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WTO Agreements: Implications and Imbalances

This paper, by the former Director of UNCTAD's Trade Programmes, provides a critique of some of the imbalances existing in the Uruguay Round agreements, for the South countries. He argues that since these agreements were targetted to obtain commitments and concessions from the South, severe imbalances with adverse effects have resulted for the South. Thus, the South should aim to correct these imbalances and allow the WTO system to work for them.

by Bhagirath Lal Das


As one of the main objectives of the proponents of the Uruguay Round was to obtain commitments and concessions from developing countries, it is no surprise that the final result is heavily weighted towards fulfilment of that objective. Consequently, the contents of the agreements have severe imbalances with adverse implications for the interest of developing countries. Hence, an important aim of developing countries in the WTO should naturally be to try to correct these imbalances and make the WTO system more useful to them.

Without going into any deep analysis because of the limitations of space, this paper aims at listing out some of the obvious imbalances which may hinder full utilization of the system by the developing countries. The listing starts with the mechanism of enforcement of rights and obligations which has been hailed as a big achievement of the Uruguay Round, and then it goes on to the market access and the systemic issues of contingency actions and further, to sectoral issues and the "new" areas of services and intellectual property rights. Towards the end, an attempt has been made to list out fresh efforts at introducing new imbalances.

Enforcement of rights and obligations

Effective enforcement of rights and obligations, through an improved dispute settlement understanding, has been considered to be one of the major achievements of the Uruguay Round. Effectiveness has been enhanced and dilatory tactics have been curtailed by prescribing specific time schedules for various stages of the dispute settlement process and by near-automatic establishment of panels and adoption of panel reports.

The process is ideally suitable for disputes between the partners that are almost equally powerful. The system may prove less effective when a weak trading partner is to get redress against the omissions and commissions of strong trading partners. Some of the general deficiencies of the system as well as those arising from the weakness of a trading partner are being mentioned below:

(i) Under normal situations a Member with a grievance may have to wait for nearly two years to get any redress. Seven to nine months may pass before the report of the panel or the Appellate Body is available and is adopted. Thereafter, the Member that has been found to have done something wrong will have nearly fifteen months to implement the recommendations fully.

To get full relief in two years after having raised the issue would be considered a case of justice delayed by any standard. For weak trading partners like developing countries, such delayed relief may be sometimes totally infructous as their trade and economy would have suffered irreparable damage. Resilience of their industry and trade is comparatively low, therefore they may not be able to sustain the adverse impact of the wrong action of powerful trading partners for such a long time.

(ii) Even this delayed relief could be illusory for weak trading partners in some cases. The ultimate means of getting relief in the WTO framework is through retaliation against the erring trading partner. Normally, of course, the moral and political pressure would work to persuade the erring Member to take corrective action in accordance with the recommendations of the Dispute Settlement Body, but in real difficult cases, where the domestic compulsions of the erring Member renders the implementation of the recommendations difficult or inconvenient, it may drag its feet or even totally refuse to take corrective action. Considering the importance of such cases, these may be of great relevance to the affected Member.

In such a situation, the erring Member takes the risk of retaliatory action by the affected Member. Naturally, there will be more willingness to take such risks if the affected Member is not a strong or important trading partner. Clearly, developing countries are more likely to be exposed to such risks.

For an affected developing country it may be difficult for various reasons to take retaliatory measures. Politically, it may not be prudent to take action against a strong partner. Economically too, retaliation may not be convenient, as it has a cost.

Hence a weak trading partner, particularly a developing country, may sometimes find that the relief through the dispute settlement mechanism is not real and effective.

(iii) Time limits have been prescribed for the various stages of the dispute settlement process. Obligations in this regard have been laid on the Members, and in some cases on the panels and the Appellate Body.

But, in respect of panels and Appellate Body, apart from these provisions of time schedules being strongly persuasive and acting as a moral pressure, there is really no relief if these bodies fail to adhere to these schedules.

