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Why we should oppose a new WTO Round

As preparatory moves get under way for the Ministerial Conference of the World Trade Organisation (WTO) at Seattle in November-December, developed nations led by the European Union are setting the stage for a new Round of trade negotiations which will have a crucial impact on the economies of the South. Setting out some of the key issues which are being pushed by these rich countries on to the agenda of the Seattle Conference, Martin Khor explains why it is of vital importance for the countries of the South to resist this latest drive to compel them to liberalise their economies.


1. RECENT DEVELOPMENTS IN THE WTO

'Globalisation' was given a bad name by the Asian financial crisis, which spread to other parts of the world, including Russia and Brazil. It is (or should be) clear that there are great risks for developing countries when they liberalise their economies too fast, or in ways and sectors for which they are unprepared.

When a country opens up its financial sector before it fully understands the risks involved, it can be subjected to speculative attacks and financial instability. Similarly, there can also be social and economic dislocation when a developing country is asked to open its economy to free trade or investment flows across the board when its local firms and farms are not ready to compete with international giant corporations.

Yet before the full lessons of how to manage the interface between the domestic and external economies are digested, pressures are once again building up to get developing countries to open up even more to the big companies of the industrial countries.

The forum for these pressures is the World Trade Organisation, which will be holding its third Ministerial Meeting in Seattle (United States) on 30 November to 3 December 1999. The European Union, backed by Japan, Canada and other developed nations, have announced they want to launch a new comprehensive 'Round' of trade negotiations at this meeting.

They hope that in such a Round, several issues will be made the subject of negotiations for new multilateral Agreements that will be legally binding on WTO members. For example, the Uruguay Round (1986-94) concluded with many new Agreements covering services, agriculture, intellectual property rights, investment measures and other issues. It also created the WTO to replace the old GATT (General Agreement on Tariffs and Trade).

Deep fear

The developing countries were then generally against these new issues entering the trade system, as the Agreements legally oblige them to change their national policies and laws so as to open up their economies further to foreign goods, services and companies. Since the farmers and local firms are generally small and lack the technology or marketing skills, they are unable to fairly compete with the big companies of the West or Japan.

There is a deep fear that when these existing Agreements are implemented (after a grace period of five years or so), the developing countries will face many of problems. Cheaper goods or services may swamp the market, replacing what is locally made. Bigger foreign firms with the latest technology or with marketing outreach will increasingly take more market share away from the local sector. This may well cause retrenchment and dislocation, especially in the less developed of the Third World countries. The least developed countries are understandably the most worried.

Even before these problems arising from the Uruguay Round have been understood (let alone dealt with), the big companies are once again pushing their governments to open up yet more areas in the developing countries for them to enter.

The European Union therefore proposed launching a new Round of negotiations,on which it even conferred the glamorous term 'the Millennium Round'.

Although the US originally seemed cool to the idea (preferring to push issues it liked on a sector-by-sector basis), President Bill Clinton appears ready to endorse the idea. The developed countries thus seem united in pushing the WTO into this 'new Round'.

A few developing countries, such as Malaysia, India and Egypt, have spoken up strongly against such a new Round with new issues thrown in. Many other developing countries, especially in Africa, have supported this position.

Should the countries of the South want to prevent such a new Round, they had better make a stronger impression in the WTO meetings, otherwise we may have another intensification of the globalisation process foisted upon us. The WTO has become the main vehicle for globalisation, which after all is not an 'inevitable process' but is man-made, through deliberate policies, pushed through at occasions like the WTO Ministerial Conference.

2. THE PROPOSED NEW ISSUES IN A NEW ROUND

The EU has already made it clear that it wants to pursue 'new issues' such as international investment rules, competition policy and government procurement through this Round.

These three issues were put on the agenda of the first WTO Ministerial Conference in Singapore in 1996. Most developing countries were against having any negotiations for Agreements on these issues, but the pressure from the developed countries was so strong that they compromised and agreed to taking part in 'working groups' to discuss the issues. The developing countries made it clear that the working groups had the mandate only to discuss the topics in a sort of academic way, in what was called an 'educative process'. The working groups had no mandate to start negotiations for Agreements.

The three working groups have now gone through more than two years of discussion, during which time some of the developed countries made it clear they intend to 'upgrade' the talks into negotiations.

Their plan now is to use the device of the 'Millennium Round' to make the three issues (investment, competition, government procurement) the subject of talks for new Agreements.

But this is not the end of the story. Some of the industrialised nations also want other issues like 'trade and environment' and 'labour standards' to be part of the proposed new Round.

