Impact of WTO policies on developing economies

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Information about Impact of WTO policies on developing economies

Published on December 25, 2013

Author: nilchalanrasi


IMPACT OF WTO POLICIES ON DEVELOPING COUNTRIES Globalisation and development 5th November 2013

THE WTO: ITS EVOLUTION • The ITO and GATT 1947 • Filling the gap left by still born ITO • De facto international trade organisation • Success and failure • Uruguay Round (1986-1993): the longest round ever • • • • Punta del Este Declaration Proposals for a MTO (1990) Marrakesh Agreement (1994) WTO since 1.1.1995 2

WTO-A BRIEF PROFILE 159 member nations (over 97% of world trade). 3 25 ‗observer‘ countries.

4 GATT/WTO Membership 180 160 140 120 100 80 60 40 20 19 48 19 53 19 61 19 65 19 70 19 78 19 83 19 90 19 94 19 98 20 02 20 07 0 total membership new members

The World Trade Organization (WTO/GATT) 5 Duration of GATT rounds and number of countries involved 100 To k y o U ru g u a y K ennedy Fourth 40 S econd 60 Third 80 First num ber of countries at start 120 D illo n 20 0 1945 1955 1965 1975 y ear 1985 1995

6 -December 3-6, 2013 in Bali, Indonesia. -Trade Facilitation -WTO rules -Agriculture

7 VIDEO WTO-an introduction

8 ECONOMIC GLOBALISATION AND WTO LAW • Economic Globalisation and International Trade • What is meant by economic globalisation? • Gradual integration of national economies into a global borderless economy • Influenced by (and their democratisation) • forces of technology • of finance • of information • Why is it under critique? • • • • • Reasons and reactions Globaphiles vs globaphobes Expansion of cross-border economic interaction: more trade, more welfare Erosion of local control, autonomy and identity Soverignity • WTO as vehicle of freer and open trade? • Balancing of interests necessary • Global economic governance

9 ECONOMIC GLOBALISATION AND WTO LAW • Figures on trade (last 50 years) show changes in trade developments General increase of world trade Increase of share of services in relations to goods decline of trade in Europe raise in Latin-America, Africa and Asia 48 LDC account to only 0.5 percent of world trade China, India and Mexico major suppliers of cutting/-edge technologies and laborintensive goods • Increased trade with companies and foreign direct investment • • • • • • • International trade rules: reasons • Restraining protectionism • More security and predictability • Governance in globalised economy

10 URUGUAY ROUND REQUIREMENTS: DIFFICULTIES • Intellectual Property (TRIPS) : Time frame-5 years • TRIMS (TRIMS) : o Minimum local content and trade balancing ; o Flexibility to choose investment promotion policies; o Time frame (by 1st Jan 2001) o Sanitary and phytosanitary measures and technical barriers to trade (SPS) : o No consultation o Difficulty to meet global standards o Market Access: o Agricultureo Extremely high tariffs o Escalated tariff on processed foods o Trade distorting subsidies o Quotas o Textiles and Clothing o Quota (Multi fibre agreement) o Transitional Safeguards o Anti dumping actions o Discriminatory rule of origin

11 DOHA ROUND • Launched in Doha (Qatar) in November 2001 • Doha Development Agenda • To postpone the deadline for some developing countries to eliminate export subsidies and for least-developed countries to provide protection for pharmaceutical patents and test data, and to tackle problems faced by countries unable to make generic versions of patented medicines. • Areas of Concern: • • • • Implementation-related issues and concerns Agriculture Services TRIPS and issues • • • • And public health And geographical indications And biodiversity Protection of traditional knowledge and folkore

12 SUBJECTS IN DOHA DECLARATION • • • • • • • • • Agriculture (par 13, 14) Services (par 15) Non-agricultural products (par 16) TRIPS (par 17-19) Relationship between trade and investment (par 20-22) Interaction between trade and competition policy (par 23–25) Transparency in government procurement (par 26) Trade facilitation (par 27) WTO rules: anti-dumping and subsidies (par 28) WTO rules: regional trade agreement (par 29) Dispute Settlement Understanding (par 30) Trade and environment (pars 31–33) Electronic commerce (par 34) Small economies (par 35) Trade, debt and finance (par 36) Trade and technology transfer (par 37) Technical cooperation and capacity building (pars 38–41) • Least-developed countries (pars 42, 43) • Special and differential treatment (par 44) • • • • • • • •

