WHY THE SOUTH SHOULD AVOID NEW ISSUES IN W.T.O.

With so many problems already arising from the existing WTO rules, developing counries can ill afford to allow new issues (being proposed by the major developed countries) to enter the WTO at its Seattle Conference. These new issues would divert attention from the existing problems and also greatly worsen the already heavy bias against developing countries. This article examines why the proposed new issues of investment, competition, procurement and industrial tariffs will work against the South. (Second of a two-part article based on the writer's presentation at the recent Group of 77 Ministerial Meeting at Marrakech)

By Martin Khor

October 1999

A thorough review of the existing rules and system of decision-making in the World Trade Organisation is urgently needed to have more balance in the system, which is now heavily biased in favour of the developed countries.

Such a review is now being demanded by many developing countries as they prepare for negotiations in the weeks before the WTO's Seattle Conference in November.

In contrast, the major developed countries are insisting that a new Round be initiated, during which new rules or agreements are drawn up for new issues like investment, competition, government procurement, industrial tariffs and electronic commerce.

This clash of priorities in what should constitute the work of the WTO in the next few years will dominate the WTO negotiations before and at Seattle. The process of reviewing the present WTO rules and system, which is so badly needed by developing countries, will not take place properly if there is a proliferation of new issues in a new Round.

The extremely limited human and financial resources of developing countries would be diverted away from the review process to defending their interests in the negotiations on new issues. The limited time of the WTO would also be mainly engaged in the new issues.

There will be little time for examining, reviewing and improving the existing agreements, and the problems arising from their implementation will increase through time and accumulate, and manifest themselves in social and economic dislocation and political instability in many countries.

If this is not enough, most of the proposed new issues would also have the most serious consequences for the South's future development. These issues do not belong in the WTO (which is supposed to be a trade organisation) in the first place.

They are sought to be placed there by the developed countries to take advantage of the enforcement capability (the dispute settlement system) of the WTO, so that disciplines can be effectively put on developing countries to open their economies to the goods, services and companies of the developed countries.

Developing countries should therefore oppose the injection of these new areas into the WTO. The following is an examination of four of the proposed 'new issues'.

(i) Investment Issue

The proposal to negotiate an investment agreement would convert the WTO from a trade organisation to one also dealing with a different area: investment policy. The present rights of developing countries (as hosts) to regulate the entry, conditions and operations of foreign firms would be severely restricted. Performance requirements, investment incentives, regulation of inflow and outflow of funds, preferences in many areas to local firms and citizens, would be curtailed.

Due to widespread opposition to the original model of the multilateral agreement on investment that was discussed at the Organisation for Economic Cooperation and Development (OECD), a watered-down version is now being put forward at the WTO to make the investment issue more palatable at the start.

However, there is no doubt that once an investment agreement is in place, even if it is initially a 'diluted' version, pressures will continuously be put on developing countries to liberalise, and to curtail their ability to regulate in favour of local firms or to place conditions or obligations on foreign firms. Eventually the viability or development of local firms (and farms) will be threatened.

Given the seriousness of the whole issue, the investment working group at the WTO should continue to only study the issue, and the WTO should not initiate a negotiation for an investment agreement in Seattle.

(ii) Transparency in Government Procurement

The proposal to initiate negotiations for an agreement (or even to already conclude an agreement) on transparency in government procurement at Seattle is also detrimental to the South.

Up to now, government procurement decisions are exempted from multilateral GATT (General Agreement on Tariffs and Trade) disciplines. By right, states in developing countries have the freedom and option to spend according to their own criteria and development objectives, and preference for local firms is a practice in most countries.

It is argued by the proponents that there is no harm (and every benefit) to developing countries to have greater transparency and reduce corruption and that market access is not part of the proposed agreement. In itself, greater transparency is good. However, in the WTO context, there is no escaping the link between transparency and market access for foreign firms, and when this is also linked to the dispute settlement system, there will be many problems for developing countries.

More importantly, it is well known through earlier papers submitted to the WTO that the real aim of the major countries is the full integration of government procurement (especially market access and national treatment for foreign firms) in the WTO. The transparency agreement would be only phase one. Once procurement enters the WTO in this 'innocent guise', the real issues of access and national treatment are bound to quickly follow.

