998), the definition of protectable software was further expanded, and a software patent awarded on a data-processing system used in financial transactions was validated. The diplomatic conference for the revision of the European Patent Convention (Munich 20–29 November 2000) rejected (by 16 of 20 votes) the proposal to delete the prohibition to grant patents for computer programmes from Article 52(2)(c) of the convention. These articles allow members to exclude from patentability those inventions whose commercialization may offend morality or public order and to exclude plants and animals as well as essentially biological process to obtain them, respectively. This doctrine provides a conceptual framework to determine if a violation exists when there is no literal infringement of patent claims. Representatives of the following NGOs took part in the meeting in an observer capacity: American Bar Association (ABA), American Intellectual Property Law Association (AIPLA), Asian Patent Attorneys Association (APAA), Biotechnology Industry Organization (BIO), Chartered Institute of Patent Agents (CIPA), Committee of National Institutes of Patent Agents (CNIPA), Institute of Professional Representatives before the European Patent Office (EPI), Intellectual Property Institute of Canada (IPIC), Intellectual Property Owners Association (IPO), International Association for the Protection of Industrial Property (AIPPI), International Federation of Industrial Property Attorneys (FICPI), International Intellectual Property Society (IIPS), Max-Planck-Institute for Foreign and International Patent, Copyright and Competition Law (MPI), Trade Marks, Patents and Designs Federation (TMPDF), Union of European Practitioners in Industrial Property (UEPIP) and Union of Industrial and Employers’ Confederations of Europe (UNICE). See, e.g. paragraphs 28, 167, 170, 185 and 186, SCP/6/9. The proposal is available at www.iprsonline.org/resources/docs/Brazil Argentina_WIPO.pdf (accessed 10 May 2007). They include 14 developing countries: Argentina, Bolivia, Brazil, Cuba, the Dominican Republic, Ecuador, Egypt, Iran, Kenya, Peru, Sierra Leone, South Africa, Tanzania and Venezuela.

9 WTO and environment: think locally, act globally? 1 This chapter draws heavily from an article by the present author, ‘Trade and Environment: In Search of a Global Agenda’, GALT Update, March 2007, a newsletter from TERI, New Delhi. 2 WTO, The Doha Declaration Explained (www.wto.org/English/tratop_e/dda_e/ dohaexplained_e.htm) (accessed 10 October 2006). 3 Centad, ‘Doha Development Agenda: Some Frequently Asked Questions’, (www.centad.org/relatedinfo10.asp) (accessed 10 June 2007). 4 The issue may need careful examination. Subsidies may also discourage intercontinental trade. 5 www.whitehouse.gov/news/releases/2001/06/20010611-2.html (accessed 1 March 2007). 10 Resisting the expansion: experiences and possible implications 1 For example, Guy de Jonquières, in his article, ‘Cancun’s Failure Threatens End to Machiavellian Games’, observes: Sir Leon (now Lord) Brittan, EU trade commis-