The governments of these countries want to placate their environmental groups and labour unions who have been protesting about the negative effects of free trade. If the environment and labour standards are also thrown into the pot of the new Round, the influential civic groups may then be won over, or at least they may not campaign so hard against the proposed Round. Or so the establishment thinking goes.

US interests

The US meanwhile is very keen that the Uruguay Round issues of services, agriculture and intellectual property rights be revisited and revised so that its corporations will have yet more market openings or advantages.

New negotiations on these existing topics, which are already on the WTO agenda in any case, will also certainly be part of a new stage of negotiations, whether or not the new issues are accepted as part of a Round.

However, it is still not certain that there will be a new Round. As already mentioned, many developing countries are against it. Their position is that the WTO should allow developing countries (who after all form the majority of the membership of the WTO) the time and space to tackle the problems of implementation of the existing Agreements.

That is cause enough for headaches and economic dislocation. The financial crisis and its bad impact on trade and growth has now magnified the problem. How then can they cope with negotiations on yet more new issues, which are certain to cause another round of new and potentially disastrous problems or crises?

Whilst this position obviously has merit, the developing countries are unfortunately not united. India, Malaysia, Egypt and many African and least developed countries have spoken out against a new Round. But most Latin American and a few Asian countries have indicated they are for the European proposal.

Need to unite

Those countries that have thought through the problem and oppose negotiations on new issues should now get together and strengthen their position as the talks in the WTO hot up in the next few months. Up till July, WTO member countries were supposed to put in their proposals for the WTO Ministerial. Then after the summer break in August, negotiations will be on at full speed, from September to November, to thrash out a draft Ministerial Declaration that will be brought to the Seattle Conference. The contents of that Declaration will determine what are the issues mandated for negotiations in the next few years.

The economic crisis should not deflect the attention of policy makers or the public from what is happening in the WTO. Otherwise, through pressure or by default, we, in the South will be landed with a new Round that is not of our choosing and that will place more obstacles not only to the recovery process but also to our development in the long term.

Trade officials from Japan, the EU and the US have agreed that they should conclude the next round of talks within three years, compared to the eight years for the Uruguay Round. There are good grounds for such confidence. Although they form only a small minority, the rich countries (and in particular, the US, the EU, Japan and Canada, known as the 'Quad') have usually succeeded in calling the shots in the WTO, often riding roughshod over the objections of many developing countries.

It may well happen again at the WTO Conference this year.

3. INVESTMENT, COMPETITION AND GOVERNMENT PROCUREMENT IN THE WTO

The three issues that should especially worry developing countries are investment, competition policy and government procurement. If there is a new Round, it could lead to new WTO Agreements on these topics.

The following is a summary of how these issues will affect the developing nations:

(a) The Investment Issue
On the INVESTMENT ISSUE, the rich countries are pushing to introduce new rules that make it mandatory for all WTO countries to give foreign investors the right to enter and establish themselves, with 100 percent ownership. Governments would lose the right to regulate the entry of foreign investors (not only for long-term direct investments but also short-term investors, for example in the stock market).

Foreigners and foreign firms should also be treated as well as (or better than) locals (under a WTO principle known as 'national treatment') and restrictions on the free flow of capital into and out of the country would be prohibited. Moreover, the 'performance requirements' that host governments now place on foreign companies (such as technology transfer, the use of local professionals, reinvestment of profits) would be banned. There is even talk of prohibiting the use of investment incentives to attract foreign investments.

In discussions at the WTO working group on investment, the rich countries have sought to give a wide scope to the definition of foreign investment. It would include not only foreign direct investment but also portfolio investment and purchase of property.

Needless to say, if such an agreement were to be passed within the WTO, developing countries would no longer be able to give preferences or protection to local investors, firms or farmers. They would face the threat of having their local products wiped out by competition from the bigger foreign firms, or of being taken over by them.

Also, the kind of restrictions that Malaysia and other countries place on inflow and outflow of portfolio or loan capital from abroad, and on foreign ownership of land and houses, may come under question or be banned.

(b) The Competition Issue
On COMPETITION POLICY, the EU is advocating a new agreement that would look unfavourably on domestic laws or practices in developing countries that favour local firms, on the ground that this is against free competition. The EU argues that what it considers to be the core principles of the WTO (national treatment and non-discrimination) should be applied through a WTO agreement on competition policy.

Through such an agreement, it would be compulsory for developing countries to establish domestic competition policies and laws of a certain type. Distinctions that favour local firms and investors would not be allowed. For example, if there are policies that give importing or distribution rights (or more favourable rights) to local firms (including government agencies or enterprises), or if there are practices among local firms that give them superior marketing channels, these are likely to be called into question and even banned.