(iv) The most serious weakness introduced in the dispute settlement system, which has often remained unemphasized, is the severe curtailment of the role of panels in the disputes relating to anti-dumping. In such cases, the panels have been specifically restrained from pronouncing whether or not a measure is consistent with the obligations of the Member under the Agreement on Anti-dumping. The panels have merely to determine whether the establishment of the facts by the authorities has been proper and whether the evaluation of the facts has been unbiased and objective. Once these conditions have been established to exist, the actual evaluation of the authorities will not be challenged, even if the panel comes to a conclusion different from that of the authorities. Further, if the relevant provisions of the Agreement admit of more than one permissible interpretation, the panels must declare the measure in conformity with the Agreement, if it rests upon one of these permissible interpretations.

The curtailment of the role of panels in anti-dumping cases is particularly harmful to the developing countries, as these are the cases most predominant in the disputes involving them.

Further, a decision of the Ministerial Meeting in Marrakesh, says that this provision must be reviewed after a period of three years, with a view to considering the question whether it is capable of general application. Thus, there is a possibility of this provision being extended to other areas as well. If it actually takes place, it will make the whole dispute settlement process almost totally ineffective and infructous.

(v) For the past few years, the work of the panels has tended to be intensely technical. The panels have started going into fine points of law. It is fast becoming difficult for the authorities of developing countries to prepare their cases and make presentations before the panels with their own technical resources. This is particularly so when the other party involved is a developed country and information on details from that country is required to be collected and analyzed. Often, the authorities of the developing countries have to employ lawyers and other experts from developed countries, which proves very costly. In the case of very poor developing countries, the cost of taking a case to the panels may be totally prohibitive.

These problems suggest their own solutions. For example:

(i) There should be a provision for quicker relief against the encroachment of the rights of others and failure to meet one's obligations. Besides, there should also be a provision for compensation to the affected Member, by the erring Member for losses based on the duration for which the measure in question has remained operative. For calculating the quantum of compensation, the duration of the measure causing loss is relevant, rather than the time of initiating the dispute settlement process or the adoption of the panel report. The compensation could be in the form of some trade benefit or even in the form of cash payment.

(ii) If the erring Member fails to take the corrective action, the retaliation should not be left solely to be undertaken by the affected Member; rather there should be a joint action by all Members. Modalities for this purpose may be worked out. After all, GATT 1994 does provide for joint action by Members in certain circumstances. Alternatively, there may be a provision for financial compensation by the erring Member to the affected Member.

(iii) There should be some built in disincentive for the panel members to delay the process beyond the stipulated time limits. For example, one criterion for selecting the panel members could be the timeliness with which the panel gave its report.

(iv) The curtailment of the role of the panel in the anti-dumping cases should be completely eliminated. And there should be no question of extending this process to any other fields.

(v) The panels have the discretion to call for materials on their own. There should be a practice that in case a developing country, party to a dispute, makes out a case for the need of some materials relevant to the case, the panels should collect these materials and take them into consideration. Besides, there could also be a provision for the panels awarding costs to the affected developing countries which should be paid by the erring developed country.

Market access

It has been repeatedly emphasized on various occasions, that developed countries have reduced their tariffs significantly during the Uruguay Round. They have been credited with having reduced their trade weighted average tariff on industrial products by nearly 39 percent. As a matter of fact their trade weighted average tariff on industrial products has been reduced from 6.3 percent to 3.9 percent. From the angle of its impact on market access, all it means is that a product with a unit price of $100, will now cost $103.9, whereas it was costing $106.3 earlier. This is a more realistic description of the reduction than the assertion that the tariffs have been reduced by 39% on an average.

It is not only the developed countries that have reduced their tariffs. Some developing countries which had very high tariffs earlier, have significantly reduced their tariffs. For example, the trade weighted average tariff on industrial products has been reduced from 71.4% to 32.4% by India, from 40.7% to 27% by Brazil, from 34.9% to 24.9% by Chile, from 46.1% to 33.7% by Mexico, from 50% to 31.1% by Venezuela,and so on.