13 WTO Ministerial Meeting in Cancun Developing countries, led by Brazil, China, and India, were unwilling to move forward without meaningful cuts in agricultural subsidies. Moreover, they never fully accepted to the idea of the Singapore agenda : --Trade and Investment --Trade and Competition --Transparency in Government Procurement --Trade Facilitation. Two issues caused the negotiations to break down, The developed world : 1) The developed world would not compromise on the issue of agricultural subsidies. 2) The developed world called for a liberalization of foreign investment rules to improve transparency, reduce red tape, and open government procurement. 5th Ministerial Conference of the WTO Cancun, September 9-14, 2003

14 WHY DO DEVELOPED WORLD DOMINATE WTO? • Arm Twisting Technique • Low level of financial and knowledge resources among developing economies • Negotiations and decisions are dominated by the developed economies • The developing economies are not consulted/considered while formulating policies • WTO remains ineffective in imposing it‘s disciplines on developed economies

15 WHAT IS A DEVELOPING COUNTRY ? • No definitions Countries from WTO on Developing • Members declare themselves • They are challengeable • Mostly the standards of World Bank considered for classification of countries. are • There are provisions for special, differential and more favorable treatment for the developing countries  WB classifies its member countries on the basis of GNI per capita.  Economies are divided according to 2012 GNI per capita, calculated using the World Bank Atlas method.  World Bank Atlas method :  The groups are: low income: $1,035 or less; lower middle income: $1,036 - $4,085; upper middle income: $4,086 - $12,615; and high income:$12,616 or more.  With this classification, 2/3 rd of the member countries are developing countries

16 WHY DEVELOPING ECONOMIES ARE TOO SENSITIVE ? • Agriculture is the major source of livelihood • Disturbance leads to breaking down of agricultural ecosystem • Unemployment • Vicious cycle • Poor people are fragile & distress migration followed by starvation • Difficult to revive

17 WTO AND DEVELOPING COUNTRIES • Over three quarters of WTO members are developing or least-developed countries • WTO agreements contain special provisions for them  Longer time periods to implement agreements and commitments  Measures to increase their trading opportunities  Support to help them build the infrastructure for WTO work  Handle disputes  Implement technical standards  Technical Assistance and Training

18 WHY ARE DEVELOPING COUNTRIES IMPORTANT? • Change in the equilibrium of power in the global economy The emerging powers gain importance • 2/3 of the WTO members are developing countries

19 HOW WTO DEALS WITH DEVELOPING COUNTRIES? • In the agreements: more time , better terms • Legal Advice: a secretariat service • Gainful opportunities for developing countries: • Fundamental reforms in agricultural trade • Phasing out quotas on developing countries exports of textiles and clothing • Reductions in customs duties on industrial products • Expanding the number of products whose customs duty rates are ―bound‖ under the WTO, making the rates difficult to raise • Phasing out bilateral agreements to restrict traded quantities of certain goods —these ―grey area‖ measures (the so-called voluntary export restraints) • Tariff peaks (37% Vs 40%) and Tariff escalation • Erosion of preferences • The ability to adapt (difficult for lDC)

20 SPECIAL AND DIFFERENTIAL PROVISIONS • Longer time periods for implementing Agreements and commitments, • Measures to increase trading opportunities for these countries, • Provisions requiring all WTO members to safeguard the trade interests of developing countries, • Support to help developing countries build the infrastructure for WTO work, handle disputes, and implement technical standards, and • Provisions related to Least-Developed country (LDC) Members

21 SPECIAL & DIFFERENTIAL TREATMENT. DO WE NEED IT? • Yes ! • Lack of financial & human resources to fulfil their commitments. • S & D: o More flexible terms within specified time limits: for example, longer transition periods, smaller commitments (for example the commitments on agriculture) o Clauses which say in broad terms that developed countries should help developing countries in specific areas (such as technology transfer under intellectual property protection) but without defining exactly what action is needed. • Did S & D yield the desired result? • NO.. S & D were usually insufficient and that the broader requirements of category are too vague and often ignored.

