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TWN Info Service on WTO and Trade Issues (Nov05/21)

29 Nov 2005
 

The draft text of the Ministerial statement for the WTO's Hong Kong conference in December was issued on Saturday 24 November.

Below please find a TWN analysis of the draft text.

With best wishes
Martin Khor
TWN

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CRITIQUE OF THE DRAFT MINISTERIAL TEXT FOR THE WTO’S HONG KONG CONFERENCE

By Martin Khor, Third World Network
27 November 2005


The draft Ministerial text for the WTO's Hong Kong Conference was issued on Saturday 26 November at an informal heads of delegation meeting.

The main text comprises 38 paragraphs in 8 pages. There are 6 annexes dealing with agriculture, NAMA, services, rules, trade facilitation, and special and differential treatment. The draft can be obtained from the WTO website (www. wto. org).

An introduction page says the draft is presented by the Chairman of the General Council and the Director General, that it does not purport to represent agreement overall, and draws on work done by Chairs of the negotiating bodies.

The introduction tries to explain why the draft is so uneven in its treatment of different subjects. It distinguishes between three types of text. First, the Chairs' consultations have in "many cases produced inputs for the present draft that are fully agreed by Members or reflect a high level of convergence."

Second, "in other areas, the text reflects a lower level of convergence." And third, in some areas where important differences persist, "this draft attaches a report by the relevant Chair, on his own responsibility, setting out the present situation as he sees it."

Although there is this categorization into three states of convergence -- full or high; lower and none - the draft does not indicate under which category the various paragraphs or issues in the main text and the various annexes fall. So the reader will have to make his or her own conclusion as to whether there is full, high, lower or no convergence of views in each item.

This is a serious deficiency. There is an implied assumption that the reports by the Chairs under their own responsibility fall under the third category (no convergence) whereas texts (not reports) attached as annexes enjoy full or high convergence.

This is a hugely inaccurate assumption. It is clear that there are many important differences remaining in agriculture and NAMA, and thus there are only status reports by the Chairs of negotiations (Annex A for agriculture and Annex B for NAMA).

But for services, there is in contrast a full text (not status report) provided, in Annex C. And Para 9 on services in the main text says the Ministers are "determined to intensify the negotiations in accordance with" the principles, approaches and timelines in Annex C.

The implied implication is that Annex C has been agreed to by or enjoys high convergence of views of the Members, and thus that it is in the form of text rather than a status report.

However, the assumption is wrong. The services text, drafted not by members and reached not by consensus but written "under the personal responsibility" of the Chair, is highly contentious, having been criticised in most of its parts by a wide range of developing countries. Yet it contains not a single bracket, giving the false and dangerous illusion that it enjoys consensus.

Treatment of Services

This unfair and unbalanced treatment of the services issue is the biggest flaw of the text. If not resolved before Hongkong, it may well be the most contentious problem in Hongkong, and threaten to derail the process there.

There are many aspects to this imbalance. Firstly, there is an unbalanced treatment of services vis-ŕ-vis the two other major market access issues, agriculture and NAMA.

The latter two are described only through status reports of the Chairs and thus there will be no Ministerial decisions on the direction or substance of negotiations taken on the basis of the present text (although new decisions can of course emerge in Hongkong). The form of the annexes - status reports - befits the lack of convergence.

In the services negotiations, there are equally if not more serious disagreements on many of the key issues, and thus the correct form for the annex should also be only a status report, stating the areas and extent of agreement and disagreement. Instead there is a text, purporting to represent consensus, when there is none.

Secondly, the services text contains many operational elements that orientate future negotiations and that obliges members to take on serious new commitments. Developing countries, which have mainly defensive interests, are asked to take on most of the new and onerous commitments. This is unfair.

Developing countries had resisted bringing services into the multilateral trading system, and had eventually agreed only on the assurance that under the GATS structure and principles they had the choice to liberalise at their own chosen pace, through a bottom-up approach and four modes of delivery, and this was written into the agreement. While GATS has provided for a series of negotiations to liberalise beyond initial commitments, the architecture envisages 'bargaining' and 'trade-offs' within the services sectors and modes of delivery.

