Developing Countries and the Multilateral Trading System

T.N. Srinivasan
Westview Press, 1999

Preface

The purpose of this work is to access the interaction between developing countries and the multilateral trading system from the end of World War II to the present and to place the achievements and failures of the Uruguay Round (UR) in that context. Both the history of the General Agreement on Tariffs and Trade (GATT) since its origin in 1947 and the failure soon thereafter to establish the International Trade Organization (ITO) that would have subsumed it are traced. A discussion on the extent to which the flaws of GATT have been rectified in the newly established World Trade Organization (WTO) follows; and a brief account of the UR agreement with a quantitative assessment of the benefits of trade barrier reductions and a critical look at the agreements on other issues are presented. Further, the evolution of developing countries' participation in the GATT and the incorporation of concerns for development in the GATT articles are described. The possible future linkages between trade policies and environmental and labor standards, as well as the dangers of linkages, are addressed. Next, the opportunities and threats regionalism poses to a liberal global trading and investment order are explored, and the institutional reforms necessary for the integration of developing countries into the global economy are discussed. The work closes with an analysis of the impact that possible interactions between the WTO, the IMF, and the World Bank would have on developing countries.
          T. N. Srinivasan is Samuel C. Park Jr. Professor of Economics at Yale University.

Introduction

The Uruguay Round (UR) of the multilateral trade negotiations (MTNs), the latest, eighth, and most ambitious of a series of such negotiations, was formally concluded with the signing on April 15, 1994, at Marrakech, Morocco, of the Final Act, which embodies all the multilateral and plurilateral agreements of the round. The first round, held in Geneva in 1947, resulted in the General Agreement on Tariffs and Trade (GATT). The UR agreements extended multilateral rules and disciplines to trade in services, trade-related aspects of intellectual property rights, and investment measures. They also brought trade in agriculture and textiles back into the GATT. The Final Act included the decision to establish a formal organization called the World Trade Organization (WTO) "to provide the common institutional framework for the conduct of trade relations among its members in matters related to the (Uruguay Round) agreements" (GATT 1994: 6). Ministers representing the 124 governments and the European communities that participated in the UR affirmed in their declaration at the signing of the Final Act "that the establishment of the World Trade Organization (WTO) ushers in a new era of global economic cooperation, reflecting the widespread desire to operate in a fairer and more open multilateral trading system for the benefit and welfare of their peoples" (GATT 1994: iv).

Concentrated protectionist producer interests often have considerably more political power within countries as compared to diffused consumer interests. Negotiations under the GATT have served to redress this imbalance in political power within countries through reciprocal liberalization of trade barriers between countries. All the eight rounds of the MTNs, including the UR, reduced tariff barriers. The last two, the Tokyo Round and the UR, attempted to set up discipline guidelines regarding the use of nontariff barriers. An important aspect of the evaluation of the UR is the quantitative impact of the reduction of trade barriers on the volume of trade and on welfare in the short and long run. A number of studies at-tempt to do precisely that, and in Chapter 5, I will briefly turn to them.

But an equally, if not more important, though not quantifiable, impact of the UR is its potential effect on the rules of the game, so to speak, in re-straining both powerful actors who may be tempted to take advantage of the weak and weak countries that may want to "free ride" on the commitment of the powerful to the system. The developed countries are admittedly powerful and developing countries weak in this sense.

The purpose of this book is not simply to assess the success and failures of the UR per se but also to pursue a much broader theme, namely the interaction between developing countries and the multilateral trading system since the end of World War II and to place the UR in that con-text. I view this broader theme to be extremely pertinent, since the developing countries have had an ambivalent attitude to the GATT, and their attitude toward integrating their economies with the global trading system has evolved from one of hostility to active promotion. Pursuit of this theme requires a review of history from the beginnings of the GATT to the establishment of the WTO and, in particular, of the negotiations in which developing countries played an active part.

