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Why developing countries cannot afford new issues
in the WTO Seattle Conference


In a speech to the 9th Ministerial Meeting of the Group of 77
at Marrakech on 16 September 1999, Martin Khor, the Director
of Third World Network, called for a rethink on trade
liberalisation and its effects. We reproduce below the full
text of his speech.




WE meet in the shadow of the global financial crisis as well
as the shadow of the forthcoming Seattle World Trade
Organisation (WTO) Conference. It is thus urgent and timely
to examine and re-examine what is the right approach
developing countries should take towards integration in the
world economy, and to liberalisation of trade, finance and
investment.

On financial liberalisation, there are new lessons to be
learnt from the recent events. It is now clear that financial
liberalisation, especially when done inappropriately, was the
main cause of the East Asian economic crisis. Many of the
affected countries, which had been in the forefront among
countries of the South in global economic integration, are now
cautious and reviewing their approach to financial openness.

In Malaysia, for example, a fixed exchange rate system was
established (to prevent fluctuations and enable flexibility of
options for monetary and fiscal policies). Also, selective
exchange controls were introduced to protect the financial
system from currency and financial speculation and from the
negative effects of short-term 'hot' capital flows. Even the
original critics admit these moves have helped stabilise the
economy. There are good lessons to be learnt both from the
financial crisis and from the Malaysian experiment.

On trade liberalisation, the issue is even more complex. There
is a strong paradox or contradiction in the manner developing
countries in general and many scholars take towards this
issue. On the one hand, it is almost invariably repeated that
'we are committed to trade liberalisation which is positive
for and essential to growth and development.' On the other
hand, many developing countries also notice and are now
actively complaining that trade liberalisation has net
negative results for their economies, or has marginalised
them.

A clear explanation of why trade liberalisation often leads to
negative results is found in the UN Conference on Trade and
Development's (UNCTAD) Trade and Development Report 1999. It
focuses on the behaviour and balance between imports and
exports, and finds that rapid trade liberalisation has
contributed to the widening of the trade deficit in developing
countries in general. The report finds that rapid trade
liberalisation led to a sharp increase in imports but that
exports failed to keep pace. For developing countries
(excluding China), the average trade deficit in the 1990s is
higher than in the 1970s by 3 percentage points of GDP while
the average growth rate is lower by 2 percentage points.

This latest important UNCTAD finding corresponds with several
new studies that show there is no automatic correlation
between trade liberalisation and growth. Countries that
rapidly liberalised their imports did not necessarily grow
faster than those that liberalised more gradually.

The problem in trade liberalisation is that a country can
control how fast to liberalise its imports (and thus increase
the inflow of products) but cannot determine by itself how
fast its exports grow. Export growth partly depends on the
prices of the existing exported products (and developing
countries have suffered from serious declines in their terms
of trade) and also on having or developing the infrastructure,
human and enterprise capacity for new exports (which is a
long-term process and not easily achieved).

It also depends on whether there is market access especially
in developed countries. Herein lies a major problem beyond
the control of the South, for as is well known there are many
tariff and non-tariff barriers in the North to the potential
exports of developing countries. Unless these barriers are
removed, the South's export potential will not be realised.
Thus, trade liberalisation can (and often does) cause imports
to surge without a corresponding surge in exports. This can
cause the widening of trade deficits, deterioration in the
balance of payments and the continuation or worsening of
external debt, all of which constrain growth prospects and
often result in persistent stagnation or recession.

This should lead us to conclude that trade liberalisation
should not be pursued automatically or rapidly and in a 'big
bang' manner. Rather, what is important is the quality,
timing, sequencing and scope of liberalisation (especially
import liberalisation), and how the process is accompanied by
(or preceded by) other factors such as the strengthening of
local enterprises and farms, human resource and technological
development, as well as the build-up of export capacity and
markets.

Developing countries must have the ability, freedom and
flexibility to make strategic choices in finance, trade and
investment policies, where they can decide on the rate and
scope of liberalisation and combine this appropriately with
the defence of local firms and farms.

The need to review and amend the WTO agreements

This conclusion has profound implications for the WTO
negotiations. As has been discussed at this Ministerial
Meeting, the Uruguay Round has caused serious problems for
developing countries. The next stage of negotiations must
address these problems which arise from shortcomings and
deficiencies as well as imbalances in agreements that curtail
the ability of developing countries to make necessary and
strategic economic choices.

As the Chairman of the G77 has said, the next stage of the WTO
negotiations should be about the three Rs, to review, repair
and reform the WTO agreements and system. This is necessary
now in order to avoid further damage to developing countries.