Moreover, the developed countries, which had enjoyed exempting their agriculture from GATT rules for several decades, had agreed to re-integrate agriculture into the multilateral trade system in the Uruguay Round and had exacted a heavy price from developing countries for doing so, as the latter had to agree to introducing TRIPS and services, among others. While the developed countries provided themselves with a long-term reform process, the developing countries paid a heavy price upfront through the TRIPS and GATS, and in strengthened disciplines under the various GATT rules.

Now, it is found out that the same developed countries (through loopholes in the agriculture agreement) have not in fact reduced their high agriculture protection at all under the Marrakesh agreement. And even now, they have not yet committed themselves to any meaningful reductions or to an irreversible and time-bound reform process. And yet they are demanding that the developing countries pay again, and pay heavily and unreasonably, not only by opening up their services sectors, but by also changing the basic structure of the GATS, in contravention of the Uruguay Round understanding and the terms of the Marrakesh treaty.

Developing countries have paid thrice over already, and there is no reason why they should agree, yet again, to pay a new heavy price, in exchange for the developed countries to undertake in agriculture what they should originally have done without payment in any case. Subsidies for production, protection or exports are not a right under GATT, and the developed countries have no right, even in bargaining, to get a price to give these up. And there is no evidence even now of any commitments on the agriculture front from the developed countries.

Thirdly, there is an unfairness in relation to the texts in relation to ambition for Hong Kong. While the level of expectations in terms of achieving modalities has been much lowered for agriculture and NAMA, it has been heightened - artificially -- for services. This is doubly unfair, since the modalities for services were already settled in 2001 itself, in the form of the guidelines and procedures for the services negotiations. The focus should thus be on attaining progress on modalities for agriculture and NAMA, the deadlines for which have been missed.

There is thus no need to develop more modalities for services. Yet, ironically, of the three market access subjects, it is services that gets the full modalities treatment. This is the fourth and most serious of the imbalances and injustices. The draft text and Annex C subverts the existing modalities that have been agreed on, thus disrupting the stability of the negotiations.

Even more, Annex C subverts the very nature and architecture of the GATS agreement itself, by eroding the flexibilities for developing countries and countering the principles of strengthening the domestic services of developing countries and increasing their share of world services trade.

Fifthly, the reappearance of the services text in virtually unchanged form - except for one important change, i. e. the deletion of the controversial "quantitative targets and indicators" - shows up the extremely manipulative and top-down process by which the Chair, Fernando de Mateo of Mexico, has been conducting the services negotiations.

When the services text and its revised version were discussed at informal services meetings in the previous week, they were severely criticised. (See SUNS reports on 22, 24, 25 November).

Despite repeated opposition by a wide range of countries and groupings (including the African, LDC, Asean and Caribbean groupings and several other countries from Latin and Central America), the text still contains (almost unchanged) commitments to mandatory plurilateral negotiations, and detailed references to qualitative benchmarks (commitments in various modes), to sectoral negotiations and to a possible framework on rules for government procurement.

The appearance of the contested text and the unsatisfactory top-down process have made a mockery of the claim by the director general Pascal Lamy that the drafting has been "bottom up" and inclusive. Having a Chairman drawing up a text, without taking account the views of members, and refusing to depict expressed differences, and submitting it under the pretext that it is under his own responsibility, is hardly democratic. This text was submitted by de Mateo to the Director General Pascal Lamy.

The same text of the services Chair appears in the draft Ministerial text as an annex. Since the main text that gives the context to the annex does not explain it is only a Chair's draft that does not enjoy consensus, the responsibility of transmitting this contested document as if it had been agreed to now rests with the Director General.

An examination of Annex C on services shows the following. On the plus side, the previous reference to "quantitative targets" ( a code for requiring members to undertake to commit to liberalise in a percentage of sub-sectors) has been removed. This was unsurprising because the opposition to it was so widespread, and the demands of some the proponents, especially the EU, were so extreme, that even some developed countries were embarrassed and had become aware of the near certainty that its presence in a draft at Hongkong could destabilize the entire Ministerial.

Nevertheless, the item is far from dead. The EU, for one, has given notice that in the next few days' negotiations, it will try to re-inject it in Annex C. Even if that fails, many diplomats believe the EU and others will make another bid in the Green Rooms in Hong Kong to place it firmly in the final Ministerial text.

Even without "quantitative targets", the services text contains many elements that have rightly been rejected by a large number of developing countries, because they run counter to the main negotiating procedure (the bilateral request-offer system) and to the development principles and flexibilities of the GATS.