Developing countries should therefore reject the 'multilateralisation' of the procurement issue, since once the concept of procurement makes an entrance into the multilateral trading system, even in limited form, the full body will eventually follow inside through further intense pressures. The consequences for developing countries will be tremendous as governments would largely lose perhaps their most important direct instrument for achieving social, economic and developmental goals.

They should therefore not agree to sign an agreement (or to negotiate an agreement) even on transparency. Instead, the whole issue should continue to be studied in the relevant working group until it is clear what the ultimate intentions of the major countries are and what are the development implications of integration of procurement into the WTO system.

(iii) Competition Policy

On the competition issue, it is clear that the major proponents for a WTO agreement on competition policy would like to use it as another tool to gain market access to developing countries which are held to have too many practices and policies that favour local firms and thus work against foreign firms. Through a WTO agreement, developing countries would have to establish competition policies that discipline state enterprises and the practices of local firms; preferential treatment for local firms would also be curbed, in order that foreign enterprises can compete 'on equal terms' as locals.

The likely end result is that the smaller local firms will be rendered uncompetitive as any advantages they have left would be largely removed, and large foreign firms or their products would have a greater monopolistic share of local markets.

Many developing countries have perspectives that are different from the above. They would like the restrictive business practices of large multinationals to be curbed and the trend of mergers of giant banks and corporations to be reversed. They also want the abuse of anti-dumping and other trade measures in the North to be stopped, as this is anti-competitive against imports from the South. But the major countries do not share these concerns.

Due to the complexities of the issues and their importance, it is unclear how competition policy should be treated in the WTO. The competition working group should thus continue its discussions. Seattle should not launch any negotiations for an agreement.

(iv) Industrial Tariffs

The proposal for a new round of industrial tariff cuts would place great pressure on the developing countries' manufacturing sector. Since their industrial tariffs are generally higher than the rates in developed countries, it is the developing countries that will be asked to make more concessions overall in any such exercise.

Firstly, this is unfair because the developing countries have already liberalised at a faster rate generally in recent years. Also, the developed countries have yet to bring down their high barriers in textiles and clothing, or in agriculture, despite having been given waivers for four to five decades.

Their need to continue such very long-term protection demonstrates that developing countries (that have much weaker economies and a much shorter time since Independence to build their own capacities) have an even greater need to protect their local industries.

Developing countries are still able to have industrial policies and in future may decide to selectively increase tariffs on some selected products which may be chosen for domestic development. This policy option would be closed should a new round of industrial tariff cuts cause these countries to bind their tariff rates at lower and lower levels.

In many developing countries, there has already been a deindustrialisation process in which the lowering of tariffs leads to imports displacing local industries. Moreover, as the 1999 UNCTAD Report points out, in many developing countries, rapid import liberalisation led to a high increase in imports that was not matched by export growth, thus causing a widening of trade deficits and balance-of-payments difficulties which in turn placed constraints on growth.

In light of the above, it would be wrong for developing countries to agree now to another round of industrial tariff liberalisation. To correct the present imbalances, and show their sincerity, the developed countries should instead pledge at Seattle to reduce or eliminate their industrial tariff peaks and escalation, without asking the developing countries to engage in another round of industrial tariff cuts. Conclusion

The next few months before and at Seattle are crucial for the future of developing countries. The developing countries, which after all are the majority, can shape the WTO to be a pro-development organisation, or we can continue to give in to the pressures from the major developed countries which want to make use of the WTO's enforcement system of trade sanctions to shape the world according to their interests.

We may be unhappy and frustrated with the approach of the North and with the status quo but feelings or even expressions of unhappiness and frustration are insufficient. The situation must urgently be corrected. Developing countries must unite and persuade first ourselves and then the developed countries that this is the time to review the WTO and not to expand its scope further until the review is done and the imbalances and deficiencies are corrected. New issues should not enter until the reform is completed.

The task in the months ahead is great as the future of developing countries and their people are at stake. - Third World Network Features

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About the writer: Martin Khor is Director of the Third World Network.

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