TWN Info Service on WTO and Trade Issues (Sept05/4)

18 Sept 2005


The Third World Network held a regional Asian workshop on bilateral and regional FTAs on 26-29 August in Kuala Lumpur.

Many speakers and participants voiced concerns about how the developed countries are making use of such FTAs to get developing countries to accept issues (such as investment) and rules (such as in intellectual property and services) that oblige them to take on more commitments than they have accepted in the WTO.

The workshop was attended by policy makers and NGOs from ten Asian countries.

A report of the seminar is below.  It was published in the SUNS Bulletin on 31 August.

With best wishes
Martin Khor


Developing countries warned against WTO-plus issues and rules in FTAs

TWN Report in the SUNS (South North Development Monitor)
31 August 2005

Kuala Lumpur, 30 Aug (TWN) - Bilateral free trade agreements (FTAs) are being made use of by major developed countries to obtain concessions from developing countries that they are unable to get through negotiations in the World Trade Organisation, and the developing countries should thus be on their guard against accepting such "WTO-plus" obligations that they had rejected in the multilateral forum.

This was one of the key themes emerging from an Asian regional workshop on bilateral FTAs held here on 26-29 August. The workshop, attended by about a hundred participants from 10 Asian countries, including government officials, trade experts, representatives from NGOs and international agencies, was organized by the Third World Network (TWN).

Focusing especially on FTAs between developed and developing countries, the workshop examined various elements of FTAs that were recently concluded or are being negotiated, and their development implications.

Speakers and participants especially compared the obligations undertaken by developing countries in FTAs with their obligations in the WTO, or the decisions taken at the WTO.

It was pointed out that the FTAs contain many provisions that remove the flexibilities available to developing countries in existing WTO rules to choose between different policies. The closure or narrowing of such "policy space" would seriously restrict the ability of the governments to make use of policy options and instruments in many areas.

In his presentation, international trade expert, Bhagirath Lal Das, said that in view of the rush by many countries to negotiate bilateral FTAs, it was best if the developing countries were to pause and look at the consequences.

The US and the European Union (EU) had clear objectives - to advance their interests beyond what they could obtain in the WTO from the developing countries, and they feel that they can get through bilateral FTAs what they could not get in the WTO, he said Das also warned that when the developed countries had got what they wanted in the FTAs, they would then later attempt to place these FTA rules inside the WTO. For example, the TRIPS-plus provisions in bilateral agreements would then become their proposals in the next Round of WTO negotiations.

Das added that developing countries may decide to enter FTA negotiations, as they had certain expectations, in particular to obtain benefits in market access. There was also the fear by some countries of "losing out" if others enter into FTAs and they did not.

However, the hoped-for gains in market access are often illusory or hyped up by projections that are suspect because they are based on unrealistic assumptions. Moreover, the projected increase in exports is often overvalued because it does not take into account the high import content of the exports.

Das said there was need for countries thinking of entering into FTAs and those already negotiating them to carry out cost-benefit analysis, using qualitative and quantitative methods. He also suggested that there should be more information sharing about the effects of FTAs, the raising of public awareness through interest groups and alliance building among the developing countries.

Martin Khor, director of TWN, said that a review of recently concluded FTAs would find that they contain many issues, provisions and rules that went far beyond what the WTO obliges developing countries to undertake.

For example, in most bilateral agreements signed between the United States and developing countries, there are rules on investment, government procurement and competition policy. The discussions on these "Singapore issues" had already been shelved at the WTO on the insistence of the developing countries as part of the "July 2004 package", and the working groups on these issues had been suspended.

Yet, the FTAs contain chapters on these issues and the provisions go much further than what had been discussed (and so far rejected) as possible rules in the WTO.

Khor said that the rules in the investment chapter of FTAs between the US and developing countries such as Singapore and Chile covered not only foreign direct investment but also portfolio investment, loans and intellectual property. Investors' rights included pre-establishment rights. The definition of "expropriation" was broad, including indirect expropriation. The FTAs also allow for investor-to-state disputes.

On government procurement, the FTAs involving the US have rules on market access, establishing "national treatment" rights for foreign firms and products, and prohibiting preferential treatment for national firms. This is in contrast to the working group discussions in the WTO where only "transparency" aspects had been mandated for consideration.