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8 9 10 11 12 13 14 15

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sioner at the time, badly wanted to launch a new world trade round in the mid-1990s. But to do so, he had to overcome expected objections from France and other EU member states that feared trade liberalization would undermine Europe’s CAP. Leon’s advisers hit on a Machiavellian solution. As one explained later, ‘The trick was to come up with a negotiating agenda that the French thought other WTO members would reject. Then we would get our agenda accepted [by the rest of the WTO members] and call France’s bluff.’ The upshot was proposals for investment rules, competition, trade facilitation and transparency in government procurement. Also see Amorim (2003). ‘High-level Meet Called Again Before December 15’, Financial Express, New Delhi, 16 September 2003. WTO, ‘Singapore Issues: The Way Forward’, Joint Communication from Bangladesh (on behalf of the LDC Group), Botswana, China, Cuba, Egypt, India, Indonesia, Kenya, Malaysia, Nigeria, Philippines, Tanzania, Uganda, Venezuela, Zambia and Zimbabwe, 12 December 2003 (WT/GC/W/522). EU has a partnership agreement with a group of 77 least developed, landlocked and island states from Africa, Caribbean and Pacific (ACP) regions known as the Cotonou Agreement. Rules of origin are a requirement in all RTAs/PTAs to prevent non-members from taking advantages via entry into members, e.g. a country getting easy access into the US market through a bilateral agreement with Mexico which is a member of NAFTA. US State Department Press Releases and Documents, 28 April 2004. To quote an extreme reaction to such agreements, Oscar Campos, the head of CONNAROZ, the rice federation of Cost Rica, has described his country’s FTA with the United States in the CAFTA framework as, ‘The treaty is this: I screw you and you let me screw’ (In Costa Rica, it all boils down to rice, The Miami Herald, 8 February 2006). Costa Rica is also the only country that could not ratify CAFTA due to resistance from the agricultural sectors. Statement of Robert Zoellick, US Trade Representative-designate before the Committee on Finance, US Senate, 30 January 2001. The concepts of trade-creation and trade-diversion were first espoused by Jacob Viner in 1950. A detailed discussion on these issues can be found in Bhagwati et al. (1999). ‘High-level Meet Called Again Before December 15’, Financial Express, New Delhi, 16 September 2003. This is in the context of EU15 only and not the current membership that includes 12 more countries that are substantially behind the rest. EU has a partnership agreement with a group of 77 least developed, landlocked and island states from Africa, Caribbean and Pacific (ACP) regions known as the Cotonou Agreement. Though it should not be linked directly to stalled talks at the WTO as the initial discussions on the proposed EU–India started even before that. The July 2006 situation was repeated even in June 2007 when the so-called G4 meeting including the United States, the EU, Brazil and India failed to resolve the issue. Though essentially the Doha Agenda was shaped by the developed world, inclusion of some concerns of the developing countries, particularly the issue of TRIPS and public health, created an impression within the developing world that they emerged ‘victorious’.

11 Evolving a trade regime for development: some considerations 1 See, for example, Golden et al. (1993), Nguyen et al. (1993), OECD (1993) and GATT Secretariat (1993). 2 See Global Economic Prospects 2002 for a survey of such estimates.

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3 Incidentally, the Heckscher-Ohlin-Samuelson theorem of trade assumed that all countries in the world are equally capable in technological terms, but they choose different technologies only because of different relative factor endowments. So if Bangladesh is not producing robots, it is only because they are produced with a technology that is capital intensive, which is relatively scarce in Bangladesh! 4 For example, in a particular industry, there may be ten global brands, but in a particular national market, all of them may not be present. The incumbents may charge prices higher than the competitive price but not high enough to invite new entrants. Moreover, there could be costs of entry and the threat to reduce the prices at the competitive level by the incumbents. Thus, when a small economy opens up, some global firms may enter, but those who miss the first bus may not enter at all. 5 These have used well-accepted methodology widely in several studies based on the assumption that if the degree of competition were less in a market, firms would earn above-normal profits over a long period of time. 6 It is, however, not necessarily true that the developed countries have lower trade barriers. Surely, their tariff barriers are lower, but they have different types of NTBs. On the other hand, after the removal of quantitative restrictions under the UR, most developing countries hardly have any NTBs. Hence, one cannot rule out the possibility that the persistence of higher profits in developed markets is the reflection of the existence of higher NTBs. 7 Such a strategic trade policy has been strongly recommended by the Asia-Pacific Human Development Report 2006 (UNDP 2006). 8 Interestingly, the first dispute under the new WTO dispute settlement system, Malaysia – Prohibition of Imports of Polyethylene and Polypropylene (WT/DS1), related to this. Malaysia resorted to GATT Article XVIII:C as a reason to enforce import permit system on polyethylene. Although Singapore, the main affected party, filed a case at the WTO against this Malaysian practice, it later withdrew its complaint. 9 See Communication from India, dated 4 October 1999, titled, ‘Preparations for the 1999 Ministerial Conference: Proposals Regarding Article XVIII:A and C of the GATT 1994 in Terms of Paragraph 9(a)(i) of the Geneva Ministerial Declaration’ (WT/GC/W/363). 10 See WTO Document, ‘Compilation of Outstanding Implementation Issues Raised By Members’ (JOB(01)/152/Rev.1).

