Rethinking trade policy and the multilateral trade system

In view of the problems and imbalances in world trade, there is a need to rethink the dominant model of trade policy that advocates across-the-board rapid liberalisation for developing countries. 

Martin Khor

FOR a successful trade policy, a country has to calibrate and aim for balance between the two major aspects of trade, i.e., imports and exports. Many developing countries do not yet possess the factors required for sustained export growth. They face supply constraints. Moreover the main exports of many developing countries are primary commodities, the prices of which have declined significantly through time. Also, products of export interest to many developing countries still face serious market-access impediments. Thus the export performance of many developing countries has not been good, and in the short and medium term the prospects for significant improvement are not bright. Yet they have been under pressure to rapidly liberalise their imports. If import liberalisation proceeds whilst the conditions for successful export growth are not yet in place, there can be adverse results, such as increases in the trade deficit and balance-of-payments difficulties, which then add to the level of external debt and the debt-servicing burden, leading to retardation of economic growth and increased unemployment. 

In the recent experience of many developing countries,  trade liberalisation can (and often does) cause imports to surge without a corresponding (or correspondingly large) increase in exports. The United Nations Conference on Trade and Developments (UNCTAD) Trade and Development Report 1999 found that for developing countries (excluding China) the average trade deficit in the 1990s was higher than in the 1970s by 3 percentage points of GDP while the average growth rate was lower by 2 percentage points. Inappropriate trade liberalisation contributed to this negative phenomenon. It (trade liberalisation) led to a sharp increase in their import propensity, but exports failed to keep pace, particularly where liberalisation was a response to the failure to establish competitive industries behind high barriers. 

Empirical evidence has shown that there is no straightforward correlation between trade liberalisation and overall economic growth performance as measured by gross domestic product (GDP). For example, a 1994 UNCTAD study of 41 least developed countries (LDCs)over 10 years found no clear and systematic association between trade liberalisation and devaluation, on the one hand, and the growth and diversification of output and growth of output and exports of the LDCs, on the other. In fact, it found that in many LDCs, trade liberalisation had been accompanied by de-industrialisation, and where exports expanded they were not always accompanied by the expansion of supply capacity (Shafaeddin 1994).

Disturbing evidence of post-1980 liberalisation episodes in the African and Latin American regions has also been described by Buffie (2001: 190-91).

For example, Senegal experienced large job losses following liberalisation in the late 1980s; by the early 1990s, employment cuts had eliminated one-third of all manufacturing jobs. The chemical, textile, shoe and automobile assembly industries virtually collapsed in Cote d’voire after tariffs were abruptly lowered by 40% in 1986. Similar problems have plagued liberalisation attempts in Nigeria. In Sierra Leone, Zambia, Zaire, Uganda, Tanzania and the Sudan, liberalisation in the 1980s brought a tremendous surge in consumer imports and sharp cutbacks in foreign exchange available for purchases of intermediate inputs and capital goods, with devastating effects on industrial output and employment. In Ghana, industrial sector employment plunged from 78,700 in 1987 to 28,000 in 1993 due mainly to the fact that large swathes of the manufacturing sector had been devastated by import competition. Adjustment in the 1990s has also been difficult for much of the manufacturing sector in Mozambique, Cameroon, Tanzania, Malawi and Zambia. Import competition precipitated sharp contractions in output and employment in the short run, with many firms closing down operations entirely.   

Some developing countries outside Africa have also experienced similar problems.  According to Buffie (2001: 190): Liberalisation in the early 1990s seems to have resulted in large job losses in the formal sector and a substantial worsening in underemployment in Peru, Nicaragua, Ecuador and Brazil. Nor is the evidence from other parts of Latin America particularly encouraging. The regional record suggests that the normal outcome is a sharp deterioration in income distribution, with no clear evidence that this shift is temporary in character.

It would be important to make a compilation of experiences in the Asia-Pacific region, especially of the countries with a weaker industrial base.