First are the "qualitative benchmarks" in the long paragraph 1 of annex C. The Ministers agree that members should strive to ensure new and improved commitments adhere to a list of objectives. These include "commitments at existing levels of market access" (which means the binding of the existing level of liberalization) in modes 1 (cross border supply) and 2 (consumption abroad); and commitments on enhanced levels of foreign equity participation as well as "allowing greater flexibility on the types of legal entity permitted" in mode 3 (commercial presence).

Agreeing to this, even on a best endeavour basis, would place developing countries under greater pressure and in a weaker bargaining position. Under the present flexibilities, they can choose their own level of commitment in accordance with national policies and priorities.

This includes the option of liberalizing in practice but not making GATS commitments or not to the same degree; and regulating foreign firms and their participation at the appropriate levels of foreign ownership in each sector and the type of legal entity (such as joiint ventures with locals). Para 1 of the text erodes these flexibilities.

Para 1 also includes Mode 4 (movement of natural persons), including new and improved commitments in contractual services suppliers, professionals delinked from commercial presence and intra-corporate transferees and business visitors. The inclusion of this can arguably increase the case of developing countries when pressuring developed countries in their mode of interest.

But the scope for improvement is limited (for example, it is the US Congress that decides on the number of visas for professionals); the benefits in these categories will not be evenly spread among developing countries; and the costs from increased pressures on developing countries to open their markets in mode 3 will outweigh the benefits from mode 4, at least for the majority of countries.

Second, in Para 2, references are made to "sectoral and modal objectives" and in a footnote to the report made by the previous Chair on sectoral initiatives. Many developing countries have rejected reference to the sectoral and modal approaches, and specifically to the Chair's report. They are rightly concerned that these references will upgrade the status of the sectoral initiatives, in which groupings of countries that are demandeurs of liberalization in particular sectors join up to pressurize targeted countries.

This practice has increased in recent years, but up to now the targeted countries can choose whether and to what extent to participate. Para 2 and its footnote can be an instrument to legitimize the movement of this so far voluntary practice to a more mandatory participation, thus intensifying the pressure on developing countries to open their markets sector by sector. Despite repeated demands to delete this paragraph, it has been retained.

Third is the imbalance in the treatment of subjects under rule making, in paragraph 4. There is only a general reference to technical and procedural questions on any possible emergency safeguard measures in services (which many developing countries have been advocating), whereas on government procurement (where developed countries have offensive interests) there is reference specifically to greater emphasis on proposals for a "possible framework on government procurement."

It should be noted that the developing countries successfully fought to remove discussions on "transparency in government procurement" (one of three "Singapore issues" so removed) in the July 2004 package. The discussion on government procurement in services has a much broader scope than transparency as it covers market access as well. Having ejected transparency by the front door, para 4 is building an instrument for bringing a framework on market access in procurement through the side door.

Fourth is the expansion and strengthening of the “plurilateral approach” which paragraph 7 seeks to do.  Up to now the bilateral request-offer method is the predominant negotiating method.  However, para 7 seeks not so much to complement but to replace this with a plurilateral method in which a member or a group of members present requests in any specific sector or mode of supply, and those members receiving the requests shall enter plurilateral negotiations. 

Thus, it is mandatory for those receiving requests to negotiate on a plurilateral basis with groups of countries demanding new or additional commitments. This removes the present right of a developing country not to participate in plurilateral negotiations.

The plurilateral approach would greatly expand the opportunity of the big services firms and their governments to form clusters that demand to negotiate with developing countries and pressurize them to increase their level of liberalization commitments, especially in key sectors such as finance, telecommunications, energy, distribution, etc. Such increased commitments would result in great pressure on the business and survival of local service enterprises.

All in all, the services text directs the negotiations in ways that place the developing countries at grave disadvantage, changing the method of negotiating to one that increases the pressures on them to open up. Given the great inequality in supply capacity, it is the developed countries and their firms that will have all the advantage and that will reap the benefit at the expense of developing countries and their firms.

To rectify the unfairness and imbalance in the Ministerial draft, the services text in Annex C has to be drastically amended to remove the elements that do not enjoy consensus, and which are counter to development interests. Or else, the form of the Annex should be changed from that of a consensus and prescriptive text to that of a status report text that reflects the differences of views.