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Index

acquisitions 85, 104–6, 112, 159–60 Adhikari, R. 137 Adlung, R. 51, 54 African, Caribbean and Pacific (ACP) countries 66, 144, 145, 150, 151 Agosin, M. R. 105 Agreement on Agriculture (AoA) 38, 40–1 Agreement on Subsidies and Countervailing Measures (ASCM) 21–2, 116 agricultural trade: global product markets 85–6; growth and poverty reduction 41–2; issues at Doha Round 42–6; liberalization of 38–41; nature of production and trade 32–6; overview 2, 3–4, 31–2; subsidies 36–7, 138–9, 148, 151 agro-business companies 35, 37, 41 ‘aid for trade’ 166 Aizenman, J. 106–7 Akhavein, J. D. 104, 160 American Natural Soda Ash Corporation (ANSAC) 84–5 Amorim, C. 152 Amsden, A. H. 95 Amul Dairy, India 43 animal welfare 12 anti-competitive practices: control of 91; nature of 83–7; TNCs 85–6 anti-dumping 86, 97–8 Argentina 129, 130 Asia-Pacific Economic Cooperation (APEC) 69 Asia, FDI 106 Association of South East Asian Nations (ASEAN) 58 ATA Carnet for the Temporary Admission of Goods (ATA Convention) 1961 72–3 Australia 113, 139

Baldwin, R. E. 164 Banga, R. 52 Bangladesh 73, 74, 76 Barlow, N. 149 Baumert, K. A. 140 Baumol, W. J. 158 Beghin, J. S. 38 benefits: global trade rules 155–6; trade facilitation 5–6, 66–71 Berger, F. 161 Bhagwati, Jagdish 17, 146, 149, 157, 161 bilateral agreements, competition law 90 Bilateral Free Trade Agreements: spread of 146–7, 151–2; and TRIPS 120–3 Bilateral Investment Agreement Treaties (BITS) 107–8, 109–10, 111–12, 116–18, 140–1 binding rules 163–4 biodiversity 137–8 Birch, M. B. L. 110 Blair House agreements 31, 146 Bolivia 129, 130 Bouët, A. 156 Brazil 96, 105–6, 129, 130, 150 Brusick, P. 18, 97 Budapest Treaty (1977) 121, 124 business associations 76 business visas 62 Bustelo, P. 161 Cairns Group 44 Canada 72, 113 Cancun Ministerial Conference: agriculture issues 31; competition issues 21, 82; investment issues 101–2; trade issues 142, 143 capacity building 64, 65, 66, 78–9, 98–9 capital formation, effects of FDI 105 capital movement, services sector 51

188

Index

Caribbean Community (CARICOM) 58, 90 cartels 23, 84–5, 94, 95–6 Cattaui, M. L. 64 Central American Free Trade Agreement (CAFTA) 123 Cernat, L. 149, 151 Chandler, W. 140 Chandra Shekara, P. 43 Chang, Ha-Joon 132, 160 Charlton, A. 11, 23, 111 child labour 20 China 15, 140, 158, 161–3 Clarke, J. 83, 84, 96 climate change 139–40 coffee market 35–6 commercial presence 51, 56, 116 common agricultural policy (CAP) 37 Common Market for Eastern and Southern Africa (COMESA) 90, 149 comparative advantage theory 13, 157–9 competition agreements: effectiveness of 6; existing 90–1 competition authorities (CAs) 83, 87, 88, 91, 94, 98 competition policy: anti-competitive practices 83–7; and development 23; overview 82–3; regional/national level 165; role of international cooperation 88–90; WTO as forum for 91–9 competition, effects of liberalization 159 complementarity, trade 151–2 computable general equilibrium (CGE) model 155–6 Convention on Bio-Diversity (CBD) 137, 138 Correa, C. 22, 123 Cortes, P. 106 costs, trade facilitation 5–6, 66–71, 76–8, 79 Council for Trade in Goods 59, 64 Cullet, P. 138 Customs Valuation Agreement 74 customs: costs of reforms 76–8; efficiency 79–80; environment 66–8, 69, 70–1; fees and formalities 73–5; publication/administration of regulations 75–6 De, P. 53 development: and investment flows 110–12; liberalization as panacea for 3–4; overview 1–2, 11–12; trade linkage 12–16; trade regime for 154–66;

