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WTO Law and Developing Countries Developing countries make up the majority of the membership of the World Trade Organization. Many developing countries believe that the welfare gains that were supposed to ensue from the establishment of the WTO and the results of the Uruguay Round remain largely unachieved. Though they are often clumped together under the ubiquitous banner “developing countries,” their mulilateral trade objectives, particularly the policy interests and the concerns they face, vary considerably from country to country and are by no means homogeneous. Coming on the heels of the 9/11 terrorist attacks, the ongoing Doha Development Round, launched in that Middle Eastern city in the fall of 2001, is now on “life support.” It was inaugurated with much fanfare as a means of addressing the difficulties faced by developing countries within the multilateral trading system. Special and differential treatment provisions in the WTO agreement in particular are the focus of much discussion in the ongoing round, and voices for change have been multiplying because of widespread dissatisfaction with the effectiveness, enforceability, and implementation of those special treatment provisions. George A. Bermann is the Jean Monnet Professor of European Union Law (a chair conferred by the Commission of the European Communities), and the Walter Gelhorn Professor of Law at Columbia University Law School. He has been a member of the Columbia Law School faculty since 1975, teaching a range of subjects, which were initially heavily domestic, but for many years have been entirely comparative, international, and transnational. Professor Bermann is also a member of the teaching faculty of the College Europe in Bruges, Belgium, and regularly gives courses at the Universities of Paris I (Pantheon–Sorbonne) and Paris II (Pantheon–Assas), as well as the Institut des Sciences Politiques in Paris. More recently, Professor Bermann undertook a Tocqueville-Fulbright Distinguished Professorship at the University of Paris from June to December 2006. Dr. Bermann is the President of the Law International Academy of Comparative Law, the former President of the American Society of Comparative Law, and a member of the American Law Institute. Petros C. Mavroidis serves as Professor of Law at the University of Neuchatel and Chair of European Community and International Economic Law there; he is also the Edwin B. Parker Professor of Foreign and Comparative Law at Columbia University Law School. He specializes in the law of the World Trade Organization (WTO), serving as the Legal Advisor to the WTO in the Technical Cooperation Division, where he assists developing countries in WTO dispute settlement proceedings. He is also the Chief Co-Reporter of the American Law Institute project “Principles of International Trade: The WTO,” now in its third year, and a member of the board of the Council of the World Trade Law Association.
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WTO Law and Developing Countries
Edited by
George A. Bermann Columbia University Law School
Petros C. Mavroidis Columbia University Law School University of Neuchatel
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CAMBRIDGE UNIVERSITY PRESS
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Dubai, Tokyo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521862769 © George A. Bermann and Petros C. Mavroidis 2007 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2007 ISBN-13
978-0-511-67517-1
eBook (NetLibrary)
ISBN-13
978-0-521-86276-9
Hardback
Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.
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Contents
Contributors Developing Countries in the WTO System George A. Bermann and Petros C. Mavroidis
page vii 1
1 The Legal Status of Special and Differential Treatment Provisions under the WTO Agreements Edwini Kessie
12
2 Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization Nuno Lim˜ao and Marcelo Olarreaga
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3 China in the WTO 2006: “Law and Its Limitations” in the Context of TRIPS Frederick M. Abbott
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4 Developing Countries in the WTO Services Negotiations: Doing Enough? Juan A. Marchetti
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Comment on Marchetti Kal Raustiala
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5 Developing Countries and the Protection of Intellectual Property Rights: Current Issues in the WTO Jayashree Watal
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6 Participation of Developing Countries in the WTO – New Evidence Based on the 2003 Official Records H˚akan Nordstr¨om
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Contents
Comment on Nordstr¨om Jeffrey L. Dunoff
7 Developing Countries and GATT/WTO Dispute Settlement Marc L. Busch and Eric Reinhardt 8 Representing Developing Countries in WTO Dispute Settlement Proceedings Niall Meagher Comment on Meagher Chad P. Bown
9 Compensation and Retaliation: A Developing Country’s Perspective Mateo Diego-Fern´andez Comment on Diego-Fern´ andez Joel P. Trachtman
10 A Preference for Development: The Law and Economics of GSP Gene M. Grossman and Alan O. Sykes
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213 227
233 248
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Comment on Grossman and Sykes Jeffrey L. Dunoff
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Comment on Grossman and Sykes Jeffrey Kenners
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11 The GSP Fallacy: A Critique of the Appellate Body’s Ruling in the GSP Case on Legal, Economic, and Political/Systemic Grounds Anastasios Tomazos 12 Is the WTO Doing Enough for Developing Countries? Patrick Low Comment on Low Wilfred J. Ethier
