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WTO & developing country interests
Arvind Panagariya


The Uruguay Round (UR) Agreement stipulates that, beginning January 1, 2000, WTO members will launch a round of negotiations for trade liberalisation in agriculture and services. With that date approaching, there is now a talk in international policy circles of a millennium round of multilateral trade negotiations (MTNs). In all likelihood, the next WTO Ministerial, to be held in Washington, D.C. next year, will begin giving shape to the agenda for such a round. How should the developing countries such as India approach this development?

Prior to the Uruguay Round, developing countries had not participated actively in the MTNs. On the one hand, this fact gave developing countries a ``free ride''; under the Most Favoured Nation (MFN) rule of the General Agreement on Tariffs and Trade (GATT), now a key component of the WTO, a tariff reduction granted to one trading partner must be granted to all GATT members. But on the other hand, this non-participation encouraged developed countries to leave the sectors of greatest interest to developing countries out of the liberalisation exercises. Indeed, they were able to maintain tight control of the sector in which developing countries have the greatest export potential, textiles and clothing, via the abominable, GATT sanctioned Multi-fibre Agreement (MFA).

All this changed in the Uruguay Round, however. Developing countries participated actively in this MTN, accepting for the first time the GATT tariff bindings. Despite this switch, in the post-Uruguay-Round era, developing countries have largely played a reactive role in shaping the WTO agenda. Therefore, it makes more sense to adopt a joint, pro-active approach that pushes common developing-country interests at the WTO Ministerial in Washington, D.C. next year.

The first element in this approach should be to place on the forefront proposals for trade liberalisation in not just agriculture and services, as required by the built-in UR agenda, but also industrial goods. There are many reasons why the inclusion of industrial products in this round should be an integral part of developing Asia's strategy.

First, starting with TRIPs and TRIMs, developed countries have increasingly focused attention at the WTO on what is essentially non-trade agenda. The clearest example of this approach is the attention given to the inclusion of labour and environmental standards into the WTO agenda. Thanks to a concerted action on the part of the developing countries and the support from some key developed countries, the issue of labour standards has now been delegated to the International Labour Organisation. But other non-trade issues, often involving concessions by developing countries, will continue to form a part of the WTO agenda put forward by developed countries. One way to defuse this agenda is to re-focus attention on the conventional border-trade measures from whose liberalisation all parties concerned can gain.

Second, in recent years, the impression has been conveyed that with developed-countries' post-Uruguay-Round average tariff rates coming down to 3 to 4 per cent, these countries have virtually reached a state of free trade with respect to border measures. Yet, from the viewpoint of developing countries, nothing could be farther from truth. Thus, despite an end to the MFA scheduled to be accomplished by January 1, 2005, tariffs in the US, EU and Japan on textiles and clothing will remain very high. According to the calculations done by the United Nations Conference on Trade and Development (UNCTAD), the average tariff rates on products in this category are 14.6 per cent in the US, 9.1 per cent in EU and 7.6 per cent in Japan. Within this category, many products have much higher rates. In the US, post-Uruguay-Round rates on 52 per cent of textiles and clothing imports are between 15 to 35 per cent. Other categories of interest to Asian developing countries with high post-Uruguay-Round tariffs are leather, rubber nd footwear and fish and fish products.

Third, despite much liberalisation in recent years, developing countries continue to have sufficiently high tariffs on industrial products to engage the developed countries in a bargain. In the countries in South Asia, with the possible exception of Sri Lanka, tariffs are extremely high. In east and southeast Asia, they are lower but still high by developed-country standards. Thus, room for the first and perhaps last major North-South bargain exists.

Fourth, on the surface, it may seem that trade barriers in developing countries are higher than in developed countries so that in a negotiation leading to more or less free trade across the board, the former will end up giving more concessions than they will receive and the ensuing bargain will be uneven.

There are two arguments against this line of reasoning, however. First, developed-country markets are much larger than developing-country markets. Therefore, a 1 per cent tariff reduction by the former, especially in products of interest to developing countries, is worth more than a similar reduction by the latter. Even if the extent of additional liberalisation by developed countries is smaller, the gains to the developing countries may be larger. Second, developing countries being individually small, if a further round of multilateral trade negotiations is delayed, many of them are likely to carry out a substantial liberalisation on a unilateral basis anyway. Therefore, it may be in their self interest to push for such a negotiation.

Finally, some may argue that with Information Technology Agreement and the agreements on basic telecommunications and financial services successfully concluded, there is no need for a comprehensive round. Negotiations can proceed along sectoral lines on a piecemeal basis. In my judgement, this is an inefficient way to conduct negotiations and it does not serve the developing countries well. First, to the extent that negotiating agenda is set by developed countries, those sectors of interest to developed countries will be liberalised first. The Information Technology Agreement was clearly pushed by developed countries with developing countries accepting it as fait accompli at the Singapore Ministerial. An extension of this approach is sure to place the sectors of interest to developing countries - e.g., textiles and clothing - at the bottom of the liberalisation time table.

Second, a comprehensive negotiation offers a much greater scope for bargains than sectoral negotiations. For instance, concessions in industrial products can be exchanged against those in agriculture or services. Finally, from the viewpoint of economic adjustment, simultaneous liberalisation in several sectors is superior to sector-by-sector liberalisation. The former offer opportunities for resource allocation across sectors while the latter limits them to the single sector. Indeed, in a subtle way, liberalisation which is limited to a few sectors which already have very low tariffs, despite its MFN nature, leads to a ``diversion'' of trade from sectors with high protection and is likely to be harmful according to the standard welfare analysis.

Some may argue that with the Uruguay Round still under implementation, the time for initiating talks for another comprehensive round is not ripe yet. But it must be recalled that the preparations today will lead to the launching of a round no sooner than the year 2002. And if the Uruguay Round is any guide, the negotiations will take another ten years, yielding an agreement some time in the year 2012. Thus, the time for a consideration of the next round is now.

Economic Times, December 14, 1998

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