Why developing world afraid of WTO

By Sahibzada Hussain Mohi-ud-Din Qadri

The World Trade Organization was the culmination of Uruguay round aimed at regulating international trade. The edifice of WTO is erected on multilateral trading system evolved in the form of GATT since 1947. In 1947 the members of the system were 23 which increased to 150 in 2007. In terms of membership, it is remarkable increase and points to the fact that multilateral trading system is the best possible arrangement for regulation of international trade evolved by the world community so far. WTO is a reality now.

The proponents of multilateral trading system argue that not only has the membership of multilateral trading system increased; its scope has also enlarged with the passage of time. Initially multilateral trading system was restricted to regulation of trade in goods only but with the formation of WTO in 1995, its scope increased to services and intellectual property rights also. The issues like antidumping duties, Customs valuation, Rules of origin, subsidies and safeguard measures etc. have also come under its ambit. There is an elaborate legislation on these issues under the WTO and different cases decided by its appellate body have further improved and clarified the WTO legislation.

It is argued that WTO dispute settlement mechanism is very remarkable. The law provides for timelines to be observed for different stages of the case. It further provides for equality before the law where a least developed country can file a complaint against the giant like USA. Two fundamental principles of non-discrimination i.e. Most Favored Nation (MFN) and National Treatment (NT) underpin the equal rights of WTO members. It treats all its members alike irrespective of the fact whether they are rich or poor, big or small, strong or weak.

The decision making in WTO is based on the principle of consensus. All member countries have full participation and this distinguishes WTO from other international organizations where authority is normally delegated to take decisions on behalf of members of the organization. WTO secretariat has limited executive powers and does not have power to influence the countries’ policies. It merely provides technical and analytical comments on issues like regular trade policy reviews. The proponents of WTO also say that development issues concerning the developing countries have also been taken up by the WTO as these issues are at the core of Doha development round launched in November 2001.

Despite all above ‘good’ points, the popular perception among the developing countries is that WTO is not adequately addressing their concerns. It has failed to take concrete steps on issues having much relevance with the developing countries. The mushroom growth of regional trading agreements is manifestation of their dissatisfaction with the multilateral trading system. The concerns of the developing countries came to the fore at Cancun when they raised their voice on market access issue both for agriculture and non-agriculture products. The Cancun Ministerial Meeting in September 2003 ended in fiasco and without an agreement on how to proceed.

The developed countries are the major providers of domestic support to their farmers. This agricultural domestic support is of great concern for developing countries. The farmers of the developing countries are unable to compete in the international market with the farmers of the developed countries who receive large amount of domestic support from their governments. The bulk of domestic support is provided by the EU, USA and Japan. According to World Trade Report (2006), the EU spent on average US$96.1 billion on domestic support, followed by the USA with US$66.2 billion and then Japan with US$48.1 billion, during the period 1995 – 2001.

Export subsidies for non-farm goods are prohibited under the WTO law. Elimination of farm export subsidies means bringing agriculture at par with other goods. It was agreed at the Hong Kong Ministerial Meeting that such subsidies will be phased out by 2013. The World Trade Report says that 21 developed countries spent nearly US$250 billion in 2003 on subsidies. The total subsidies given by whole of the world were about US$300 billion in that year. In terms of subsidies to GDP ratio, the developing countries spent 0.6% compared with developed countries whose ratio was 1.4%. It is imperative that elimination of these subsidies should be an essential component of a comprehensive Doha agreement.

The results of negotiations on non-agricultural tariffs are also not forthcoming. The effective rates of tariff on goods of particular interest for developing countries are still high. Even the Generalized System of Preferences (GSP) has not yielded any tangible results for the least developing countries. The traders of the developing countries requesting preferences have to comply with some administrative and technical requirements. The most important requirement is related to compliance with Rules of Origin intended to prevent trade deflection. Different empirical studies have estimated the cost of compliance in the range of 3 – 5% of the value of goods. For developing countries this compliance cost may be higher due to institutional weaknesses and information disadvantages. Paul Brenton & Miriam Manchin (2002) have found that only one third of EU imports from developing countries eligible for preferences under GSP entered the EU market with reduced duties.

The developing and least developed countries constitute an insignificant share in world trade. In 2004, Least-Developed Countries (LDCs) accounted for only 0.6% of world exports and 0.8% of world imports. Their export profile is characterized with a narrow range of products, a lack of diversification of export markets and low technology content. Besides market access issue, these countries face acute supply-side constraints and do not have much “exportable surplus” to supply in the world market. Even if trade is fully liberalized and market access issue is appropriately tackled, the developing world will not be in a position to take full advantage of trade liberalization due to their low capacity to supply. The emphasis of WTO is on trade liberalization and no tangible mechanism is in place to increase their potential for generating more exportable surplus, which reduces the degree of relevance of WTO for them. This strengthens their perception that WTO is a club of developed countries only.

The development issues came to the forefront when provisions under the head “Trade and Development” were added to GATT. Special and differential (S&D) provisions were also a part of this move but fact remains that WTO has not been able to evolve an effective mechanism to render help to the least developed countries for overcoming their supply-side constraints. There is a growing demand from the developing world that they should be given aid for increasing their trade. “Aid for trade” is highly needed to address the concerns of the developing world and change the popular perception that WTO is not capable of solving their trade problems.

Time factor is highly important in this regard. The negotiations under the WTO are conducted in rounds spanning over years, meaning thereby that reforms in the system are not frequent. About seven years elapsed between the end of the Tokyo Round and the beginning of the Uruguay Round and it took eight years for the completion of Uruguay Round and the launch of the Doha Development Agenda in November 2001. The Doha Development Round is still going on and chances of its early completion are not visible due to deep differences between the developing and the developed world over the issues of agricultural subsidy and market access. The glacial pace of negotiations in WTO Rounds has further disillusioned the developing world. Despite several ministerial meetings, the WTO has failed to break the impasse regarding cuts in barriers to trade in agriculture, industrial goods and services amid cross-cutting disagreements. It is imperative that all WTO members make their contribution for successful completion of Doha Round. They need to show political will to move forward and break the deadlock on the Doha Round of talks.

E-mail: hmq@hmqadri.com