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 A Godsend for developing Countries

Arvind Panagariya

Immediately preceding the Cancun conference, three former prime ministers—H.D. Deve Gowda, I.K. Gujral and V.P. Singh—lent their support to a rally decrying WTO as the World Terrorist Organization.  Deve Gowda and Gujral had served as prime ministers after the birth of WTO on January 1, 1995 and therefore had the opportunity to withdraw from it.  They did no such thing perhaps because they knew that India benefited hugely from the membership.  But now that they are in the opposition, they must not feel the same responsibility any longer.

That WTO is beneficial should be obvious from the fact that as many as 148 countries are its members today.  China made very substantial concessions to join it two years ago and Russia is waiting in the queue.  While new members have steadily been added, few have exited the institution.

Why member governments nearly universally view WTO as beneficial can be best appreciated by understanding what it does.  In its current form, WTO has three major functions:  administering the trade agreements negotiated by its members in the past; settling trade disputes; and acting as a forum for negotiations for further trade agreements.  All of these functions contribute to the smooth flow of trade within a rules-based trading system.

The existing agreements that WTO administers span three areas: trade in goods; trade in services; and intellectual property rights (IPRs).  The agreements in the last two areas were concluded relatively recently as a part of the Uruguay Round Agreement that established WTO, while those relating to goods have had a much longer history.  The General Agreement on Tariffs and Trade (GATT), the principal agreement governing trade in goods, had come into force as early as January 1, 1948.  Initially, only 23 nations including India had signed it but the membership expanded steadily over time.

            Though GATT has now been in existence for more than five decades, it never became controversial in the way WTO has become controversial today.  For decades, it has provided a set of rules within which the world trade has grown rapidly.  The cornerstone of this agreement is the so-called Most Favored Nation (MFN) principle, which says that member nations are not to discriminate among GATT signatories in their trade policy.  This means that if the United States lowers its tariff on the Japanese automobiles in return for a tariff reduction by Japan on the imports of U.S. steel, the two nations must automatically extend these tariff reductions to all other GATT signatories to rule out discrimination.

            A key function of GATT (like that of WTO now) was to serve as a forum for negotiations of new agreements among member nations.  This mandate translated into the conclusion of seven negotiating rounds by 1979, principally aimed at tariff reductions among the signatories.  A key feature of these negotiations was that until the seventh round, known as the Tokyo Round and concluded in 1979, developing countries were allowed to stay out of the active negotiations if they so chose.  The result was that even though developing countries undertook no liberalization commitments whatsoever, under the MFN rule of GATT, they became the beneficiaries of the massive liberalization commitments made by developed countries.

            Developing countries such as South Korea, Taiwan, Hong and Singapore, which nevertheless chose to adopt outward-oriented policies themselves, were able to take advantage of this progressive opening of the developed country markets and rapidly transformed themselves into semi-industrialized economies.  Countries such as China and India that chose to be inward oriented, on the other hand, missed the boat until they too began to open up their economies in the 1980s.

            It was in launching the Uruguay Round in the 1980s that the United States and other developed countries insisted that developing countries actively join the negotiations and undertake liberalizing commitments of their own.  Moreover, they also insisted on bringing trade in services and intellectual property rights (IPRs) within the ambit of international rules.  The round became contentious with a key source of controversy being IPRs that the United States insisted on and developing countries vehemently opposed.  In the end, the United States prevailed and the round concluded in 1993 with the signatory countries agreeing to establish WTO as a permanent institution and trade in services and intellectual property rights brought under its purview along with trade in goods.

            Reflecting their greater bargaining power due to a very large share in the world trade and income, developed countries benefited more from the Uruguay Round (UR) Agreement than developing countries.  Developing countries benefited from their own liberalization; liberalization by developed countries, especially the agreement to end the Multi-fibre Agreement (MFA) that restricts their exports of textiles and apparel to developed countries through a web of bilateral quotas; and a strong dispute settlement system that protects their trading rights on equal footing with developed countries.  But they lost on account of the agreement on IPRs, which allows developed countries to collect large rents from them on innovations and is expected to put an end to the availability of inexpensive copies of patented medicines.

            Unfortunately, in the post-WTO era, the international institutions and civil society groups have failed to emphasize sufficiently the benefits of WTO to developing countries and chosen, instead, to focus exclusively on the protection that remains in developed countries.  Worse yet, the proposition that the UR Agreement benefited developed countries more has been translated by many into the proposition that developing countries were actually hurt by it.  Such focus has contributed to the demonization of an institution that has been godsend for developing countries.

            Those who view WTO as an evil organization need only contemplate the counterfactual.  Suppose there was no WTO.  Will developed countries then need to negotiate a link between trade and labor standards or trade and environmental standards with developing countries?  No.  In the absence of a rules based system offered by WTO, these countries would simply impose trade sanctions unilaterally against countries that do not adhere to their desired standards.

Economic Times, October 22, 2004