SUNS 4302 Thursday 15 October 1998



WTO RULES NEED CHANGES TO BENEFIT LDCS

Geneva, 14 Oct (Chakravarthi Raghavan) -- The Least Developed Countries could gain some benefits by joining the World Trade Organization and its multilateral trading system, but membership also carries some obligations and, even more, requires the active participation of the
countries in the processes of the WTO.

In presenting this assessment, the UN Conference on Trade and Development has examined the various rules and agreements of the WTO, and their "unfair" burdens on the LDCs and other developing countries, in a large number of areas and has called for changes and modifications
in the processes for review of implementation and built-in agenda expected to be an important part of the preparatory process for the 3^rd Ministerial Conference of the WTO in the US in 1999.

While the US is still unsure of what it should do, the EC and other major trading nations are pushing for a new round of negotiations to be launched at that time, and bring in new issues including investment, competition policy, government procurement and environment.

The LDC report cautions the least developed countries on these new issues, and underscores the need for the LDC members of the WTO to be active and fully participate in these, in order to ensure necessary changes in their favour in the existing WTO rules, and ensure that new rules in new areas don't work to their disadvantage.

Of the 48 LDCs, twentynine are WTO members and eight are observers (with four of them actively seeking accession). Only 12 of the 29 LDC members of the WTO, as of mid-1997, had missions in Geneva, and several others, as also many of the small island countries, service the WTO from out of Brussels. And even those with missions in Geneva have to look after other international organizations and have at most one or two who could be present at the WTO where there are formal and informal meetings, more than one a day.
While LDCs could benefit from the WTO and some of its positive elements, this requires actions to facilitate the membership of those who are not members and strengthening the capacity of the LDC members to participate effectively in the WTO and its activities, UNCTAD Secretary-General Ricupero remarked Tuesday at a press launch of the 1998 LDC report. And participation in the WTO activities, Ricupero added, involved more than mere technical help, and regretted that the
problems have not been addressed.

Part II of the LDC report is devoted to "Trade, Investment and the Multilateral Trading System".

While draft previews of the report, containing chapter outlines and subjects to be addressed, which had reached the hands of many delegations several weeks ago, suggested that the report under the "investment" rubric would address this major burning issue of multilateral investment rules in the WTO, there is no discussion or analysis of this in the published report.

But the chapters of the report dealing with the various WTO rules and on new issues (environment, investment, competition policy and government procurement) notes that LDCs "have much at stake" in these matters within the WTO and their objective must be "to ensure that they get the best possible deal from any agreements on these issues."

In a chapter "The Way Forward", the report notes that in the area of investment the current study process in the WTO is of vital interest to LDCs and they need to contribute to this process so that their interests are taken into account in any future course of action.

[According to trade diplomats, the meetings of the study group, formal and informal, sees very little participation from LDCs, and even those present often are silent spectators.]

FDI, says the LDC report, is necessary and useful for LDCs: it augments their own meagre domestic resources and thereby accelerates their growth, and allows them to obtain higher technology from abroad and improve their production efficiency.

"At the same time, "foreign investment may entail a net outflow of foreign exchange in the course of time, imbalanced sectoral investment and a geographical imbalance in the country's development," says the report.

"Given these possible adverse impacts, the host country needs to be take certain safeguards.

"It should retain the discretion to guide investments into selected sectors and geographical areas and to limit the entry of investment which is likely to have adverse effects on its balance-of-payments or its overall development objectives and efforts. The objective of these safeguards should be to ensure a healthy linkage between investment and the domestic economy, and to encourage the dissemination of technology and greater efficiency in domestic industries."

Ricupero's attention was drawn at his press conference to these views (on page 163 of the report, specifically dealing with investment as a proposed new issue), and he was asked how any developing country and LDCs would be able to safeguard themselves against these adverse
effects of multilateral rules on investment -- whether under an EC multilateral agreement or a possible framework mooted by UNCTAD -- that gives foreign investors the right to invest and get national treatment in a WTO member?

Ricupero said that many of the WTO agreements dealt with investment including in TRIMs and Services and other areas.

"But our position is very clear," Ricupero said. "We need to discuss and to deepen our understanding of the different impacts of investment before we engage in any negotiations. This is what UNCTAD is doing and is preparing studies that I think will help clarify these impacts. So,
we are not advising countries that they should engage in any negotiations they fully understand the implications of these fundamental negotiations."

In assessing the pros and cons of the membership in the WTO, the report comes out in favour of such membership given the "rights" that it provides to the members, but also cautions that it is not without costs.

Strengthening the capacity of LDCs to participate in the system, including in the non-member LDCs acceding to the WTO, should be an important part of the international community's efforts to strengthen the integration of LDCs into the world economy.