Index
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324 358
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Contributors
Frederick M. Abbott Edward Ball Eminent Scholar Professor of International Law, Florida State University College of Law. Chad P. Bown Associate Professor, Department of Economics and International Business School, Brandeis University, MS 021, Waltham, MA 02454-9110 USA. Tel: 781-736-4823, fax: 781-736-2269, e-mail:
[email protected], web: http:// www.brandeis.edu/∼cbown/. Marc L. Busch Karl F. Landegger Professor of International Business Diplomacy, School of Foreign Service, Georgetown University, Washington, DC 20057, USA,
[email protected] Mateo Diego-Fern´andez Deputy Permanent Representative of the Mission of Mexico to the WTO. Jeffrey L. Dunoff Charles Klein Professor of Law & Government and Director, Institute for International Law & Public Policy, Temple University Beasley School of Law. Wilfred J. Ethier Professor of Economics, University of Pennsylvania. Gene M. Grossman Jacob Viner Professor of International Economics and Chair, Department of Economics, Princeton University. Jeffrey Kenners Professor of European Law, University of Nottingham. Edwini Kessie LL.B. (Ghana), LL.M. (Toronto), LL.M. (VUB, Brussels), (UTS, Australia), Counsellor in the Council and Trade Negotiations Committee Division of the World Trade Organization.
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Contributors
Nuno Lim˜ ao University of Maryland Economics Department and CEPR. E-mail:
[email protected] Patrick Low WTO Secretariat. Juan A. Marchetti Counsellor, WTO Trade in Services Division. The views expressed are the author’s own and should not be attributed to any WTO Member or the WTO Secretariat. Niall Meagher Senior Counsel, Advisory Centre on WTO Law (“ACWL”), Geneva. ˚ Hakan Nordstr¨ om National Board of Trade, Stockholm, Sweden. Marcelo Olarreaga World Bank Research Group and CEPR. E-mail:
[email protected] worldbank.org. Kal Raustiala Professor, UCLA School of Law. Eric Reinhardt Assistant Professor, Department of Political Science, Emory University, Atlanta, GA 30322, USA,
[email protected] Anastasios Tomazos LL.M. Candidate, May 2006, Columbia University School of Law. Joel P. Trachtman Professor of International Law, Tufts University. Alan O. Sykes Frank & Bernice Greenberg Professor of Law, University of Chicago. Jayashree Watal Counsellor, Intellectual Property Division, WTO.
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GEORGE BERMANN AND PETROS C. MAVROIDIS
Developing Countries in the WTO System
In this volume, we have put together an internally coherent series of papers discussing the most crucial, to our mind, aspects of developing countries’ participation in the WTO. Its timing was deliberate: The Doha Round, hailed as the development-round, was supposed to address issues of concern for developing countries. And there are many: preference erosion (as a result of tariff reductions during the Uruguay Round), asymmetric (across sectors) tariff liberalization, the onus of implementing the TRIPs Agreement, participation in dispute settlement procedures, and the current remedies r´egime, to name a few. Special and differential treatment, the cornerstone describing developing countries’ participation in the GATT/WTO, is very much under discussion in the ongoing round. There is widespread (across developing countries) dissatisfaction with its current workings, and voices for change are multiplying. One of the major challenges facing the WTO is how to facilitate the fuller integration of developing countries in the multilateral trading system. Although the share of developing countries as a group in world trade has increased to 30 percent in recent years, the majority of developing countries, particularly the least-developed countries (LDCs), have seen their share in world trade stagnate or even decline. The lack of active participation of LDCs in the multilateral trading system has been a source of concern. Historically, special and differential treatment, technical cooperation, and capacity building have been at the forefront of the GATT/WTO’s efforts to facilitate the integration of developing countries into the multilateral trading system. In recent times, however, doubts have been expressed as to the effectiveness of special and differential treatment in assisting developing countries to participate actively and derive significant benefits from the multilateral trading system. Still, however, most developing countries dispute the assessment that preferences have not been helpful and that their integration into the multilateral trading system would have been achieved at a faster pace, had they accepted to follow WTO disciplines like other Members. Moreover, these developing countries have always insisted on the legal enforceability of special and differential treatment provisions like any other provisions 1