Khor said that in their chapter on services, the FTAs make use of the "negative list approach", in which full liberalisation in all sectors is assumed unless they are included in a list of exceptions. This is unlike the WTO services agreement's "positive list" approach, in which only the sectors and type of liberalization listed are committed by the country concerned.

The FTAs thus overturn the architecture of the WTO's services agreement and reduces the flexibilities for developing countries to choose whether or not to liberalise particular sectors and at what level and pace. They had fought for this flexible structure during the Uruguay Round and were still defending it strongly at the WTO in the face of pressures, but some countries were ceding the hard-won policy space in the FTAs.

In market access, developing countries had advanced the principles of special and differential treatment and "less than full reciprocity" in tariff reduction obligations in the WTO, said Khor. However, the FTAs between a developed and developing country require concessions to be on a reciprocal basis. Developed countries cite Article XXIV of the GATT to make the case that free trade agreements have to involve tariff elimination by parties on "substantially all trade."

Thus, in developed-developing country FTAs, the developing countries are obliged to eliminate their tariffs, in phases, as a general rule, with exceptions to be placed in an annex. There is thus additional pressure on them to open up their goods sector.

In a session on market access, Laura Carlsen of the Mexico-based Americas Program of the International Relations Centre said that the Latin and Central American experience in FTAs with the US had shown that the developing countries get poor benefits in market access vis-a-vis the costs to them. The US concedes little but demands a lot, she added.

Carlsen said that in the industrial sector, the gains in exports to the US are expected to be short-lived, as preference margins are diluted by multilateral tariff cuts. In Mexico, the small and medium enterprises are adversely affected by the North American Free Trade Agreement (NAFTA). Central American countries are expected to gain little in textiles because even with the preferential treatment, they are unable to compete with Chinese products.

The situation in agriculture shows up the fallacy of expectations of gains in market access, Carlsen added. One major reason is that the US has refused to discuss reduction of its subsidies under the FTAs, and it thus manages to continue "dumping", with prices of its exports below production costs.

After NAFTA came into force, Mexican fruit and vegetable exports to the US had increased by 50%. But this had been more than offset when Mexico reduced its agricultural tariffs and imports increased by threefold for corn (Mexico's most important crop) and fivefold for soybean, wheat, poultry and beef. There is also an impact on other crops: sorghum producers are in crisis as livestock farmers switch to using cheaper corn for animal feed. There has been a loss of 1.7 million rural jobs.

Carlsen said that an increasing number of countries, such as Brazil, Venezuela and Uruguay, are questioning the premises of FTAs, and the negotiations for the Free Trade Area of the Americas (FTAA) are at an impasse.

She highlighted several lessons from the Latin American experience. First, in the trade off between more access to the US vis-a-vis displacement of local products, the latter outweighs the former. Second, concessions to US demands can have long-term detrimental effects. For instance, Mexico saw the erosion of the position of its small-holders, higher food dependency, reduction in South-South links, and the loss of sovereignty and the ability to use development tools.

Third, the longer implementation periods and safeguards in the agreements are not enough to protect the threatened products and sectors in the developing countries. Fourth, FTAs hinder regional integration efforts. Fifth, developing countries have to concede a lot of ground in other areas in order to get a little gain in market access.

She concluded that FTAs with the US should be avoided by developing countries, or at least careful consideration has to be given before entering into such agreements. The gains tend to be few and short-lived while the costs tend to be heavy and long-term.

The workshop had several sessions on intellectual property (IP). Professor Peter Drahos of the Australian National University said that the US and other developed countries have been practising "forum shopping", in which they seek what to them are the appropriate organizations or arrangements to use to push through their goal of getting developing countries to take on new obligations for higher IP standards.

The developed countries were now making use of FTAs as the convenient forum to get the developing countries to take on TRIPS-plus obligations. He warned against giving in to such pressures, as high IP standards in developing countries would result in their incurring extra losses as most IP is owned by foreigners. He estimated the developing countries' extra cost from their implementing TRIPS to be at least $40 billion annually.