Trade liberalisation should not be pursued automatically or rapidly, as an end in itself.  Rather, what is important is the quality, timing, sequencing and scope of liberalisation (especially import liberalisation), and how the process is accompanied by (or preceded by) other factors.  If conditions for success are not present yet in a country, then to proceed with import liberalisation (or liberalisation of services, including investments) can lead to negative results or even persistent recession.

Developing countries need adequate policy space and freedom to be able to choose between different options in relation to their trade policies.  Developing countries must have the scope and flexibility to make strategic choices in trade policies and related policies in the areas of finance, investment and technology, in order to make decisions on the rate and scope of liberalisation.  This principle should be integrated into the WTO system of principles and rules.

Reorienting the WTO towards development as the main priority

The preamble to the Marrakesh Agreement Establishing the WTO recognises the objective  of sustainable development and also the need for positive efforts to ensure the developing countries secure a share in international trade growth commensurate with the needs of their economic development.  However, in practice, development is not seen as a primary WTO objective;  nor was it a primary purpose of the Uruguay Round or the Marrakesh Agreement.

In the preparation for the Doha Ministerial, many developing countries (in their own regional Ministerial conferences and in their statements at the WTO) strongly advocated that the WTO Ministerial Conference decide on reorienting the WTO in order to place development concerns at the centre of the organisations rules and work.  Although the substance of the Doha Declaration has not been development-friendly (and is in many ways contrary to the interests of development), the Declaration does make the following statement: The majority of WTO members are developing countries. We seek to place their needs and interests at the heart of the work programme adopted in this Declaration (para 2). If we are to believe that the main objectives of the WTO are to promote the trade and development of developing countries, then the logical question to resolve is, what would it take to orient the WTO to become such a pro-development organisation?

The objective of development should become the overriding principle guiding the work of the WTO, whose rules and operations should be designed to produce development as the outcome. Since the developing countries form the majority of the WTO membership, the development of these countries should be the first and foremost concern of the WTO.

The test of a rule, proposal or policy being considered  in the WTO should not be whether it is trade-distorting but whether it is development-distorting. Since development is the ultimate objective, whilst reduction of trade barriers is only a means, the need to avoid development distortions should have primacy over the avoidance of trade distortion. So-called trade distortions could in some circumstances constitute a necessary condition for meeting development objectives. From this perspective, the prevention of development-distorting rules, measures, policies and approaches should be the overriding concern of the WTO.

The reorientation of the WTO towards this perspective and approach is essential if there is to be progress towards a fair and balanced multilateral trading system with more benefits rather than costs for developing countries. Such a reorientation would make the rules and judgment of future proposals more in line with empirical reality and practical necessities.

Taking this approach, the goal for developing countries would be to attain appropriate liberalisation rather than maximum liberalisation.

The rules of the WTO should be reviewed to screen out those that are development-distorting, and a decision could be made that, at the least,  developing countries be exempted from being obliged to follow rules or measures that prevent them from meeting their development objectives. These exemptions can be on the basis of special and differential treatment.

Reconsidering the introduction of the proposed new issues into the WTO

It is argued above that there is a need to rethink trade liberalisation and to reorient the WTO towards development objectives. These require reforms to the existing WTO system.  Before such reforms are implemented, it would be counter-productive to introduce yet more new issues into the WTO which would further burden the developing countries with inappropriate obligations and which would make the system even more imbalanced. There should thus be a consideration of the proposed new issues from a development perspective.

The proposals for bringing in new issues (the Singapore issues, especially investment, competition and transparency in government procurement; and environmental and social standards) are inappropriate for the following reasons:

·        The WTO is a multilateral trade organisation that makes and enforces rules.  It should stick to its mandate for dealing with trade issues. 

·        Principles (such as transparency, national treatment) and operations that were created for a regime dealing with trade issues may not be suitable when applied to non-trade issues.

·        The new issues are not trade issues and do not belong in the WTO. If these issues are to be discussed internationally, other, more appropriate venues should be found for them. If they are nevertheless brought into the WTO, they will lead to a distortion and possibly to a destabilisation of the multilateral trade system, to the detriment of world trade.

