TWN Info Service
on WTO and Trade Issues (Apr07/01)
02 April 2007
UNCTAD meeting warns
of effects of bilateral, regional FTAs
Published in SUNS
#6214 dated 20 March 2007
By Sangeeta Shashikant and Riaz K. Tayob
Geneva, 18 March 2007
Free trade agreements among developing countries can help them strengthen
regional cooperation, but trade treaties between a powerful developed
country with developing countries can result in problems for their consumers,
farmers and industries.
This was one of the major themes that emerged at an expert meeting in
Geneva last week on the interface between the multilateral trading system
and regional trade arrangements (RTAs), organized by the United Nations
Conference on Trade and Development (UNCTAD).
South-South RTAs (such as ASEAN, SADC, Mercosur and Caricom) are among
neighbouring countries that are at about the same development level
while in North-South FTAs, the rich country is so far ahead economically
that their goods and firms can overwhelm the developing country's economy.
Mrs. Lakshmi Puri, Director of UNCTAD's Trade Division, at the opening
said that the meeting's focus was the interface between the multilateral
trading system and RTAs, and whether RTAs were building blocks or stumbling
blocks towards multilateral trade relations.
Approaches to RTAs are not uniform and they differ, whether they are
North-South or South-South in nature, especially in relation to delivery
of development imperatives. The number of RTAs had grown rapidly, with
366 notified to the WTO, 214 remaining in force and 400 expected by
Mrs. Puri posed several questions for discussion: How to ensure that
participation is beneficial particularly in regard to asymmetries in
North-South RTAs? How can special and differential treatment be used
in North-South agreements like the Economic Partnership Agreements (EPAs)?
How do countries best approach North-South RTAs when developing countries
are in the process of deepening South-South processes?
Referring to the recently agreed transparency mechanism at the WTO on
regional trade arrangements, she asked what can be done to assess RTAs
in the multilateral trading system using this mechanism.
She said that new-generation RTAs have substantially increased their
"bite" to encompass new non-trade areas such as investment,
competition and intellectual property (IP). But at the same time some
elements of trade liberalisation are not addressed in RTAs, the most
obvious example being agricultural subsidies.
This theme of "cherry picking"of issues in North-South RTAs
was taken up by several experts during the meeting. The selection of
issues, done usually by the developed countries, reflects the lop-sidedness
of such agreements.
Issues like investment and IP which benefit the developed countries
are put in (even if they were rejected at the WTO) while measures that
can most benefit developing countries (such as removing Northern agricultural
subsidies) are left out, at the insistence of the more powerful countries.
Ransford Smith, Deputy Secretary-General of the Commonwealth Secretariat,
said that the expansion of RTAs is evidence of a contradiction in the
multilateral trading system whose main tenet is "non-discrimination",
while RTAs are based on discrimination. RTAs may also diffuse the negotiating
capacity of developing countries.
He added that developing countries must be rightly concerned with North-South
RTAs. Smith said that developing countries in their RTA negotiations
need to consider enhancing special and differential treatment, facilitate
the movement of workers and improve trade remedies. On the investment
and competition issues, he said that these need to be first implemented
at the national level and between countries at similar levels of development.
South Centre Executive Director Yash Tandon distinguished between three
types of RTAs: (1) integrative partnerships (where partners have compatible
interests and which are based on solidarity and subsidiarity where benefits
go to members at the lower levels); (2) enforced partnerships where
one side dictates the terms and the other side either has to "take
it or leave it"; and (3) structured regionalism where the partnership
is enforced and located in structures linked to historical relationships
(such as the EU-ACP agreements).
Tandon said that there are two opposing trends. The first is where enforced
and structured partnerships are still in place, while the second trend
is a struggle by developing countries towards integrative regionalism
so as to liberate themselves from the predatory lock of structural relationships.
In the economic partnership agreement talks, the ACP countries are trying
to reposition themselves to bring onto the agenda their genuine concerns
where the structure imposes the interests of the dominant partner, the
Third World Network Director Martin Khor said that a major problem for
developing countries was that WTO rules hinder the existence of special
and differential treatment (SDT) for developing countries in bilateral
and regional agreements, because Article XXIV of GATT establishes "reciprocity"
in that RTA parties have to eliminate barriers on "substantially
He said that this seemed to be absurd, because RTAs by their nature
contradict the non-discrimination principle of GATT/WTO and thus the
multilateral rules should place limits to this non-discrimination, instead
of insisting that if parties want to form an RTA, they have to "go
all the way" or almost all the way.