"This would be facilitated by speeding up the processes for accession to the WTO and strengthening their capacity to participate," Ricupero said and stressed that "there was a long way to go on both."

"I am not very impressed by what has been done in this respect so far, and there is no prospect of any improvement in the short-term" said the UNCTAD head. "Enabling the 15 or 20 who are members to participate more actively, and enabling others to join, is more than one of providing
technical assistance. The accession process which is now time-consuming and makes no distinction between one country and other, should be more flexible."

Accession negotiations and eventual WTO membership require a considerable strengthening of national institutional infrastructure in acceding countries, many of whom are poorly equipped in terms of human and financial resources to meet this challenge. The heavy burden that the accession process imposed on the limited human and institutional capacity of the LDCs need to be reviewed, without compromising the requirements of transparency and integrity of the multilateral rules and disciplines, an overview to the report by Ricupero says.

The report notes that many of the 29 LDC members started the accession process in the course of the Uruguay Round, but failed to anticipate fully the consequences of membership on their particular trade and development interests. Some of these have now become clearer, as countries have sought to implement the agreements and fulfil their obligations. They have posed two distinct sets of problems: those derived from their own processes of interpretation and domestic implementation, and the problems arising from parallel processes of other WTO members.

Notifications to the WTO secretariat, designed to promote transparency, involve compulsory sharing of specific information relating to trade policy and measures of governments. They present major administrative hurdles for countries with poor communication infrastructure, and an understaffed or inefficient civil service.

The LDCs have also to eliminate trade-restrictive measures, mainly involving non-tariff barriers in agricultural sector, investment-related domestic content requirements or subsidies to facilitate import substitution. While there may be good reasons for treating the barriers of the first two as temporary measures for BOP reasons, prohibited import subsidies have to be abolished by end 2002. Some of the national institutions that have to be established to perform administrative or enforcement functions represent a heavy drain on financial and administrative resources of these countries. And even delaying establishing institutions whose creation is not compulsory, such as anti-dumping authorities, may involve costs for the country.

Many agreements involve compulsory legislative enactment and  formulation of procedures. And the way non-LDC WTO members implement their obligations also create problems for developing countries, the report says and cites the way the agriculture agreement and that on textiles and clothing.

LDCs are also exposed to the problems of ongoing or unfinished business and the continuing reviews and built-in agenda envisaging further negotiations. They need to be prepared to defend their interests in each of these -- such as under the Agreement on Subsidies and Countervailing Duties, the patenting of plants and animals under TRIPs, the limitations on anti-dumping panels, and the formulation of rules of origin and under TRIMS.

Though developing countries and the LDCs have specific or minimum obligations, and cannot be sanctioned for breach if these minimum obligations are fulfilled, many of the LDCs and others seeking accession are being pressured in bilateral talks to assume greater obligations than the minimum they are required under the agreements. Some acceding countries are reported to be under pressure to accept the obligations of the government procurement code, which is now only a
plurilateral accord under the WTO. Several are also being pressured to accept a lesser transition period than allowed under the accord.

The LDC report outlines how "loopholes" in the agreements, such as on textiles and clothing, are being used by the developed countries to postpone integration till the very final stage, and suggests that "perhaps the developed countries are fully reconciled to their commitment to subject textiles to normal WTO disciplines".

LDCs and other developing countries have therefore to remain vigilant to ensure that there is no slackening of the process of liberalizing the international trade in this sector.

The report also draws attention to the severe criticisms that have been advanced over the way the Agriculture Agreement and the tariffication of non-tariff barriers have been implemented by the developed countries, and the aggregate measure of support (AMS) applied in such a way as to reallocate domestic support to sensitive sectors.

And while the agricultural agreement has provided some leeway for developing countries, and in particular the LDCs, the rules of the agreement on reduction of market access barriers, domestic support and export subsidies are such that developed countries which have had very high barriers are allowed to maintain them at high levels after mandatory reductions for a period of six years.

But the requirement that the current AMS should not exceed the base AMS has created severe difficulties for LDCs. Almost all the LDCs provided no domestic support for export subsidies during the 1996-1998 base period and hence declared a zero base AMS. As a result, the support related to that is restricted to 10% of output.

"In other words, the developed countries can continue to support their farmers to produce for domestic consumption and export, while the LDCs cannot," report caustically comments.

This anomaly it suggests should be reversed through a commitment by developed countries to eliminate domestic support and export subsidies at a specific date in the future, sway 1 January 2005.

And given the importance of the agricultural sector to LDCs as a source of food and livelihood for the majority of their people, there is a need for flexibility in the use of support related to the AMS. The current 10% level could be raised to 25 percent of farm-gate value of output in any one year for LDCs.