Drahos advised that developing countries should only commit to take on the same level of obligations as was already contained in TRIPS and to make clear that they would not agree to any TRIPS-plus provisions. He gave details on how the US-Australia FTA would result in serious damage to the Australian generic drug industry due to TRIPS-plus obligations.

He also proposed that "centers of modeling excellence" be set up to counter the wrong econometric models being used in studies that exaggerate the gains and underestimate the costs of FTAs, and which can promote the use of appropriate methodology that can produce reliable cost-benefit analysis.

TRIPS-plus provisions with adverse consequences for access to medicines were extensively discussed in two sessions.

Sanya Smith of TWN presented examples of FTA provisions that remove or reduce TRIPS flexibilities. These include: allowing for extending the patent life span by the time between the filing and approval of a patent application; requiring that patents can be extended (beyond the first approved period) for "new uses" of the same product; and limitation to conditions for compulsory license.

Another major TRIPS-plus provision, explained by Smith and Karin Timmerman, a World Health Organisation advisor, relates to "data exclusivity." The WTO does not require members to establish "data exclusivity" (i. e. where data of the originator company submitted to drug regulatory authorities for marketing approval cannot be made use of for the approval of other applicants' generic drugs).

However, the US seeks through FTAs that its partners are required to grant "exclusive rights" to the originator companies over the use of their test data, thus placing a serious hurdle in the way of the use of generic drugs.

Dr Jiraporn Limpananont, a pharmacy professor with the Drug Study Group in Thailand, said that the US was pushing for a range of such TRIPS-plus provisions in its FTA negotiations with Thailand. According to Limpananont, such provisions would remove the ability of Thailand to make use of the existing TRIPS flexibilities; result in much higher prices of medicines; and block research and development of local drug manufacturers, as generic drugs cannot be developed and there would be no supply of patented active ingredients.

Chutima Akaleephan of the Ministry of Health of Thailand said that a study had been undertaken on the possible effects of introducing TRIPS-plus provisions in the FTA. Estimates show that an extension of market exclusivity by three years would result in additional cost of medicines to Thailand of between $65 million and $279 million annually. If the extension is by ten years, the annual extra expenses would be in the range of $837 million to $5.4 billion.

Renee Vellve from GRAIN, an NGO based in the Philippines, said that many FTAs signed by developing countries with the European countries (in EFTA or the EU) and with the US contain many TRIPS-plus provisions in relation to the patenting of biological resources.

Although TRIPS allows WTO members to exempt patenting of plants and animals, some FTAs require the parties to patent plants, and in some cases plants and animals.

Also, the TRIPS provides that members can establish a "sui generis" system of protection of plant varieties. However, in several FTAs with the US, the developing country is required to accede to the UPOV treaty, with many mentioning UPOV 1991 (the latest version of the treaty that has especially "high" standards of plant breeders' rights that severely restricts the farmers' rights to save and re-use seeds).

Sangeeta Shashikant of TWN said that several treaties had been concluded at the World Intellectual Property Organisation (WIPO) which contained higher obligations than the TRIPS agreement. In recent FTAs with the US, the developing country is obliged to sign on to many of the WIPO treaties, thus requiring them to take on TRIPS-plus standards of IP.

She also said that in many FTAs involving the US, the developing countries are obliged to take on TRIPS-plus obligations with regard to copyright. For example, while TRIPS and the Berne Convention establishes copyright protection for the period of the lifespan of the holder plus 50 years, the FTA extends the period to life plus 70 years.

Some FTAs also require the parties to provide for technological protection measures (TPMs), in line with US domestic law (1998 Digital Millennium Copyright Act). The TPMs have been criticized by consumer groups for limiting fair use of copyrighted materials and for having a chill-effect on freedom of expression and scientific research.

Although the TRIPS agreement does not require WTO members to establish TPMs, some of the FTAs require the parties to have TPMs, with standards even higher than the US law.

Sangeeta also said that some FTAs require the parties to have enforcement laws that are stricter than TRIPS, for example, in the criminalizing of some aspects of infringements on copyright and trademark counterfeiting that are not required by TRIPS.

At the workshop, government officials and NGOs also made presentations on the state of negotiations of FTAs in which the country is involved, and its implications. A summary of the workshop discussions and recommendations was also presented.