trading-off 17–25; WIPO agenda 129–30; WTO development agenda 27–30; WTO negotiating approach 25–7 Dhaka Declaration 29 dispute settlement: BTAs 147–8; competition disputes 96–7; environmental issues 135, 138, 139; investment issues 111–12, 113; services sector 51, 53; trade facilitation 68 Dixit, A. 161 Dobson, W. 49 documentation, imports/exports 74 Doha Declaration (2001): competition issues 21, 92, 93, 98; development issues 12; labour issues 19; service sector issues 54; on trade and investment 114–15, 116, 117; trade facilitation issues 66, 78–9 Doha Development Agenda (DDA) 11, 143 Doha Round (DR): agriculture negotiations 31, 42–6; environmental issues 135–6; and GATS 54–6; IPR issues 130–1; issues 27–8 Doha Work Programme 115; July Package 59, 64, 65, 78–9, 81 Dollar, D. 14, 71 domestic subsidies, agriculture 36, 44–5 Drahos, P. 120, 123, 124, 129 Draper, C. 67 Dubey, M. 17, 42, 45, 46, 166 Dubos, Rene 133 Dutz, M. 89 East African Community (EAC) 90 East Asian miracle 160–1 Eblen, R. A. and W. 133 Economic and Monetary Community of Central Africa (CEMAC) 90 Economic Community of West African States (ECOWAS) 149 economic gains, distribution of 157–8 economic growth 12–16, 156–60 economic partnership agreements (EPAs) 66, 145 economic performance and FDI 103–7 ‘effects doctrine’ 84–5 effective rate of protection 161 emerging concerns 144–52 endogenous growth theory 13–14 Energy Charter Treaty (ECT) 108, 111 environmental goods 136 environmental issues: existing anomalies 137–9; overview 8, 133–5; and RTAs

Index 189 140–1; status of 19–20; WTO proposals 135–7; see also climate change Environmental Kuznets Curve argument 134–5 environmental services 136–7 European BIT model 117 European Patent Law Organization (EPO) 125 European Union (EU): accession countries 150; agriculture issues 31–2, 42; competition issues 90, 94, 95, 96–7; development issues 23; environmental issues 138; trade agreements 120–1, 122, 144, 151; trade facilitation issues 64–6, 72, 73–4 Evenett, S. J. 24, 83, 84, 96 expansion, WTO: discussion 152–3; emerging concerns 144–52; overview 8–9, 142; stakes at Cancun 143 export cartels 84–5, 96 export fees and formalities 73–5 export subsidies, agriculture 36–7, 42–4 famines 39 fees, imports/exports 73–5 fertilizers 32–5, 37, 41, 138–9 financial support, trade facilitation measures 79 Findlay, S. 53 Finger, J. M. 39, 75, 76 ‘flying geese’ pattern of development 148–9 foreign direct investment (FDI): and BITs 107–8, 109–10; GATS as instrument for promoting 4–5, 22, 109; increase in 159–60; and MAIs 109–10; nature and impacts of flows 102–7; polluting industries 134–5; and TRIPS 110 formalities, imports/exports 73–5 Fox, E. 94 Frankel, J. 15 Free Trade Area of the Americas (FTAA) 147, 149–50 freedom of transit 61–2, 70, 72–3 G20 31–2, 42, 44, 45, 144 Gallagher, K. P. 110 GDP 14–16, 155, 156 General Agreement on Tariffs and Trade (GATT): Article V 61–2, 63, 64, 71, 76–8, 80; Article VIII 61–2, 63, 64, 71, 72, 73–5, 76–8, 80, 164; Article X 61–2, 63, 64, 71, 77–8, 80; core principles 92;

Industrial Pollution Control and International Trade (1971) 133; necessity for 156–7 General Agreement on Trade in Services (GATS): and developing countries 51–4; and Doha Round 54–6; effects of 18–19; as instrument for promotion of FDI 4–5; investment provisions 109; nature of commitments 49–51; overview 48–9; way ahead 56–8 Generalized System of Preferences (GSP) 20 Ghosh, J. 15–16 Glen, J. 159 Global Competitiveness Report 70 global environment industry 136–7 global initiatives, competition problems 90–1 global integration 156–60 global trade rules: estimation of benefits 155–6; exploration of options 160–6; integration/economic growth 156–60; overview 9–10 Gomory, R. E. 158 Gopakumar, K. M. 57 government procurement 24–5 greenfield FDI 87, 105–6 gross fixed capital formation (GFCF) 103–4 Grossman, G. 161 Haiti 13 Hall, R. E. 13, 68 Hallward-Driemeier, M. 110 Harbaugh, B. 135 hardcore cartels 23, 94, 95–6 Harrison, A. 15 Hausmann, R. 106 Havana Charter 82, 95 health insurance 50 Helleiner, G. 12 Hoekman, B. 49, 94, 95 Holmes, P. 89 Hong Kong 52, 73–4 Hong Kong Ministerial Conference: agriculture issues 31–2, 44, 45; trade issues 144–6 import cartels 23, 95–6 import competition, barriers to 86–7 import fees and formalities 73–5 import surges, developing countries 38–9 import-substituting industrialization 160–1