The report also points out that the provisions of the agreement relating to the food security of LDCs and other developing countries are also quite restrictive. While budgetary allocations could be made
to fund subsidised food for the poor and for operating foodstock-holding programmes for food security, in addition to transparent and objective criteria to operate such programmes, the rules require that the price differential between acquisition price and external reference price must be accounted for in the AMS. A direct, and less cumbersome mechanism to provide for food security
needs of LDCs would be to exclude staple foods or food products for domestic consumption from disciplines on import control and domestic support, argues the report noting that many LDCs may be unable to pay for food imports to feed vulnerable groups at critical times because of the competing demands on their foreign exchange or because of shortage of foreign exchange itself.

On the TRIMS rules, and their review slated in 1999, the LDC report says that considering the development objective, in particular of encouraging backward and forward linkages in the domestic economy, underscoring the domestic content requirements in developing countries, LDCs could be excluded from the disciplines of Art. 3 of GATT 1994, either through an understanding or an amendment.

The subsidies agreement has made non-actionable subsidies typical of developed countries - those on research and development, the development of disadvantaged regions and adaptation to environmental standards. But the kind of subsidies used by developing countries - for development of industrial production and exports are made actionable.

"This imbalance could be reduced by categorising the subsides used by developing countries for product and export development as non-actionable," the report urges.

In the anti-dumping area, the LDCs would incur huge costs in defending themselves against dumping charges. The collection and gathering of facts could be costly and cumbersome, especially when the countries had to engage expensive legal experts to defend itself.

And an additional problem is that anti-dumping has effectively been barred from the WTO dispute settlement process, since the role of panels in these disputes is severely restricted.

The report also notes that many LDC officials have been concerned, justifiably or not, that their domestic industries are being destroyed by predatory practices of firms from developed countries. This complaint has been voiced by several LDCs in the southern and eastern African region, the report notes.

"This is an area where urgent actinon is required to halt the process of de-industrialization which is alleged to be taking place in the economies of several LDCs as a result of the trade liberalization
attributed to the Uruguay Round agreements."

The implementation of the WTO agreements, the report underlines, should be one of the priorities of the WTO. Incorporating new issues into the trade agenda as quickly as possible will overtax the LDCs and the international community, and "many impair the credibility of the multilateral trading system," the report points out.

Slowing down the process of consultation on the new issues would not only benefit the poorer countries, but also ensure that the issues are thoroughly researched before being brought up for negotiations in the WTO or other more appropriate forums.

Developing countries, and LDCs in particular, the report says need to take an active part in the next phase of negotiations, due to start at end of 1999 as part of the built-in agenda. These will be most crucial as they cover inter ali agriculture, the most important sector for most LDCs, and services another sector where several of them have the potential to develop into major export earners.

Referring to the various issues under study, the report argues that WTO should prioritise the implication of agreements and negotiations on built-in agenda, making a crucial distinction between those issues on which there is a commitment i.e. implementation of the Uruguay Round Agreements and built-in agenda and those where there is no commitment at present, as on the new issues.

Under the agenda for continuing reviews and negotiations, the report suggests:

expansion of non-actionable subsidies to include those involving improvement and diversification of production and trade in LDCs;
keeping plants and animals outside the domain of compulsory patentability;
flexibility for LDCs, guided fully by national objectives, in developing a sui generis system of patenting for plant varieties, and not being asked to conform to any multilateral standard;
payment of adequate compensation to source countries and indigenous communities which have nurtured particular plans and animals being put to new use or used for preparation of a patentable product;
the restrictions on panels in dealing with anti-dumping disputes should be removed;
the TRIMS agreement should be changed or an understanding reached to permit use of local content requirements.

The report also argues for improvements in the dispute settlement system, so that the protection of the rights of weak members should be a common concern of the entire membership, and a more reliable and less costly method of settling disputes involving LDCs should be evolved. when the rights of an LDC is affected, and a party does not carry out the ruling, there should be provisions for collective actions by the WTO, rather than the present power of retaliation which is impractical
for an LDC. Even corrective actions taken by a party against whom a ruling is given is only effective prospectively. There should be provisions for compensation against illegal restraints, atleast from
the time a dispute is raised.

The report also makes a strong case for reviewing the BOP understanding so that the structure and nature of the reserves of a country are taken into account in judging the adequacy.

At present the WTO relies on an IMF assessment, and the IMF takes account of all kinds of reserves, including short-term flows which has been currently shown to be highly volatile.

The report also calls for changes to provide flexibility to apply non-price measures for BOP reasons, since price measures are ineffective in LDCs and take a long time.

The promotion of technological innovation and transfer of technology, though one of the key objectives of TRIPs, has no operational content. Countries should be enabled to attach appropriate conditions to patents for this purpose.