In respect of the developed countries, two points have to be particularly noted. First, their average tariff on goods from developing countries is relatively higher than those from developed countries. Besides, their tariffs are relatively high in products of export interest to developing countries, for example, textiles, clothing, leather goods and so on. Second, their tariff escalation continues to be high in spite of the commitments on various occasions to eliminate or reduce it.

Justification is often given by arguing that developing countries have too long enjoyed the fruits of the Most Favoured Nation (MFN) treatment given to them by the developing countries. But this is clearly a partial view. It cannot be overlooked that developing countries, in their development process, have absorbed vast quantities of the products of developed countries and have thereby supported their industrial production. This has been particularly evident during the periods of recession in the developed world. In all fairness, due credit has to be given to developing countries on this account. And thus, less attention to the products of their interest in the process of tariff reduction in developed countries is not justified.

Instead of putting the developing countries on the defensive in respect of the tariff reduction exercise, developed countries should indeed recognize their contribution and concentrate on further reducing the tariffs on the products of their interest. Besides, there is a need for significantly reducing the tariff escalation in the product chains of interest to developing countries. These countries are fully justified in asking for such action on the part of developed countries.

Contingency trade measures

We cover three areas under this heading, viz, safeguard, subsidies and dumping.

In these areas, significant improvements have been made, particularly by enhancing objectivity and by introducing de minimis clauses. However, it is clear that in the area of subsidies, it is the developing countries that have made significant concessions. Earlier, their subsidization was recognized as a tool in their development process: now, except for a few types of measures like freight subsidy, they are generally debarred from using subsidy as a tool of development.

In these three areas some of the points needing further improvements are listed below:

Safeguard

It is clear that the new Agreement on Safeguard does not permit targeting a country or a set of countries for safeguard action; any such action has to be taken on a global basis. However, in respect of allocation of the share of the global quota, there is a provision for deviation from the normal practice in special circumstances. There is a fear that this enabling provision may be used to reduce the quota of developing countries. Special care needs being exercised to ensure that this provision is not used in a discriminatory manner, putting developing countries to disadvantage.

One has to be careful, particularly in the initial period when practices develop into accepted interpretations.

It may be desirable to develop some clear criteria for the conditions and extent of departure from the normal practice of allocation of the share of the global quota.

In safeguard, developing countries have the benefit of some de minimis provisions. However, it is not clear how it will operate. For example, if a Member takes to tariff type measures as safeguard, it is not clear how a developing country falling within the de minimis provision will be excluded from the higher tariff or charge. On the other hand, if quantitative restriction is adopted as a safeguard measure, again it is not clear whether a developing country falling within the de minimis provision will be totally excluded from the restrictions of export of that product into that Member country.

Considering that the de minimis provision excludes developing countries falling within such provision from the safeguard action, it is desirable to stipulate clearly that neither the higher tariff nor any limits to export will apply to such countries.

Subsidies

Subsidies which are commonly practised in developed countries, for example, those for research and development, for development of comparatively more backward regions and for adoption of environmental-friendly technologies, have all been included in the list of non-actionable subsidies. However, those types of subsidies which developing countries generally apply in the process of industrialization and development, have been generally excluded.

The industrial and trading firms of developing countries suffer from natural handicaps, as very often they do not have the advantage of large scale operations, availability of technology and finance, entry into international networking in the relevant sector and similar other facilities which their competitors in the developed world have. Therefore, it is sometimes necessary for developing countries to provide subsidies to them so that there is diversification and upgradation of production and entry into new markets. These needs have been almost totally ignored in the Agreement on Subsidies.

It appears desirable to recognize these needs, as it had been done earlier and as it has been done in the case of the subsidy practices of developed countries. Subsidies in developing countries for upgradation and diversification of production, for absorption and adaptation of higher technologies and for entry into new markets should be treated as non-actionable.

Of course, some special provisions have been made for countries having per capita income up to US$1,000. But in this case, too, some improvements need being done. For example, a country crossing this limit is excluded from the benefit almost immediately. The rise in income might in some cases be a temporary phenomenon and not a structural feature. Hence, there should be a provision for exclusion, only when a country has higher per capita income over a few years.