·        The major proponents are seeking to bring non-trade issues into the WTO not because this would strengthen the trade system, but because the WTO has a strong enforcement mechanism (its dispute settlement system with the remedy of trade sanctions). Thus, if developing countries are members to agreements lodged in the WTO, there is the strong possibility of their compliance. However, the contamination of a system created for trade issues with non-trade issues may cause serious damage to the WTO. Moreover, the fact that developing countries are likely to comply with binding rules backed by a strong enforcement mechanism does not necessarily mean that the outcome is appropriate. If the rules are inappropriate, then the fact that they are binding and complied with would actually worsen an inappropriate outcome.

·        If these non-trade issues are brought into the WTO, and WTO principles as interpreted by developed countries are applied to them, developing countries will be at a serious disadvantage, and would lose a great deal of their policy flexibility and the ability to make national policies of their own.

·        During the Uruguay Round, the developed countries already brought in new issues: intellectual property, services and investment measures. The agreements covering these areas (TRIPS, GATS and TRIMs respectively) are already causing many serious problems, giving rise to the implementation issues. Prof. Jagdish Bhagwati, the renowned trade economist, and adviser to the GATT Director-General Arthur Dunkel during the Uruguay Round, has commented in the Financial Times that it was a mistake to have introduced intellectual property into the WTO as it is not a trade issue, has distorted the trade system and has been non-reciprocal (as most patents belong to developed countries and the developing countries have had to bear the high costs of royalty payment), and that the TRIPS Agreement should be taken out of the WTO.  The lesson should be learnt from the inappropriate introduction of non-trade issues in the Uruguay Round, so that this is not repeated.

·        Even without the new issues, the present agenda of the WTO is very full and indeed already overloaded. It includes implementation issues, the built-in agenda of agriculture and services negotiations and the mandated reviews of the TRIPS and TRIMs Agreements, the many other items of the post-Doha programme and the routine work of the many committees, the trade reviews, and the dispute cases. Introducing new issues into the WTO will make the overload much worse, and distract from the other work of the WTO dealing with trade and other existing issues as listed above. Developing countries do not have the manpower and financial resources to cope with negotiations on new issues as well as the other items on the agenda. 

The WTO should therefore be limited in scope to dealing with trade issues which have a legitimate place within a system of multilateral trade rules, and these rules and the system must primarily be designed or redesigned to benefit developing countries, which form the majority of the WTO membership. There is at present no system for determining if or how new issues are brought into the WTO. Such a system should be established.  Issues to be brought under the competence of the WTO should meet certain criteria, such as that:

·        The issue is a trade issue appropriate for a system of multilateral trade rules.

·        The WTO is the appropriate venue, and there are no venues that are more appropriate.

·        The issue is sufficiently mature in that Members have an understanding of it and how it relates to the WTO and to their interests.

·        If brought into the WTO, the issue (and how it will be interpreted) will clearly be in the interests of developing countries, which constitute the majority of the membership.

·        There must be a consensus of all Members that the issue should be brought in, and on how it should be brought in.  And this should be a genuine consensus based on a full understanding by Members, all of which should be allowed to participate fully in the decision-making process in Geneva and at the Ministerial Conference itself.

Rethinking the scope of the WTOs mandate and the role of other agencies

It is misleading to equate the WTO with the multilateral trading system, as is often done in many discussions. In fact the WTO is both less than and more than the global trade system. There are key issues regarding world trade that the WTO is not seriously concerned with, including the trends and problems of the terms of trade of its Members, and the problems in primary commodity markets (including low commodity prices). On the other hand, the WTO has become deeply involved in domestic policy issues such as intellectual property laws, domestic investment and subsidy policies. There are also proposals to bring in other non-trade issues including labour and environment standards.

The WTO and its predecessor the GATT have evolved trade principles (such as non-discrimination, MFN and national treatment) that were derived in the context of trade in goods. It is by no means assured or agreed that the application of the same principles to areas outside of trade would lead to positive outcomes.  Indeed, the incorporation of non-trade issues into the WTO system could distort the work of the WTO itself and the multilateral trading system.