Firstly, the developed countries must implement their
commitments in areas which they made to the developing
countries, and which up to now they have not implemented
satisfactorily, thus giving rise to the justified charge that
developing countries have been shortchanged and have not
benefited from the Uruguay Round. This is in areas such as
phasing out of the Multi-Fibre Arrangement, reducing their
agriculture export subsidies and high tariffs, restraining
the abuse of anti-dumping measures, and implementation of the
provisions on special and differential (S and D) treatment for
developing countries.

Secondly and perhaps even more importantly, developing
countries should be allowed to lead the WTO to carry out a
comprehensive review of the various agreements to offset the
imbalances in them and the negative effects they have on
development. For example:

* There should be a review of the Agriculture Agreement from
the viewpoint of food security and rural livelihoods in
developing countries, as most of these countries depend on
small-scale agriculture for employing a large sector of their
population and to contribute to food self-sufficiency. As part
of S and D treatment, in developing countries, food produced
for domestic consumption and the products of small farmers
should be exempted from the disciplines of import
liberalisation and domestic support.

* In the Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS), in order to retain the integrity of
the patent system that prohibits the grant of patents for
discoveries, and to prevent the increasing and unjustifiable
practice of biopiracy (in which biological materials from the
South and the traditional knowledge of their use are being
appropriated through patenting), Article 27.3(b) should be
reviewed and amended so that all life forms are prohibited
from being patented. Also, in conformity with the Biodiversity
Convention, it should be clarified that the sui generis system
for the protection of plant varieties (in the same Article)
can include national laws that protect the traditional
knowledge of local communities.

* In the Agreement on Trade-Related Investment Measures
(TRIMs), the review should enable developing countries to be
exempted from the prohibition of local content requirements as
well as the foreign-exchange balancing requirement (i.e.
whereby a permissible level of imports of an enterprise is
linked to its exports). This is in recognition of the need of
developing countries for such measures on development grounds
(e.g. the need to build the capacity of domestic firms,
generate multiplier effects for the domestic economy, conserve
foreign exchange and avoid excessive foreign debt).

The need to avoid new issues in the WTO

These are only a few examples of the changes required to the
many existing WTO agreement, changes that are needed to enable
the survival and development of the domestic food-farming and
industrial sectors of developing countries. Surely the WTO
agreements were not meant to, and thus should not, render the
South's domestic firms, farms and economy unviable and
condemned to oblivion.

The review of implementation problems and the process of
initiating the necessary changes in the agreements will not
have a chance of being properly carried out if there is a
proliferation of new issues in a new round. The extremely
limited human, technical and financial resources of developing
countries and their diplomats and policy-makers would be
diverted away from the review process to defending their
interests in the negotiations on new issues. The limited time
of the WTO would also be mainly engaged in the new issues.
There will be little time for examining, reviewing and
improving the existing agreements, and the problems arising
from their implementation will increase through time and
accumulate, and manifest themselves in social and economic
dislocation and political instability in many countries.

If this is not enough, most of the proposed new issues would
also have the most serious consequences for the South's future
development. These issues do not belong in the WTO (which is
supposed to be a trade organisation) in the first place. They
are sought to be placed there by the developed countries to
take advantage of the enforcement capability (the dispute
settlement system) of the WTO, so that disciplines can be
effectively put on developing countries to open their
economies to the goods, services and companies of the
developed countries.

Developing countries should therefore oppose the injection of
these new areas into the WTO. The following is an examination
of four of the proposed 'new issues'.

(i) Investment issue


The proposal to negotiate an investment agreement would
convert the WTO from a trade organisation to one also dealing
with a different area, i.e. investment policy. The present
rights of developing countries (as hosts) to regulate the
entry, conditions and operations of foreign firms would be
severely restricted. Performance requirements, investment
incentives, regulation of inflow and outflow of funds,
preferences in many areas to local firms and citizens, would
be curtailed.

Due to widespread opposition to the original OECD-MAI-type
model (that was also earlier proposed in the WTO), a
watered-down version is now being put forward to make the
investment issue more palatable as an entry point. However,
there is no doubt that once an investment agreement is in
place, even if it is initially a 'diluted' version, pressures
will continuously be put on developing countries to
liberalise, and to curtail their ability to regulate in favour
of local firms or to place conditions or obligations on
foreign firms. Eventually the viability or development of
local firms (and farms) will be threatened.

Given the seriousness of the whole issue, the investment
working group should continue its discussions, and the WTO
should not initiate negotiations for an agreement in Seattle.

(ii) Transparency in government procurement


The proposal to initiate negotiations for an agreement (or
even to already conclude an agreement) on transparency in
government procurement at Seattle is also detrimental to the
South. Up to now, government procurement decisions are
exempted from multilateral GATT disciplines. By right, states
in developing countries have the freedom and option to spend
according to their own criteria and development objectives,
and preference for local firms is a practice in most
countries.