NAMA

Another imbalance in the Ministerial draft is the bias against developing countries' positions and interests in annex B on NAMA. Although it is only a Chair's report, the bias may work against developing countries when negotiations resume. Indeed, there is a danger in placing such a report in a Ministerial text, even if as an annex.

The report, by the NAMA group Chairman, Stefan Johannesson, highlights the positions of the advocates of "high ambition" in having developing countries cut their tariffs as much as possible, while downplaying or neglecting the views of countries that have been arguing against approaches that result in sharp tariff cuts for developing countries.

Several example of bias are in the critical section on the formula. The report states members have focused on a Swiss formula, with basically two variations on the table: a formula with a limited number of coefficients and a formula where each country's coefficient is based essentially on the average bound tariff rate.

It fails to even mention the proposal by many Caribbean countries that proposed a formula in which the existence of several development factors in a developing country can be taken as credits that are incorporated as a variable (together with the average bound tariff) in the formula, enabling the country to have higher coefficients and thus lower reduction rates.

In the same section on formula, the report says the coefficients mentioned by members in favour of dual coefficients are in the range of 5 to 10 for developed countries and in the range of 15 to 30 for developing countries.

But it fails to mention that in the other proposals, the coefficients for developing countries can be far higher than 30. In the Argentina-Brazil-India proposal, the total coefficient of a country will be a B coefficient multiplied by the average bound tariff. Some developing countries have an average bound tariff of more than 30%, and at the same time the proponents have not yet proclaimed what the value of B would be, letting it be known that the choice of this value may be influenced by the level of ambition achieved in agriculture. The implication is that in this proposal, the coefficient can be well above 30 at least for several developing countries.

Moreover, the "development-oriented formula" proposed by the Caribbean countries implies that the total coefficients for developing countries (that can make use of development factors as credits to enlarge the sub-coefficient B) could be far above 30.

In the same section, the "less than full reciprocity" principle, which is prominent in the Doha Declaration mandate on NAMA, is mentioned merely as "one benchmark" which has attracted differences on how it should be measured.

The report further says that some developing countries view this as their undertaking "less than average percentage cuts" than those undertaken by developed countries, but that developed countries measure it differently, with factors such as comparing the final rates in developed and developing countries after the formula cut, as well as the use of flexibilities by developing countries and the fact that some developing countries and LDCs are exempt from the formula cuts.

The less than full reciprocity (LTFR) principle in terms of lower tariff reduction rates for developing countries is well established as a minimum definition, and many developing countries have made references to articles in GATT (which are mentioned in the Doha Declaration paragraph on NAMA) to the effect that developing countries are not expected to make commitments that are not in line with their trade, development and financial needs as part of the general principle of LTFR.

This more general definition of LTFR (which is referred to in GATT provisions) is not mentioned in the Chair's report, which instead gives a lot of space and prominence to the views of developed countries, which are clearly out of line with the usual way in which LTFR is understood. This is an example of bias, since the LTFR principle has been so evidently important and used by developing countries during the negotiations.

Another major flaw in the report is the continuing insistence of the Chair to treat three critical issues - the formula, para 8 flexibilities and unbound tariffs - in an interlinked manner. Para 5 of the report states that members recognize these three elements are a matter of priority and "that there is a need to address them in an interlinked fashion."

But it is dangerous to do so, and many developing countries have persistently voiced their disagreement that they be linked. Most importantly, they have stressed that the flexibilities in para 8 of the July Framework on NAMA are stand-alone rights linked to special and differential treatment, and they should not be used to trade off with other areas like the tariff formula. On 8 November, a group of developing countries issued a joint paper reaffirming this position.

Despite the clear views of developing countries on this, the report states that there is a linkage, and proceeds to discuss each issue as if this linkage exists and is acceptable to the WTO membership. An example of this is in para 10 which mentions the view that para 8 flexibilities are equivalent to 4-5 additional points to the formula coefficient, and that this should be taken account of in the developing country coefficient. It does mention that many developing countries argue that the flexibilities are a stand alone provision. Yet this does not stop the report from putting forward the principle that the three issues of formula, flexibilities and unbound tariffs need to be addressed in an interlinked fashion.