Therefore, a fundamental rethinking of the mandate and scope of the WTO is required. Firstly, issues that are not trade issues should not be introduced in the WTO as subjects for rules. This rule should apply at least until the question of the appropriateness and criteria of proposed issues is dealt with satisfactorily in a systemic manner.

Secondly, a review should be made of the issues that are currently in the WTO to determine whether the WTO is indeed the appropriate venue for them. Prominent trade economists such as Prof. Jagdish Bhagwati and Prof. TN Srinivasan have concluded that it was a mistake to have incorporated intellectual property as an issue in the Uruguay Round and in the WTO. There should be a serious consideration, starting with the mandated review process, of transferring the TRIPS Agreement from the WTO to a more suitable forum.

Within its traditional ambit of trade in goods, the WTO should reorientate its primary operational objectives and principles towards development, as elaborated above. The imbalances in the agreements relating to goods should be ironed out, with the rebalancing designed to meet the development needs of developing countries and to be more in line with the realities of the liberalisation and development processes.

With these changes, the WTO could better play its role in the designing and maintenance of fair rules for trade, and thus contribute towards a balanced, predictable international trading system which is designed to produce and promote development.

The WTO, reformed along the lines above, should then be seen as a key component of the international trading system, co-existing with, complementing and cooperating with other organisations, and together the WTO and these other organisations would operate within the framework of the trading system.

Other critical trade issues should be dealt with by other organisations, which should be given the mandate, support and resources to carry out their tasks effectively. These other issues should include: (i) assisting developing countries to build their capacity for production, marketing, distribution and trade;  (ii) the need for monitoring and stabilising commodity markets, with a view to ensuring reasonable prices and earnings for commodity-producing developing countries;  (iii)  addressing the restrictive business and trade practices of transnational corporations that hamper the ability of smaller firms to engage in production and trade;  (iv) addressing the problems of low commodity prices and developing countries terms of trade.   These issues can be dealt with by various UN bodies, especially a revitalised UNCTAD.

Transparency and participation in the WTO system

The Doha Conference and its preparatory process has also raised again the issue of transparency and the limited ability of developing countries to participate in decision-making in the WTO.  Although the developing countries prepared themselves well and played an active role in making their views known at the WTO meetings and consultations in Geneva, their views were not reflected properly (and in some areas not at all) in the several drafts of the Ministerial Declaration that were produced in Geneva and subsequently at Doha.  Although the contents of the last Geneva draft were heavily disputed by many developing countries, it was nevertheless transmitted without change and in a form that did not incorporate the various diverging views and options, thus placing the dissenting developing countries at a grave disadvantage. The biases in the process in favour of developed countries, and the disadvantage at which developing countries have been placed in the negotiations, have caused exasperation and frustration among the delegations of several developing countries, as well as among many non-governmental organisations and social movements which witnessed the events and the processes. 

Although promises have been made many times (notably at the Singapore Ministerial Conference and after the Seattle Ministerial Conference), by the developed countries and by the management of the WTO Secretariat, to do away with untransparent and selective processes such as the exclusive Green Room meetings, and to ensure greater participation of developing-country Members, the unsatisfactory procedures and methods used before and at Doha have made clear that the situation is even less satisfactory than ever and thus that there is an imperative for reform in the decision-making processes and procedures of the WTO.  Until this is undertaken, it is unlikely that the developing countries efforts to improve their position and promote their interests in the WTO and in the multilateral trading system will bear fruit.

References

Buffie, Edward (2001).   Trade Policy in Developing Countries. Cambridge: Cambridge University Press.

Khor, Martin (2002). An analysis of the WTOs Fourth Ministerial Conference in Doha, 9-14 November 2001.

______ (2001). Present problems and future shape of the WTO and multilateral trade system. Third World Network Briefing Paper No. 2.

______ (2000).   Globalization and the South: Some Critical Issues.  Penang, Malaysia: Third World Network.

Shafaeddin, S.M. (1994).  The Impact of Trade Liberalisation on Export and GDP Growth in Least Developed Countries. Discussion Paper No. 85. Geneva: UNCTAD.