If Article XXIV is not amended to enable SDT (as suggested by the ACP
Group) and thus enable developing countries not to have to liberalise
in such an extreme manner, developing countries are bound to be at a
serious disadvantage in North-South RTAs. They have lower production
capacity and their domestic firms would be unable to compete if the
countries' goods and services markets are opened up suddenly and comprehensively
to giant foreign firms through the RTAs.
Khor said that in North-South RTAs, developing countries' market access
gains are limited by the developed countries' avoidance of opening up
in areas that would be of most benefit to developing countries.
Most glaring is that elimination of agricultural subsidies are off the
table in North-South FTAs involving the US, EU and Japan, and thus the
most important Northern trade barrier is not affected, depriving developing
countries of what could be their most relevant "WTO plus"
In FTAs involving the US, the gains from textiles trade are also limited
or offset by many tariffs not being eliminated immediately, and by conditions
like the "yarn forward" rule (the trade partner has to use
yarn that it produces or that is from the US) and stringent rules of
origin. There is also very limited WTO-plus gain, if any, in liberalization
of labour services.
In return, the developing country partner is asked to open its markets
in extreme ways that go far beyond its WTO commitments in goods and
services. WTO flexibilities such as less than full reciprocity and maintenance
of unbound tariffs in industrial tariffs are removed or drastically
In services, the US insists on using the "negative list approach"
in its FTAs, which has many disadvantages as compared to the "positive
list" approach in the WTO. Many other development flexibilities
built into the WTO's services agreement are also removed.
Commercial presence in services is also merged into the investment chapter
in FTAs involving the US, resulting in these services obligations coming
under the investor-state dispute mechanism in which developing countries
are liable to pay compensation for "expropriation", including
indirect expropriation, the definition of which includes government
regulations that result in investors losing their future profits.
Khor added that through the FTAs, developing countries also have to
open their markets in government procurement, which in some countries
amount to over 20% of the GDP. The procurement chapter in the FTAs go
far beyond the proposals at the WTO which only covered transparency
aspects but not market access. Even then, the procurement issue was
removed from the Doha agenda in 2004 at the WTO, while the more extreme
version involving full market access was coming in by the side door
of the FTAs.
Oxfam's Trade Campaign Director Celine Chaveriat said that FTAs involving
the United States and EU strip developing countries of the policy space
that they need to effectively govern their economies. For example, IP
provisions in FTAs go much beyond the TRIPS Agreement. The negative
effects include limiting access to technological know-how and affordable
medicines, while failing to protect traditional knowledge.
She added that every FTA being negotiated with the US delays the introduction
of generic medicines. For example, these FTAs include protection for
clinical trial data that grants exclusive use to the patent holder,
preventing registration of generics during the patent term, thus extending
Medicine costs are estimated to rise by $919 million by 2020 in Colombia
due to its FTA with the US, an amount which instead can be used to provide
healthcare for 5.2 million people.
Chaveriat said that FTAs involving the US and EU also require the adoption
of plant breeder rights legislation that removes the farmers' right
to share seeds, thereby making the livelihoods of the world's poorest
farmers even more vulnerable, whilst increasing the market power and
profit margins of the world's largest agribusiness. The US-Dominican
FTA is expected to raise agrochemical prices in the Dominican Republic
by several fold.
On services, the financial sector is especially targeted. Under FTAs
with the US, EU and Japan, developing countries liberalise in the hope
that greater competition and efficiency would improve poor people's
access to finance.
However, the opposite has happened, said Chaveriat. Recent IMF and UN
studies show that opening up the banking sector leads foreign banks
to "cherry pick" only the most lucrative customers in the
economy, leaving the poorer and higher risk customers for local banks,
as a result reducing the profitability of local banks.
In Mexico, following NAFTA, foreign ownership of the banking system
had increased to 85% by 2000 but lending to Mexican business had dropped
dramatically from 10% of GDP in 1994 to 0.3 % in 2000.