190

Index

India: agricultural issues 37, 39, 40–1, 42, 43; competition issues 84–5, 97–8; development issues 15; environmental issues 19–20, 136, 140; FTAs 150–1; investment issues 113, 114; protectionism 155; service sector issues 55, 57; trade facilitation issues 59, 71–2, 73, 74, 75; trade restrictions 164 industrial lobbying 37 infrastructure 39, 41–2, 66, 69, 70 inputs, agriculture 32–5, 37, 41, 139 institutional development 39, 41–2, 88–90 intellectual property rights (IPRs): Doha agenda 130–1; and market power 87; overview 2; rule making 7–8; and trade agreements 120–3; WIPO development agenda 129–30; WIPO Patent Agenda 125–9; WTO–WIPO linkage 124–5 international cartels 84, 95–6 International Centre for Settlement of Investment Disputes (ICSID) 53–4, 111–12 International Chamber of Commerce (ICC) 111–12 International Competition Network (ICN) 91 international cooperation, competition cases 88–90, 95–6 International Labour Organization (ILO) 19, 20 International Road Transport Union (IRU) 72–3 international trade discussions 62–6 International Union for the Protection of New Varieties of Plants (UPOV) 121, 125 Internet gambling case 53 interregional investment agreements 108–9 investment agreements, rights and responsibilities in 6–7 investment incentive activities 116 investment protection 140–1 investment: and competition 87; and development 21–3; development concerns 110–12; FDI flows and impacts 102–7; instruments for 107–9; overview 101–2; potential WTO Agreement and instruments 115–18; rights and responsibilities 6–7; WTO discussions 112–15 issues 1–3 Jacobs, S. 106 Jacquet, P. 49 Japan 39, 86, 87, 94

Jenny, F. 83 Jha, V. 39 Johansson, S. 104, 105 Johnson, Harry 157 Jones, A. 83 Jones, C. I. 13, 68 Kang, Nam-Hoon 104, 105 Karsenty, G. 52 Khemani, R. S. 89 Korea 52, 72, 73–4, 85, 160–1, 162–3 Kraay, A. 14, 71 Krugman, P. R. 160 Kumar, N. 22, 105 Kumar, P. 46 Kurtz, J. 141 Kyoto Convention 20, 63–4, 74, 80, 139–40 Kyoto Protocol 8, 20, 139–41 labour issues, status of 19–20 Lamy, Pascal 28 land productivity 32–4, 37, 138–9 Laplane, M. 106 Lardy, N. R. 163 Levenstein, M. 84 liberalization: agricultural trade 3–4, 38–41; benefits of 155–6; effects on competition 159; and growth 12–16; services sector 56–8 Lodha, R. 132 Lucenti, K. 64 Malhotra, K. 11 management techniques 75 Marchetti, J. A. 50, 56 market access (MA): agricultural trade 8, 45–6; and competition 93; environmental goods and services 138, 140; and global trade rules 166; new roads to 20–1; overview 1–2; service sector 49, 54–6; US 148 market distortions, agricultural goods 35 market power, global/export markets 84–6, 87 Marrakesh Agreement (1994) 133 Martinez, J. de Luna 56 Mattoo, A. 51 Maurer, A. 52 Mavroidis, P. C. 23, 94, 95, 98 Mayer, R. 105 Mediterranean Association Agreements (MED) 120, 122 Mehta, P. S. 19, 117