22 NEGOTIATIONS COLLAPSE • Pro-liberalization lobbies • Comfortable with current regulation • The WTO is not useful to liberalize services • Tariffs below max  • Increase in the price of commodities • Inefficient Market and global economy

23 STAGNATED NEGOTIATIONS: STRUCTURAL CAUSES • Change in the equilibrium of power in the global economy  The emerging powers gain importance GATT Institutional inertia  governance problems • High Expectations: Development Round and UR background   2/3 of the WTO members are developing countries The G-20: joint group with offensive interests



26 1. Cotton 2. Agricultural Subsidies 3. Trade Agreements 4. Special Treatment 5. Medicines 6. Legal Costs 7. Protectionist Economic Policies 8. Natural Disaster 9. Decision Making 10. Fair Trade

27  Double standard of US.  US Domestic Aid in 2012-$100 Bn and India -$20 Bn.  Avg supply of subsidized food-US-358 kg/person/year, India-60.  India has been criticized by WTO for ―creating a massive new loophole for potentially unlimited trade-distorting subsidies.‖  India‘s subsidies for feeding its hungry are being blamed for distorting trade in agriculture while the US, which provides six times more subsidies than India for feeding its hungry, is seen as doing humanitarian service.  Peace Clause (Art 13) : Expired in 2003  Procurement price:10% of the total production, and refrain from increasing the wheat procurement price in future.  No Penalisation from WTO on US and other developed countries.

28 IMPACT ON INDUSTRIALIZATION: A POLICY PERSPECTIVE 1. Tariff liberalisation under NAMA • Under the emerging NAMA rules in the Doha round negotiations, developing countries, with the exception of LDCs, have to reduce their import tariffs on industrial products and bind tariff rates below a certain ceiling. Developing countries have the option, however, of applying deeper cuts in tariff lines in exchange for greater flexibilities and vice versa. Flexibilities are in the form of exempting a certain percentage of sensitive product lines from tariff cuts as long as their import shares in total NAMA imports do not exceed a certain threshold. However the exemption of a whole sector from tariff cuts will not be possible. This implies that nonLDC African countries will have less room for pursuing import-substitution strategies behind high tariff barriers or through gradual and selective tariff liberalisation. This is further compounded by the insertion of the "national treatment" principle in WTO laws, whereby foreign firms and foreign goods are to be granted the same treatment as local firms and locally produced goods in the country. • Developing countries will apply tariff cuts according to a "Swiss" formula. Countries that apply the deepest tariff cuts will be able to "make smaller or no cuts in 14% of its most sensitive industrial tariff lines, provided that these tariff lines do not exceed 16 percent of the total value of its NAMA imports". • That country can also keep "6.5 % of its tariff lines unbound or exclude them from tariff cuts, provided they do not exceed 7.5% percent of the total value of its NAMA imports" (WTO). LDCs will not face tariff reductions but will have to raise the percentage of their tariff lines that are bound. • The WTO text mentions that additional flexibilities will be negotiated at a future date for South Africa, Botswana, Lesotho, Namibia, Swaziland and members of the South African Customs Union (SACU). According to the WTO, "the tariff reductions will be implemented gradually over a period of five years for developed members and ten years for developing members, starting 1 January of the year following the entry into force of the Doha results".

29 THE WTO AND ITS IMPACT ON INDUSTRIALIZATION • Proponents of NAMA reforms argue that, in a low-tariff world, developing countries will benefit in the form of increased market access for their industrial products to other countries, especially developed countries. For instance, in developed countries the proportion of industrial imports entering on a dutyfree basis has jumped over the last fifteen years from 20 % to 44%. • However, critics of NAMA reforms argue that the emerging rules will lead to de-industrialisation in countries that are in their early stages of industrialisation (Shafaeddin 2006). • Furthermore, they argue that the parameter of interest for developing countries should not be the average industrial tariff rate imposed by developed countries on imports but the actual rates imposed by the latter on the exports of interest to developing countries. It is not clear that such rates have been considerably lowered in return for increased market access. • There is also the fear that NAMA liberalisation will lock poor developing countries into their current or existing patterns of export specialisation. In order to build dynamic comparative advantage in higher value-added activities, entrepreneurs need to be rewarded with higher expected returns in exchange for the higher risks involved in undertaking strategic investments in new industries and new technologies. However the emerging trade rules will make it harder for developing countries to turn to selective tariffs and subsidies to provide such returns to their entrepreneurs (Shafaeddin 2006).