The GATT originated in the failure of some countries, most important, of the United States, to ratify the charter for the International Trade Organization (ITO), which was adopted by the United Nations Conference on Trade and Employment held in Havana, Cuba, during November 1947-March 1948 (hereafter, the Havana conference). The ITO, the Inter-national Monetary Fund (IMF), and the World Bank were meant to be the three premier international institutions governing economic relations among countries in the post-World War II era. Technically, since its inception in 1947 and until being subsumed under the WTO in 1994, the GATT was a multilateral agreement (general agreement) among its contracting parties rather than a treaty among sovereign nations. These numbered 23 in 1947 and nearly 100 at the start of the UR in 1986. The GATT enabled the contracting parties to reduce tariffs reciprocally and obliged them through a set of "general clauses" to refrain from taking trade-impeding measures that would reduce the value of the agreed-upon tariff reduction. It included a dispute-settlement mechanism (that in later practice turned out to be weak). Even the application of the GATT as an agreement continued to be provisional from its inception to its very end. The lack of a formal international institution or organization with universal membership and well-defined rules for decisionmaking and enforcement procedures for international commerce has been viewed by many as hampering the progress toward a nondiscriminatory and liberal world trading order. In assessing whether the WTO will serve this role, I must go back to the history of the GATT and the unratified charter of the ITO, if only to see whether the flaws of the GATT have been rectified in the WTO. I do this in Chapter 2.

Developing countries, though never a monolithic bloc, have shared a certain ambivalence toward the GATT from its inception. The original twenty-three contracting parties of the 1947 GATT included the following eleven developing countries: Brazil, Burma (now Myanmar), Ceylon (now Sri Lanka), Chile, China, Cuba, India, Lebanon, Pakistan, Southern Rhodesia (now Zimbabwe), and Syria. Burma, Ceylon, and Southern Rhodesia were not independent then. This group of twenty-three was also the preparatory committee for the Havana conference as well as the committee that drafted the charter for the ITO for discussion at the conference. Fifty-six countries, including thirty developing countries, participated in the conference. Initially, the developing countries condemned the draft submitted by the preparatory committee as serving the interests of the developed countries and holding no hopes for development. Nonetheless, except for Argentina and Poland, all the other countries approved the charter that emerged at the end of the conference. As noted earlier, the charter was not ratified by the United States, and the ITO did not come into being; instead, the treaty on tariff reductions, namely the GATT, came to be provisionally applied.

In their decisionmaking, the contracting parties of the GATT have al-most always adopted a consensus procedure in spite of the fact that Article XXV of the GATT required only a simple majority of votes cast for a decision with each contracting party having one vote. Thus in principle, developing countries could have had a significant influence in the GATT decisions. Nonetheless, they tended to view the GATT as promoting the interests of developed countries. Indeed, the first United Nations Conference on Trade and Development (UNCTAD) in 1964, subsequently institutionalized as a "permanent organ" of the General Assembly of the United Nations, provided a forum in which developing countries tried to evolve and articulate a common position on matters relating to trade. The GATT was not intended to be such a forum and had an oversight role in trade matters that UNCTAD never had. Until the Tokyo Round of trade negotiations, many developing countries did not participate effectively, and they had no significant influence on the outcomes of the earlier rounds. They had some influence on the outcomes of the Tokyo Round, where they were united, though not necessarily in ways that served their long-term interests. They chose to participate much more actively and had a greater influence on the final UR agreement. It is there-fore worthwhile to analyze the evolution not only of the participation of developing countries in the GATT but also of the incorporation of concerns for development in the articles of the GATT. Such an analysis, to which Chapter 3 is devoted, should help in assessing the potential of the WTO as a guarantor not only of a rule-based global trading order that protects the economically less powerful developing countries but also of their active participation in the making and enforcing of decisions that affect international commerce.

The UR-from its formal authorization by the GATT ministerial conference in September 1986 at Punta del Este, Uruguay, to its formal conclusion in April 1994 at Marrakech, Morocco, with the signing of the Final Act by ministers-was the longest of the eight rounds of the MTNs. A look at its tortuous negotiating history with near breakdowns, changes of negotiating positions by parties, and so on is not only fascinating for its own sake but also helpful in highlighting the basic conflicts of interest among the parties and their political-economy foundations. Clearly, any multilateral agreement is by definition a compromise that the parties found acceptable. As with all compromises, there is the issue of whether the UR agreement is simply a fragile papering over of conflicts that have not been resolved and that are likely to erupt in the future to unravel it or whether it is robust with a significant narrowing, if not a complete resolution, of differences among parties through give-and-take acceptable to each. A brief negotiating history of the UR is provided in Chapter 4.