Index 191 Mencinger, J. 105 Mercado Comun del Sur (Mercosur) 9, 62, 90, 112, 144, 149–52 mergers 85, 104–6, 112, 159–60 Metalclad 140 Mexico: development issues 13; environmental issues 134 Microsoft 85 Millennium Development Goals 129 Millier, A. 149–50 Ministry of Economics, Trade and Industry (METI), Japan 69 Monopolies and Restrictive Trade Practices Commission (MRTPC) 84–5 monopolization 75, 85–7, 97 Mortimore, Michael 106 most-favoured nation (MFN) status 24, 49, 117, 123 movement of natural persons 4, 49–51, 55, 113multilateral agreements on investment (MAIs) 109–12 Multilateral Environmental Agreements (MEAs) 135–6 Multilateral Framework on Investment (MFI) 112–15 Multilateral Investment Guarantee Agency (MIGA) 53–4, 112 Naik, G. 39 Nanda, N. 23, 46, 59, 76, 132 national treatment (NT): BITs 117; competition 93; government procurement 24; investors 17–18; service sector 49, 51, 55; taxation and regulation 139; violations 164 negotiating approach, WTO 25–7 Negotiating Group on Trade Facilitation 71–2 Nepal 73 Neumayer, E. 110 Neven, D. 23, 98 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 124 New Zealand 139 Ng, F. 25 Niger 68 Nolff, M. 125, 126 non-tariff barriers (NTBs) 164–5 North American Free Trade Area (NAFTA) 110, 140–1 Nunnenkamp, P. 103, 106 Olarreaga, M. 25

Oliveira, G. 89 Organization for Economic Cooperation and Development (OECD) 36, 40, 91 Page, S. 11, 27 Pakistan 20, 113 Palley, T. 161 Panahariya, A. 31 Panel Report – US-Customer User Fee 73 parallel imports 123 Paris Convention for the Protection of Industrial Property 124, 125 Patent Agenda, WIPO 125–9 Patent Cooperation Treaty (PCT) 124, 125–7 Patent Law Treaty (PLT) 125–7 patentability: defining requirements 127; exclusions from 128 patents 123; infringement 127 Peru 67–8 pesticides 32–5, 37, 41, 138–9 plurilateral agreement on government procurement (GPA) 24 Polaski, S. 39 polluting industries 133–5 poverty 3–4, 41–2 Pradhan, J. P. 105 Prebisch, Raul 157 predatory pricing 86, 97 preferential trade agreements (PTAs) 142, 146–7 Primo Braga, C. A. 48 private traders 77–8 privatization programmes 105–6 procedural fairness obligation 94 processing times, customs 74 product standards 39–40 productive assets, ownership of 165 productivity, customs clearance 68 propensity to trade 15 protectionism 163–4: environmental policies as 8, 133–4; success of 160–1 Proudhon, P.-J. 159 public health 28, 138, 165 Puri, H. 18, 97 Pyakhuryal, B. 73 ‘race to the bottom’ hypothesis 111, 133–4, 137 Rajan, Raghuram 165 Ranjan, P. 45, 144 regional approach, competition policy 88–90 regional integration 161–3

192

Index

Regional Investment Agreements (RIAs) 108–9 regional trade agreements (RTAs): and environmental issues 140–1; spread of 146–52 regulatory environment 69 Reinert, E. 157 research and development (R&D) 35 Robinson, Joan 156 Rodriguez, F. 15 Rokrik, D. 13, 14, 15, 25, 26, 164 Romer, D. 15 Rose-Ackerman, S. 110 Roy, M. 54 Sachs, J. D. 15, 28 Salacuse, J. W. 110 Sampson, C. 58 Samuelson, P. 158, 161 Sanitary and Phytosanitary (SPS) measures 39, 40, 80 Santangelo Group 62 Sarti, F. 106 Sauve, P. 116 Sawhney, A. 136 Schuler, P. 39, 75, 76 Seattle Ministerial Conference 142 security issues 62 Sen, Amartya 39 services sector, investment restrictions 116; liberalization 56–8; market access 49, 54–6 Shin, Y. H. 68 ‘shrimp–turtle’ case 19–20 Sidorenko, A. 53 simulated free market 161 Singapore 52 Singapore issues 2, 115, 142, 144–5, 150–1 Singapore Ministerial Conference 21, 22, 64 Singer, Hans 157 Singh, A. 95 social issues 12 South–South RTAs 149 Southern African Development Community (SADC) 90, 149 Special & Differential Treatment (S&DT) 25–6, 38, 40–1, 65, 95, 150 special products (SPs) 45–6 special safeguard measures (SSMs) 45–6 Spess, L. 110 stagnation, costs of 160 Stewart, T. 110