On investment, the FTA provisions ensure that the access and activities
of foreign investors in developing countries are unfettered and many
provide a powerful system of international arbitration to ensure that
the expanded rights of foreign investors are vigorously enforced.
She stressed that the new rules in many FTAs undermine the ability of
investment to contribute to development. In Argentina, during the 2001-2002
financial crisis, 39 groups of foreign investors lodged compensation
claims, some successfully. Amid increases in unemployment, government
emergency measures forced foreign investors to stop charging dollar
equivalent rates for basic utilities such as water and gas. Current
outstanding claims against Argentina are estimated at $18.55 billion.
On trade in goods, Chaveriat said that developing countries are being
pushed to eliminate (in some cases totally) agricultural and manufacturing
tariffs. However, the developed countries do not want to negotiate agricultural
subsidies (which have damaging impacts on farmers in developing countries).
In many cases, the developing countries are asked to undertake such
obligations to only secure current levels of access to developed country
She said that impact assessments show that Colombia, under its FTA with
the US, could experience reductions of 57% in income and 35% in employment
in nine agricultural sectors. She stressed the need for SDT for developing
countries in FTAs and called for a serious overhaul of rules governing
WTO and RTAs as well as a change of mind-set by big players about their
trade policies toward developing countries.
David Vivas of the International Centre for Trade and Sustainable Development
said that developed countries had placed strong IP provisions in their
FTAs due to strong lobbying from their pharmaceutical, biotechnology,
movie and information technology industries. Several FTAs not only require
developing countries to undertake IP obligations beyond the TRIPS Agreement
but also to ratify several WIPO agreements.
He highlighted several public policy concerns on the incorporation of
TRIPS-plus provisions in FTAs. These include: (1) difficulties in keeping
or utilizing public policy flexibilities available in TRIPS; (2) reduction
of the public domain due to ever expanding IP rights; (3) burdensome
licensing procedures; (4) lack of synergy between the FTAs on the one
hand, and the Convention on Biological Diversity and the International
Treaty on Plant Genetic Resources, on the other; and (5) lack of SDT
for developing countries.
There are also direct costs such as increased payments for licensing,
and costs establishing a legal framework of action, institutional reform,
infrastructure and administration costs.
Rohini Acharya of the WTO Secretariat said that the WTO's Doha negotiations
on the RTA issue revolve around two categories: procedural issues (to
improve RTA transparency and improve procedures for the consideration
and surveillance of RTAs by the WTO) and systemic issues (to clarify
and improve existing WTO rules of RTAs).
On procedural issues, Acharya listed the following existing problems:
(1) there is no effective WTO surveillance of RTAs; (2) there is no
consistency assessment of the RTAs in force; (3) many RTAs are not even
notified; and (4) there is a lack of RTA transparency.
On systemic issues, she listed the following problems: (1) There are
divergent interpretations of disciplines in GATT Article XXIV and GATS
Article V (that deal with RTAs); (2) There are problems of coherence
between RTA rules and between these rules and other WTO provisions (for
example, there is no clarity on the meaning of "substantially all
trade" in GATT XXIV); and (3) There are institutional tensions
and discrepancy between RTAs and the multilateral trading system.
The WTO official said that on 14 December 2006, the WTO General Council
adopted a transparency mechanism for RTAs that clarifies existing RTA
transparency provisions, that establishes guidelines and that asks the
Secretariat to prepare presentations on all notified RTAs.
However, she said, the substantial issues are harder to resolve. There
has been discussion at the WTO only on GATT Article XXIV but none on
GATS Article V.
She added that the WTO discussion had been mainly on defining "substantially
all trade", with the focus on thresholds and SDT provisions, but
there has been no agreement. In particular, there are mixed views on
the desirability of SDT in Article XXIV. The ACP countries have led
the move to introduce SDT in Article XXIV in terms of non-reciprocal
commitments and length of transition periods, but there is quite a lot
of resistance by some other WTO members.
Officials from many regional groupings, including ASEAN, the Andean
Pact, SADC, Caricom, COMESA, and Mercosur, presented their experiences
on RTAs. Other speakers at the UNCTAD meeting included representatives
from the World Bank, the OECD, the WTO and research institutions.
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