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of the WTO Agreements. Developed countries, in contrast, have mostly taken a contrary view and argue that special and differential treatment-related provisions should be seen for what they are: voluntary commitments assumed by developed countries in favor of developing countries. Our invited authors did a magnificent job in bringing out all those issues and more in the pages that follow. We begin with the contribution by Edwini Kessie, who discusses the many provisions in the WTO contract regarding the special and differential treatment accorded to developing countries. This paper briefly examines the concept of special and differential treatment and how it has evolved in the multilateral trading system; it then identifies five classes of special and differential treatment provisions and discusses whether they are legally enforceable before offering some concluding remarks on the role of such provisions in the multilateral trading system. Kessie concludes that, in general, these types of provisions are not far reaching because they are often expressed in best-endeavors terms. There is, however, one very notable exception: the generalized system of preferences (GSP), whereby donors will accept products originating in beneficiaries at a preferential tariff rate, in contravention of the non-discrimination principle. The paper by Nuno Lim˜ ao and Marcelo Olarreaga offers us an assessment from an economic perspective of the value of the GSP to developing countries. They draw a parallel between preferential trading agreements (like free trade areas) and GSP schemes to make their point about preference erosion. The proliferation of preferential trade liberalization over the past 20 years has raised the question of whether it slows down multilateral trade liberalization. Recent theoretical and empirical evidence indicate that this is the case, even for unilateral preferences that developed countries provide to small and poor countries, but there is no estimate of the resulting welfare costs. Moreover, beneficiaries come to eventually oppose non-discriminatory (MFN) liberalization, because reduction of MFN rates equals erosion of their preferences. Hence beneficiaries become a stumbling block working against the function of the WTO. This stumbling block effect can be avoided by replacing the unilateral preferences by a fixed import subsidy, which the authors argue generates a Pareto-improvement. More importantly, they provide the first estimates of the welfare cost of preferential liberalization as a stumbling block to multilateral liberalization. By combining recent estimates of the stumbling block effect of preferences with data for 170 countries and more than 5,000 products, they calculate the welfare effects of the United States, European Union, and Japan switching from unilateral preferences to LDCs to an import subsidy scheme. Even in a model with no dynamic gains to trade, they find that the switch produces an annual net welfare gain for the 170 countries that adds about 10 percent to the estimated trade liberalization gains in the Doha Round. It also generates gains for each group: the United States, European Union, and Japan ($2,934 million); LDCs ($520 million); and the rest of the world ($900 million).
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In the next chapter, Frederick M. Abbott shifts the focus to a very idiosyncratic developing country, China. He examines the legal and WTO governance implications of China’s alleged failure to fulfill its obligations under the TRIPS Agreement. The significant escalation of interest by the United States and other developed countries in China’s intellectual property rights enforcement activity merits, in the author’s view, special attention because of its systemic implications. This subject matter forms a critical part of China’s continuing WTO dialogue with the United States, European Union, Japan, and Switzerland and tests the capacity of the WTO dispute settlement system to constrain state behaviors. China appears to perceive that its national interest is not aligned with its TRIPS Agreement and Accession Protocol obligations. Though the United States may well initiate a WTO dispute settlement action, it seems unlikely that doing so will result in near-term changes to China’s conduct. WTO dispute settlement is not designed to force immediate changes to government behaviors, particularly when the party under complaint is not overly concerned about the potential for withdrawal of concessions. Politicians and industry leaders who are demanding changes by China will almost certainly be frustrated at the WTO. This frustration raises two questions: First, will the United States be justified in imposing extra-WTO-legal sanctions on China? Second, if this action is justified, is it a good idea? The answers to these questions, explored in this paper, are “probably yes” and “probably no,” respectively. To paraphrase the title of Olivier Long’s classic work on the GATT, this case may help define the limits of the law in the WTO system. With Juan A. Marchetti’s contribution we shift focus yet again, this time to evaluate the impact of GATS on developing countries. In the author’s view, the task in the months ahead in the Doha Round of multilateral trade negotiations is particularly challenging for developing countries in the services negotiations. This is an opportune time to assess what developing countries have done so far and what they should be doing to achieve (1) a deeper integration of their economies into the world trading system and the (2) advancement of higher and sustainable levels of economic growth. Trade liberalization is a necessary but not a sufficient condition to attain economic development. Many other factors, such as geography, resource endowments, the protection of property rights in its largest sense, and the quality of the institutional and regulatory frameworks, are determinants of success. It would be unfair to place all the expectations of success in only one aspect of any development policy like trade and even more myopic in only one subset of the trade in general (i.e., services). Nevertheless, services are essential for development, and further liberalization of trade in services can lead to improvements to human welfare. As such, developing countries should take the initiative (unilaterally) to liberalize their own trade regimes as they pertain to services within the context of multilateral negotiations on the further liberalization of trade in services. After an elaborate discussion on the significance of services for development and the costs of protection and an analysis of developing countries’ overall negotiating positions thus far in the current round, the following basic