The rich countries are arguing that such policies or practices create a barrier to foreign products or firms, which should be allowed to compete on equal terms as locals, in the name of free competition.

Developing countries may argue that only if local firms and agencies are given certain advantages can they remain viable. If these smaller enterprises are treated on par with the huge foreign conglomerates, most of them would not be able to survive. Perhaps some would remain because over the years (or generations) they have built up distribution systems based on their intimate knowledge of the local scene, that give them an edge over the better endowed foreign firms. But having these local distribution channels could also come under attack by a competition policy in the WTO, which is likely to pressure the local firms to open their marketing channels to their foreign competitors.

At present, many developing countries would argue that giving favourable treatment to locals is pro-competitive, in that the smaller local firms are given some advantages to withstand the might of foreign giants, which otherwise would monopolise the local market. Providing the giant international firms equal rights would overwhelm the local enterprises which are small- and medium-sized in global terms.

However, such arguments will not be accepted by the rich countries, which will insist that their giant firms be provided a 'level playing field' to compete 'equally' with the smaller local firms. They would like their interpretation of 'competition' (which ironically would likely lead to foreign monopolisation of developing-country markets) to be enshrined in WTO law and operationalised through a new Round.

(c) The Issue of Government Procurement
On GOVERNMENT PROCUREMENT, the developed countries want to introduce a process in the WTO whereby their companies are able to obtain a large share of the lucrative business of providing supplies to and winning contracts for projects of the public sector in the developing countries.

At present, such government expenditure is outside the scope of the WTO, unless a member country voluntarily joins the 'plurilateral' agreement on government procurement. This means that governments are free to set up their own rules on procurement and project awards, and most developing countries give preferences to locals in such awards.

The aim of the rich countries is to bring government spending policies, decisions and procedures of all member countries under the umbrella of the WTO, where the principle of 'national treatment' (foreigners to be treated on par with or better than locals) will apply.

Under this principle, governments in their procurement and contracts for projects (and probably also for privatisation deals) would no longer be able to give preferences or advantages to citizens or local firms. The bids for supplies, contracts and projects would have to be opened up to foreigners, who should be given the same (or better) chances as locals. It is even proposed that foreign firms that are unhappy with the government's decisions can bring the matter to court in the WTO.

Larger than exports

Since government procurement expenditure in some countries is bigger in value than imports, such an agreement to bring procurement under the WTO rules would tremendously enlarge the scope of the WTO and its rules.

As most developing countries would object to having their public-sector spending policies changed so drastically, the rich countries have a two-stage plan for this issue: firstly, have an agreement only to bring in greater 'transparency' in government procurement; secondly, to have a broader agreement that would cover the national treatment principle.

At the WTO Seattle Conference, the developed countries will try to wrap up an agreement on 'transparency in government procurement'. Governments need not apply the 'national treatment' principle and can still favour locals. But they must make public (to the world) what they are purchasing and the projects they are opening up for awards, who are eligible for the bids, and what the terms are.

After such an agreement is obtained, the developed countries would then push for an expansion of the agreement so that it incorporates the market access element, i.e., that foreign firms be given national treatment.

By agreeing now to negotiations for a transparency agreement, developing countries would also put themselves on the road to a full-scale procurement agreement incorporating national treatment. At stake is the right of governments to reserve some of their business for local firms. With the removal of that right, a very important instrument for national development, and for socio-economic engineering, would be removed.

4. CONCLUSION

All the three new issues that the developed countries hope to initiate at Seattle for new WTO agreements have very serious implications for the national economic interests of developing countries.

Our policy makers must therefore gear themselves up in the next few weeks and months to prevent these issues from entering the WTO system.

It is not inevitable that these and other new issues will be brought into the WTO, since there is not yet any decision or consensus that there will be a new Round.

But the negotiations towards the November Ministerial Conference are already entering the final lap, and developing countries must now go into full battle mode if they are to avoid a catastrophic expansion of the WTO in the wrong development-unfriendly way.

We are in danger of once again being run over by the mighty trade negotiating machine of the rich nations.

The public in each WTO member country should be kept informed of the developments in the WTO. Discussion and debate on these issues is crucial so that the negotiations are not, as usual, carried out in secrecy, with the views of the public, the local firms, the employees, the farmers and the consumers not being taken into account. (Third World Resurgence No. 108/109, Aug-Sept 99)

Martin Khor is the Director of the Third World Network.

 


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