There is a provision of exclusion when a country achieves export competitiveness continuously for two years, but there is no provision for automatic inclusion of a country in this category once the per capita income goes down below this critical level. The automatic inclusion should be provided for.

Dumping

The provisions of the Agreement on Anti-dumping have become very complex in the process of this agreement, adopting the practices followed by major developed countries in this area. Very often, the calculation of the cost of production and other expenses is involved in preparing the case on either side. For a developing country, it is very difficult to collect this information from developed countries. The authorities and the trade and industry in developing countries are not well equipped to locate the sources of such information in developed countries and collect them. Very often the services of law firms of these developed countries have to be employed and it becomes a very costly process.

In fact, considering the vast difference in the resources of the developed countries and developing countries, the process of anti-dumping enquiries, both at the importing end and the exporting end, becomes very much tilted against the developing countries, except if they are prepared to send enormous amounts for collection of materials from developed countries and engaging some law firms of those countries.

The only way out is to have very simple procedures, of course taking care that the process does not become too subjective.

The most serious problem in the area of anti-dumping, is the exclusion of this subject from the normal dispute settlement process as it has been explained above while discussing the enforcement of rights and obligations. There is a need to bring this subject into the folds of the common dispute settlement process.

Specific sectors

We take up for consideration two specific sectors for which there are specific agreements, viz., agriculture and textiles. There has been a significant progress in bringing agriculture within the general discipline of GATT 1994. Specific commitments have been undertaken by governments in respect of reducing their import restraints, domestic support and export subsidy. In textiles, an important commitment has been to end the Multi-Fibre Agreement (MFA) with the coming into force of the WTO Agreement and thereafter, to bring this sector in the folds of general rules of GATT 1994 by the beginning of 2005. The special arrangement in this sector, in derogation to general rules of GATT 1994, had continued for nearly a quarter of a century; hence its final demise is an important event in international relations.

However, these two agreements have left in their trail a number of problems, some of which are described below.

Agriculture

(i) The countries which have been maintaining import restraints, domestic support and export subsidy have been obliged to reduce these measures to some extent during the implementation period. Substantial portions of the measures will, however, continue in these countries. But the countries which did not have such measures in the past are prohibited from introducing such measures beyond the de minimis levels. This appears patently unfair in the sense that those maintaining import restraint, domestic support and export subsidy in the past, are allowed to continue with them although at reduced levels, but others are prohibited from undertaking such measures in future.

(ii) The agreement is naturally based on the assumption that totally free movement of agricultural products across borders is the most ideal condition. The underlying influence is that it is desirable for a country to import food from other countries if it is cheap compared to its own cost of production. This principle may perhaps be valid for most of the developed countries which have enough of foreign exchange all the time to import whatever they want. But most of the developing countries are short of foreign exchange most of the time. If they depend for their food on import, their population may have to starve sometimes, as they may not have enough foreign exchange to buy food abroad. Such countries may consider it wise to grow their own food as far as possible, even if it is more costly than the food available in some other countries. The food production has too much social and human compulsions associated with it than can be tackled by pure economic considerations.

And yet the agreement in this sector aims at abolishing all support for food production and all restraints on the import of food items from outside. This will particularly affect the developing countries with chronic problems of availability of adequate foreign exchange for their imports.

(iii) Another special feature in many developing countries is that agriculture is not considered a commercial activity. Farmers take to agriculture sometimes because they have land and there is nothing else for them to do. Some of them take to agriculture as purely a subsistence exercise. It will be extremely difficult to harmonize these special characteristics with purely commercial and price considerations which are the underlying principles in this agreement.

(iv) The problems of net food importing countries have been recognized, and yet there is no concrete mechanism for tackling this problem in the agreement.

(v) In the process of tariffication, several countries, particularly some major trading countries have overvalued the tariff equivalents of their non-tariff measures, with the result that their base levels of total tariffs have been recorded at very high levels.