The UR negotiating agenda was the most ambitious of all rounds. Be-sides including traditional GATT concerns of reducing barriers at the border on goods trade and extending the GATT disciplines to trade in those goods, for example, agricultural goods, textiles, and apparel, which had not until then been subject to the same disciplines that applied to trade in manufactures, the agenda included strengthening dispute-settlement mechanisms and disciplinary measures regarding safeguards (i.e., antidumping and countervailing-duties measures) as well as the so-called new issues, such as trade in services, trade-related intellectual property, and investment measures. As mentioned earlier, a quantitative assessment of the benefits of trade-barrier reductions is provided in Chapter 5. Chapter 6 takes a brief critical look at the agreements reached on other issues)

The popularity of regional economic integration through preferential trading and investment agreements among countries that often, though not always, are close to each other geographically revived in the late 1980s (with the signing of the North American Free Trade Agreement [NAFTA] among Canada, the United States, and Mexico and MERCOSUR [Preferential Trade Agreement Between Argentina, Brazil, Paraguay, and Uruguay]) in spite of the fact that such attempts by developing countries in the 1960s and 1970s had failed. This revival of interest was understandable when the prospects of concluding the UR with an agreement seemed dim and it looked as if the global trading system would collapse into a set of warring trade blocs. It then made sense for a developing country to seek to become part of a trade bloc with some industrialized country to avoid being marginalized. Seemingly paradoxically, the interest in concluding regional agreements gathered further steam after the successful completion of the UR: NAFTA is likely to open membership negotiations with Chile; a transatlantic free trade agreement (TAFTA) between EU and NAFTA countries has been proposed; the Free Trade Area of the Americas, consisting of Canada, Mexico, and the United States, was endorsed in December 1994 by these countries' leaders, who participated in the Summit of the Americas; the summiteers of the Asia-Pacific Economic Cooperation (APEC) meeting in Bogor, Indonesia, in November 1994 established a goal of free and open trade and investment in the region by the year 2010 by developed countries and by the year 2020 by developing countries of the APEC; SAPTA, the South Asian Preferential Trade Agreement, has been initiated. Besides such regional arrangements, subregional (i.e., a contiguous area covering parts of several countries) development programs, such as the Tumen River Area Development program of Northeast Asia and the development program in the Singapore-Johore-Batan region of Southeast Asia, have been launched.

It is an open question whether regional arrangements represent WTO-plus, so to speak, by accelerating and extending on a nondiscriminatory basis the liberalization envisaged in the UR or whether they are likely to weaken the WTO by bypassing it. It is conceivable that with countries simultaneously being members of several such agreements, complex rules of origin will have to be devised to determine which trade flows get preferential treatment and to what extent. Such rules, by reducing the transparency and certainty of treatment, could impede the flows. Also, whether the many developing countries who are not yet members of any such regional arrangement should unilaterally liberalize on a nondiscriminatory basis rather than contemplate membership in one or more such arrangements is worth analyzing. The opportunities as well as threats posed by regionalism and subregionalism to a liberal global trading and investment order are explored in Chapter 7 and also in Chapter 12. The eight rounds of the MTN since 1947 have virtually eliminated all tariff and nontariff barriers to trade in most goods at national borders of industrialized countries, the exceptions being agriculture and some goods exported by developing countries, particularly textiles and apparel. Trade in textiles and apparel has been governed by the Multifibre Arrangement (MFA) of bilaterally negotiated (under the auspices of the GATT!) quotas. The UR agreement envisages the phaseout of MFA and reductions in tariffs on other manufactured exports of developing countries. Imports from developing countries accounted for roughly a third and an eighth, respectively, of total imports in the United States and the European Union (EU) in the early 1990s. These shares were roughly twice what they were in the 1970s. With the implementation of the UR agreement they are likely to increase even further. As a result, according to Stephanie Flanders and Martin Wolf, "a spectre of irresistible competition from billions of impoverished workers disturbs industrialized countries" (Financial Times, July 24, 1995: 15). Whether increased imports from developing countries explain a significant part of the increased unemployment and decline in the real wages of unskilled workers in industrialized countries remains controversial. Yet at a political level, with the option of raising tariff and nontariff barriers at the border no longer feasible, the response in developed countries to increased import competition has been to demand "level" playing fields, with differences in domestic policies, particularly regulatory policies (e.g., environmental and labor standards and their enforcement), being viewed as creating or blunting international competitiveness.