Stiglitz, J. E. 11, 22–3, 111 structural flexibility, WTO 163–4 subsidies: agriculture 36–7, 38–40, 42–5, 138–9, 148, 151; clean technologies 135 Substantive Patent Law Treaty (SPLT) 125, 126–8, 130 Sufrin, B. 83 Sullivan, N. P. 110 supply side constraints 79 Suslow, V. 84 sustainable development 11–12 Swiss formula, tariff reduction 34 Syam, N. 57 Taiwan 52, 113, 160–1 tariff levels 14–15, 45–6, 163–4 technical assistance 64, 65, 66, 78–9, 89–90 Technical Barriers to Trade (TBTs) 39, 80 technology 35, 42, 127–8, 138, 151–2, 157–8, 161, 164 Telmex case 53 TIR Carnets (TIR Convention) 1975 72–3 Tobin, J. 110 trade agreements: and Cancun Ministerial Conference 143; discussion 152–3; emerging concerns 144–52; overview 142 trade and development 21–3 trade disputes 53–4 trade facilitation: costs and benefits 5–6; and development 23–4; discussion 78–81; implications for developing countries 66–8; at international fora 62–6; issues in 60–2; overview 1–2, 59–60; potential benefits 68–71; WTO proposals and expected gap 71–8 trade regulations: publication and administration of 75–6; as trade barriers 70 trade–development linkage 12–16 Trade-Related Aspects of Intellectual Property Rights (TRIPS): and competition 97; Doha agenda issues 130–1; effects of 17; and environmental issues 137–8, 165; and FTAs 120–3; and IPR 87 Trade-Related Investment Measures (TRIMS) 17–18, 92, 97, 101, 109 transnational corporations (TNCs): anticompetitive practices 82–3, 85–6; domestic control of 110–11; environmental issues 137 transparency 92

Index 193 tripartite agreements, competition law 90 Tybout, J. 159 United Nations (UN): Centre for TNCs 37; Conference on the Human Environment (1972) 133; Framework Convention on Climate Change (UNFCCC) 139–40; Set of Multilaterally Equitable Agreed Principles and Rules for the Control of RBPs 91; and TNCs 111; UNCTAD 35, 60, 68–9, 82, 91, 98 Uruguay Round: approach to tariff reduction 45; competition issues 92; development issues 17; estimation of benefits 155–6; investment issues 101; IPR issues 124; service sector issues 57 US Export Trading Company Act 84 US Trade and Tariffs Act 124 US Trade Representative (USTR) 84–5 US: agriculture issues 31–2, 36; BIT model 117; competition issues 84, 86, 87; environmental issues 19–20, 137–8, 139–40; investment issues 113; IPRs 124, 127–8; service sector issues 53; trade agreements 120, 121–2, 123, 144, 147–50, 151; trade facilitation issues 64–6, 68, 71–2; trade regime 25, 26 Vennet, R. 104, 160 Vernon, R. 158 Vietnam 13, 15 Vorley, Bill 36

Warner, A. 15 Weitenberg, S. 50 welfare effects 71, 156 Wilson, J. S. 69–71, 80 Witzel, M. 104, 160 Wood, S. 32–4 World Bank 38–9, 40, 79, 84 World Customs Organization (WCO) 62–4, 74, 80 World Intellectual Property Organization (WIPO): development agenda 129–30; patent agenda 125–9; WTO linkage 124–5 World Trade Organization (WTO): Agreement Establishing 11–12; definition of trade facilitation 61; development agenda 27–30; dispute settlement mechanism 51, 53, 68, 96–7, 135, 138, 139; environmental proposals 135–7; expansion of 142–53; as forum for competition agreement 91–9; investment agreements 109; negotiating approach 25–7; Reference Paper on Possible Modalities of Export Competition (2006) 43–4; structural flexibility 163–4; trade facilitation commitments/proposals 63, 71–8; WIPO linkage 124–5; Working Group on MFI 112–15 Zimbabwe 56 Zingales, Luigi 165 Zoellick, Robert 144, 147, 148