These problems have to be given serious consideration. Of course, these may be raised during the review process; but it may be preferable to start with some of them even before that time.

Textiles

The main problem here is the process of liberalization in accordance with the provisions of the agreement. Several major developed countries have claimed to fulfil their obligation of liberalization without actually liberalizing the items under restraint. They have taken shelter under strictly technical interpretation of the agreement without giving any consideration to the spirit of the agreement. An immediate review of the implementation is needed to decide on a revised schedule of liberalization by major importing developed countries.

Recent experience has shown that the Textile Monitoring Body (TMB) has not proved quite effective in checking unreasonable use of the transitional safeguard mechanism. In one case the TMB failed to make its conclusion, even though the agreement makes it obligatory on this body to give its finding on the measures undertaken by Members and brought before this body for examination.

This agreement has an unusual clause of sectoral balance of rights and obligations. Generally, GATT 1994 works on the principle of overall balance, but an exception to this principle has found its place in this agreement. And there again, measures in the nature of penalty have been prescribed hitting only developing exporting countries. There is no mention of any explicit penalty for importing developed countries if they fail to abide by their obligations.

Services

It is basically a framework agreement within which countries undertake obligations for liberalizing their services sectors.

One obvious imbalance in this agreement is the treatment of labour and capital. There is a specific provision for allowing cross-border movement of capital, if such movement is an essential part of the market access commitment or if a commercial presence is involved. However, there is no explicit provision on the movement of persons on similar lines.

In respect of developing countries, the agreement makes it clear that their participation in the world trade must be facilitated through appropriate negotiated specific commitments. However, in actual practice, this provision has not been much respected. For example, in the negotiations on financial services, some major developed countries insisted on very high levels of commitments from some developing countries which they were in no position to offer.

In fact, the process of sector by sector negotiation is basically flawed. The interests of various countries may not converge in the same sector. The process of give and take will be much smoother if negotiations are undertaken in a large number of sectors at the same time, so that a country may be able to offer concession in some sector for receiving concessions in some other sectors. Based on the difficulties experienced in the sectoral negotiations so far, there is a clear case for a rethinking on this issue.

TRIPs

The basic imbalance in this agreement lies in the fact that it provides for minimum protection levels for the holders of intellectual property rights (IPRs). There is hardly much concern explicitly shown in the agreement for the users of the intellectual property. A balance can be attempted by countries in their legislations within the limits of the discretion allowed in the agreement.

New Issues

Further imbalances are likely to occur in the WTO Agreements through the introduction of new issues. For example:

(i) the proposed agreement on investment seeks to ensure free entry of investors in a country without any concern for the needs and priorities of the host countries;

(ii) some proposals in the area of environment seek to justify trade restrictions without adequate objective examination in the framework of GATT 1994;

(iii) the proposals on social clauses are thinly veiled attempts to neutralize the advantage of developing countries in respect of their low labour costs, totally forgetting that there is no means of neutralizing the advantages of the developed countries in the form of cheaper and easier availability of capital, access to high technology and highly developed infrastructure and networks;

(iv) the consideration of competition policies may be targeted at clipping the wings of comparatively stronger firms in developing countries so that they do not stand in competition with the well established firms of developed countries;

(v) the consideration of corruption may be aimed at attacking the credibility of the authorities and institutions of developing countries.

Conclusion

This illustrative list of problems in the existing agreements in the WTO suggests that the review process in the successive ministerial meetings for a few years, can remain busy with tackling them and finding out solutions. In fact, these and similar other relevant problems should be listed out to form the agenda for the ministerial meetings. The recent experience has shown that these issues of the existing agreements are more likely to be ignored and further fresh issues are likely to keep the ministerial meetings busy. This trend can be changed only by a concerted action of a group of developing countries that find their interests ignored in the WTO.

(The author was formerly India's Ambassador and Permanent Representative to GATT. Subsequently, he was Director of International Trade Programmes in UNCTAD. The above paper was presented by him at the TWN Seminar on "The WTO and Developing Countries", 10-11 September 1996.)

 

 

 

 


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