The sectoral approach, which has been controversial, is given prominence and sympathetic treatment in paras 21-23 of the report. The report is evidently very supportive of the sectorals and their progress, and also proposes time lines to finalise the work. However, it fails to mention that developing countries in general have demanded a clarification that the participation in such sectorals is on a voluntary basis, and any member can choose not to take part. The African Union's Trade Ministers conference on 22-24 November called for sectoral initiatives to be excluded because of their potential detrimental effects on African countries.

Agriculture

In the agriculture annex, the focus has been to describe the differences in positions on what is seen as the main issues in export competition, domestic support and market access, and provides some figures on the range of reduction rates proposed.

There is, however, merely a passing mention of the problem of preference erosion and the proposals by the ACP Group, which has expressed its dissatisfaction.

On the cotton issue, the report paints a picture of near paralysis, with disagreements on when to eliminate export subsidies and the timing for phasing out domestic support. The sense of the report is that there has been no achievement to address the matter "ambitiously, expeditiously and specifically" and that real movement in cotton will have to be in the context of an overall agriculture agreement. The report does not convey the urgency felt by cotton producing developing countries nor the proposals of the African Group. It is thus likely that these countries will be very frustrated with the lack of progress in the WTO in resolving the cotton problem.

Trade Facilitation

Annex E on Trade Facilitation is a report not of the Chair but of the negotiating group, and it was arrived at after lengthy negotiations. In terms of process, this was a more participatory approach. The outcome, however, appears imbalanced as well. The section on proposed measures to improve and clarify GATT articles V, VIII and X is very detailed, containing a list with 13 sub-sections, and many bullet points under each sub-section.

This is in effect the list of contents for the proposed agreement or rules on trade facilitation, and they represent new and onerous obligations to be undertaken by the developing countries. Overall, they are a large set of measures and procedures that are complex and developing countries will find it difficult to comply with them.

The unique understanding in the July Framework is that developing countries can sequence their implementation to match their availability of funds, including through foreign aid. Given this, the negotiations on the details of financial and technical assistance and capacity building should have proceeded in tandem with the negotiations on rules and measures.

However, Annex E has only a very short list of items under needs and priorities, technical assistance and capacity building, and they are in very general terms. The impression is that the negotiations on rules and measures have gone faster and further ahead, and that there will be voluminous proposed texts on them soon, whereas the promise of aid and capacity building will remain vague and general, without concrete commitments by developed countries.

“Development Issues” and Development Content

The draft also has minimal treatment of special and differential treatment issues. Of the more than a hundred proposals on the agenda, the main text can only concretely refer to five agreement-specific proposals relating to LDCs. The text has Ministers taking note of work done. They also adopt decisions in Annex F on the LDC-related proposals, but this line is in brackets, and in the Annex the different positions on each issue are put as options. Whether they can be resolved before or at Hong Kong remains to be seen.

Even if they are, the record on progress on the SDT proposals is very poor. Worse is the record on "implementation issues", where note is merely taken of work being done, when in fact many deadlines have passed since 2001 without any results. The draft sets yet another deadline (in brackets) to review progress and take "any appropriate action."

The draft thus will have hardly anything (except perhaps a few LDC related SDT issues) on which to report success in the two major "development issues."

No wonder the Director General as well as the developed countries are pointing elsewhere - to the market access negotiations on agriculture, NAMA and services - as the major areas in which development gains will be found in this Doha work programme.

However, there is little development content in agriculture, with justifiable questions on whether there will be any real cuts in applied levels of domestic support in developed countries, or whether there will only be new forms of box shifting. Meanwhile, even as Northern protection is maintained, the developing countries have to undertake more tariff reduction cuts than they did under the Uruguay Round.

There is a real danger that the way the NAMA negotiations are going, developing countries will lose much of the flexibilities they have had to choose their tariff binding, the rates at which to bind, and the overall pace of their liberalization of industrial tariffs. The NAMA report makes clear that most developing countries will have to undertake very sharp tariff reductions across the board, with minimal "flexibilities" or exemptions from the formula cuts. The future prospects for the development or even survival of local industries in developing countries look bleak.

And in services, what the text in effect does is to remove a lot of the development flexibilities in GATS, in preparation for new obligations and new negotiating methods that will greatly pressurise developing countries not only to open up more deeply and in more sectors but to also commit these national measures in the GATS, thus making "back-tracking" almost impossible.

There is, in other words, in terms of meeting development objectives, very little to cheer about in the draft Ministerial text, and a lot to worry about.

 


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