In a world of increasing mobility of capital, differences among such domestic policies are also seen as creating policy-arbitrage opportunities with firms seeking to locate in countries with the most favorable policy regimes from their perspectives. The fear that firms might leave a country whose policies they perceive to be unfavorable could in turn induce countries to harmonize their policies, for example, by setting very lax environmental or labor standards. The prospect of such a "race to the bottom" in standards has led environmentalists to demand that standards be multilaterally set at sufficiently high levels and enforced through a denial of access to export markets for countries deviating from the set standards. However, the ministers who signed the Final Act of the UR were careful not to prejudge the issue in making their decisions relating to trade and the environment. Although acknowledging that measures necessary to protect the environment may conflict with the provisions of the Agreement on Trade in Services and desiring to coordinate the policies in the field of trade and environment without exceeding the competence of the multilateral trading system, they decided to establish the Committee on Trade and Environment in the WTO. In setting the terms of reference of the committee, the ministers were again cautious: They wanted the committee to identify the relationship between trade measures and environmental measures and to make appropriate recommendations on whether any modifications of the provisions of the multilateral trading system are required.

Since the Treaty of Versailles of 1919, which led to the establishment of the International Labor Organization (ILO), and even earlier, differences in labor standards among countries have been viewed as creating unfair competitive advantages. Repeated attempts have been made to link market access and the observance of labor standards in the GATT. Private arrangements among firms that actually or potentially restrict competition in a market have always been the domain of antimonopoly or antitrust policies within countries. Their absence or weak enforcement could disadvantage foreign firms in national markets. Indeed, this is one of the charges against Japan by the United States, and there are demands for harmonizing such competition policies. This is an issue of concern primarily to advanced industrialized countries. However, given the trend toward privatization of state monopolies in developing countries, it could become relevant to developing countries as well.

It is clear that the access of developing countries to the markets of developed countries, particularly in labor-intensive manufactures in which they have comparative advantage, will be threatened if the developed countries insist on setting and enforcing levels of labor or environmental standards beyond what such countries could afford at their stage of development. Besides, such threats to market access could lead to a very unfortunate slowdown or even reversal of the process of unilateral liberalization of foreign trade and payments regimes in many developing countries. Chapter 8 is devoted to the issues of the possible future link-age between trade policies on the one hand and environmental and labor standards on the other. I return to the developments since the signing of the UR on these issues in Chapter 12.

Even if there had been no pressure from developed countries to "level up" their domestic regulatory frameworks and institutions of economic management, developing countries would have had to reform their domestic financial as well as other institutions. For example, without an ad-equate legal system as it relates to commercial contracts, a framework for inviting and evaluating bids for public projects, and an efficient transport and telecommunications system, a developing country will find it difficult to integrate with the global economy and to derive maximum benefits from such integration. The post-UR environment is likely to be one of intense competition for markets for goods and for investment capital. The institutional reforms and innovations needed in developing countries to compete in such an environment are analyzed in Chapter 9.

Article III (paragraph 4) of the agreement establishing the WTO explicitly instructs the WTO to cooperate as appropriate with the IMF and the World Bank and affiliated agencies with a view to achieving greater coherence in global economic policymaking. The content and modalities of such cooperation were, however, left unspecified. At a minimum, there could be consultation among the agencies mentioned. At a maximum, there could be cross-conditionality in the sense of the benefits or rights of a country as a member of one agency being denied or reduced for that country's failing to meet its obligations to another agency of which it is a member. Given the dominance of the developed countries in the weighted voting system of decisionmaking of the IMF and World Bank, in contrast with WTO's one-member-one-vote majority decisionmaking, in the absence of a consensus, cross-conditionality may provide leverage to developed countries to pressure developing countries in the WTO. Problems could also arise if a country is a member of only a subset of those agencies. A speculative discussion of these issues is offered in Chapter 10. Chapter 11 summarizes the part of the book that was completed by the end of 1995 and offers some policy conclusions.

Chapter 12 takes up developments since 1995 and, in particular, the results of the first ministerial meeting of the WTO in Singapore during December 9-13, 1996.

Note
1. UNCTAD has published six volumes of International Monetary and Financial Issues for the 1990s. Volume 6, published in 1995, deals with the implications of the UR for developing countries. This book was largely completed prior to the avail-ability of Volume 6.