30 THE WTO AND ITS IMPACT ON INDUSTRIALIZATION 2. Subsidies • With respect to the use of subsidies as a tool for promoting industrial development, under WTO rules subsidies linked to either export performance (export subsidies) or the use of domestic over imported goods (local content subsidies) are prohibited, except for LDCs and countries with less than US $1,000 GNI per capita. • When linked to export performance, export subsidies can provide appropriate incentives to domestic firms to invest in building their competitiveness rather than stay complacent. However, such type of subsidies can no longer be used. Other types of subsidies, for example production subsidies, are allowed but are now actionable which means that their use can be challenged if deemed to damage the interests of other parties. In importcompeting industries with high sunk costs, there may be a case for subsidizing production by domestic infant firms, albeit temporarily, in order to promote greater entry and more competition in the long-run. As a result of WTO rules, it is now more difficult to nurture local infant industries through subsidies.

31 THE WTO AND ITS IMPACT ON INDUSTRIALIZATION 3. Investment measures • The Trade-Related Investment Measures (TRIMs) Agreement under the WTO prohibits countries from using local content or trade balancing requirements. In addition, as discussed in the preceding section, countries cannot subsidise firms to favour use of domestic inputs over imported ones. • This means that these industrial policy instruments used by currently advanced and emerging economies, are no longer available to the non-industrialised countries. While Brazil for instance was able to use local content requirements to establish a local auto manufacturing industry, Indonesia had to review the local content provisions of its National Car Program in 1999 under the WTO (DiCaprio and Gallager, 2006). • Under the TRIMs agreement, countries can no longer use local procurement programs to minimize import leakage rates, optimize the domestic value-chain and promote the building of production linkages across sectors in their industrial policy programs. • TRIMs also prohibits the use of performance requirements in FDI policies for the purpose of maximising benefits from FDI such as promoting use of local industrial products, inserting local enterprises in the production chain of transnational corporations (TNCs) and facilitating technology transfer to local suppliers.

32 IMPACT ON INDUSTRIAL SECTOR : SUMMARY • Significant reduction in industrial tariffs • Tariff binding (progressively high) • De-industrialization phase : as a result of cheaper imports from developed/industrialised economies • Doha round : strong pressures from developed world for a steep cut on the tariff rates (non linear formula) & almost 100% tariff binding


34 ACTUAL WTO IMPACT ON POLICY SPACE • Membership of GATT/WTO has not had a major impact on bindings or tariffs of developing countries • Other sources of tariff and NTB reforms (unilateral and regional) • Very limited use of industrial and export subsidies • Evidence of greater WTO influences on new members (e.g. Saudi Arabia, Vietnam) • Concerns about future tightening and stricter implementation of rules

35 PRE- AND POST REFORM NTBS AND EXCHANGE RATE DISTORTIONS Pre-Reform (1) Country (1) Various years, usually 1980s (2) Various years, usually early 1990s Source: Dean, Univ Nottingham (1995) Cote d’Ivoire Ghana Kenya Madagascar Malawi Mali Nigeria Senegal South Africa Tanzania Uganda Zaire NTB Coverage 38% 100% 71% 100% 100% 58% 100% 55% 100% 100% Black Market Premium (average) 985% 16% 37% 51% 210% 0% 242% 303% 71% Post-Reform (2) NTB Coverage 38% 2% 0% 0% Few 0% 17% 15% 23% 100% 5% 100% Black Market Premium (average) 17% 9% 13% 12% 27% 3% 119% 79% 9%

36 OVERALL ASSESSMENT AND CONCLUSIONS • WTO has not significantly affected developing countries‘ policy space to-date • The effects (constraints and enhancements) may increase in future • but scope for phased or gradual affects and differentiation within WTO rules • Many of the key pro-development issues are outside the WTO agenda • improving governance, institutions, human capital and infrastructure


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