It is argued by the proponents that there is no harm (and
every benefit) to developing countries to have greater
transparency and reduce corruption and that market access is
not part of the proposed agreement. In itself, greater
transparency is good. However, in the WTO context, there is
no escaping the link between transparency and market access
for foreign firms, and when this is also linked to the dispute
settlement system, there will be many problems for developing
countries.

More importantly, it is well known through earlier papers
submitted to the WTO that the real aim of the major countries
is the full integration of government procurement (especially
market access and national treatment for foreign firms) in the
WTO. The transparency agreement would be only phase one.
Once procurement enters the WTO in this 'innocent guise', the
real issues of access and national treatment are bound to
quickly follow.

Developing countries should therefore reject the
'multilateralis-ation' of the procurement issue, since once
the concept of procurement makes an entrance into the
multilateral trading system, even in a limited form, the full
body will eventually follow inside through further intense
pressures. The consequences for developing countries will be
tremendous as governments would largely lose perhaps their
most important direct instrument for achieving social,
economic and developmental goals.

They should therefore not agree to sign an agreement (or to
negotiate an agreement) even on transparency. Instead, the
whole issue should continue to be studied in the relevant
working group until it is clear what the ultimate intentions
of the major countries are and what the development
implications are of integration of procurement into the WTO
system.

(iii) Competition policy


On the competition issue, it is clear that the major
proponents of a WTO agreement on competition policy would like
to use it as another tool to gain market access to developing
countries which are held to have too many practices and
policies that favour local firms and thus work against foreign
firms. Through a WTO agreement, developing countries would
have to establish competition policies that discipline state
enterprises and the practices of local firms; preferential
treatment for local firms would also be curbed, in order that
foreign enterprises can compete 'on equal terms' as locals.
The likely end result is that the smaller local firms will be
rendered uncompetitive as any advantages they have left would
be largely removed, and large foreign firms or their products
would have a greater monopolistic share of local markets.

Many developing countries have perspectives that are different
from the above. They would like the restrictive business
practices of large multinationals to be curbed and the trend
of mergers of giant banks and corporations to be reversed.
They also want the abuse of anti-dumping and other trade
measures in the North to be stopped, as this is
anti-competitive against imports from the South. But the
major countries do not share these concerns.

Due to the complexities of the issues and their importance, it
is unclear how competition policy should be treated in the
WTO. The competition working group should thus continue its
discussions. Seattle should not launch any negotiations for
an agreement.

(iv) Industrial tariffs


The proposal for a new round of industrial tariff cuts would
place great pressure on the developing countries'
manufacturing sector. Since their industrial tariffs are
generally higher than the rates in developed countries, it is
the developing countries that will be asked to make more
concessions overall in any such exercise.

Firstly, this is unfair because the developing countries have
already liberalised at a faster rate generally in recent
years. Also, the developed countries have yet to bring down
their high barriers in textiles and clothing, or in
agriculture, despite having been given waivers for four to
five decades. Their need to continue such very long-term
protection demonstrates that developing countries (that have
much weaker economies and a much shorter time since
independence to build their own capacities) have an even much
greater need to protect their local industries.

It is argued that many developing countries have already
reduced their industrial tariffs, mainly under IMF-World Bank
loan conditionality. However, they are still able to have
industrial policies and in future may decide to selectively
increase tariffs on some selected products which may be chosen
for domestic development. This policy option would be closed
should a new round of industrial tariff cuts cause these
countries to bind their tariff rates at lower and lower
levels.

In many developing countries, there has already been a
deindustri-alisation process in which the lowering of tariffs
leads to imports displacing local industries. Moreover, as
earlier mentioned, the UNCTAD Trade and Development Report
points out that for many developing countries, rapid import
liberalisation led to a high increase in imports that was not
matched by export growth, thus causing a widening of trade
deficits and balance-of-payments difficulties which in turn
placed constraints on growth.

In light of the above, it would be wrong for developing
countries to agree now to another round of industrial tariff
liberalisation. To correct the present imbalances, and show
their sincerity, the developed countries should instead pledge
at Seattle to reduce or eliminate their industrial tariff
peaks and escalation, without asking the developing countries
to engage in another round of industrial tariff cuts.

Conclusion

The next few months before and at Seattle are crucial for the
future of developing countries. The developing countries,
which after all are the majority, can shape the WTO to be a
pro-development organisation, or we can continue to give in to
the pressures from the major developed countries which want to
make use of the WTO's enforcement system of trade sanctions to
shape the world according to their interests.

We may be unhappy and frustrated with the approach of the
North and with the status quo but feelings or even expressions
of unhappiness and frustration are insufficient. The
situation must urgently be corrected. Developing countries
must unite and persuade first ourselves and then the developed
countries that this is the time to review the WTO and not to
expand its scope further until the review is done and the
imbalances and deficiencies are corrected. New issues should
not enter until the reform is completed.

The task in the months ahead is great and we must be up to it
as the future of our people is at stake. - (Oct/Nov 99)

 


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