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themes emerge from this discussion: first, the essential role of services for economic development; second, the high costs imposed by trade protection; third, the benefits of liberalization; fourth, the need to make use of the WTO forum to enhance credibility and sustain domestic regulatory reform programs; fifth, the challenges of regulatory reform and the importance of appropriate sequencing; and, finally, sixth, the benefits of seeking further market access overseas in those areas in which developing countries have a comparative advantage. Kal Raustiala focuses on four interesting questions about trade in services raised by Marchetti in his contribution. First, why does the multilateral trading system not discipline protectionism in services as much as it does in goods? Ostensibly, services trade, which also encompasses professional services, will undoubtedly dramatically increase over the next decade. Although the structural barriers that keep some services purely local still exist, trade in services increasingly transcends these barriers through technology. On basic economic grounds, services trade should rationally have a larger part of the WTO agenda in the current round and perhaps an even larger part in future rounds of negotiations. Trade barriers in services tend to be in the form of complex nontariff barriers, which are more difficult to regulate effectively compared with more transparent barriers like tariffs. Moreover, unlike trade in goods, disciplines on services were only negotiated and later agreed to during the Uruguay Round, almost 50 years after GATT, in which membership was much less heterogeneous than that of the GATT contracting parties. Second, what is the role of WTO negotiations in reducing regulatory barriers? Raustiala comments that the inference that the GATS has actually resulted in a decrease in the trade in services is unlikely, though it leads to speculation as to what evidence exists indicating that GATS is actually promoting rather than inhibiting trade in services. Third, what promotes or demands more unilateralism in the trade in services vis-`a-vis other areas of WTO negotiation? In this context, the author borrows from cooperation theory to advance his conclusions that account for the particularities of services trade. Fourth, why has there been a lack of progress on mode 4? The comment suggests that in the final analysis political obstacles are at play, impeding serious liberalization in the movement of persons within the WTO, despite the enormous economic gains that would accrue to both migrants and their host countries. Jayashree Watal’s contribution concerns the developing countries’ adherence to the TRIPS Agreement, one of the most contested topics regarding their participation in the WTO. The TRIPS Agreement provides minimum standards for the protection of intellectual property rights and does not envisage harmonization of these rights among all WTO Members. It makes it clear that Members are not obliged to implement more extensive protection but does not prevent them from doing so. The demandeurs for the inclusion of an intellectual property agreement in the Uruguay Round of negotiations were developed countries. One of the reasons for inclusion of this subject in trade negotiations may well have been the attractiveness of the trade enforcement mechanism. However, more importantly,
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developed countries saw the trade forum as one in which the chances of making progress from their perspective were higher because of the possibilities of making trade-offs with other areas. Even if not all developing countries participated in these negotiations in equal measure, it would be fair to say that their perspective was represented. As is widely acknowledged, the TRIPS Agreement, in an effort to strike a proper balance among the differing interests of the participating countries, provides for significant flexibility in the protection to be given (see examples in the Annex). This flexibility, which went considerably further than some of the demandeurs in the negotiations would have liked and were achieving in bilateral agreements at the time, resulted from a compromise achieved through negotiation by developing countries acting collectively and making issue-based alliances in a multilateral context. The TRIPS Agreement continues to be the generally accepted point of reference for the protection that countries should give to the intellectual property of others. This does not mean that it is not criticized, but this criticism comes from both sides. On the one hand, some developed countries do not accept it as necessarily providing for adequate and effective protection of their intellectual property, and there has been a continuing effort to get trading partners to provide enhanced protection in important respects. On the other hand, developing countries have proposed, and in one important case – that of TRIPS and public health – achieved amendments to the TRIPS Agreement to improve the balance from their perspective. The next five chapters discuss developing countries’ participation in the ˚ WTO in general and in dispute settlement proceedings in particular. Hakan Nordstr¨ om discusses participation of developing countries in the WTO. The WTO takes pride in being a member-driven organization, with decisions taken by consensus among all member states. But how active are the various member states in reality? In particular, to what extent do developing countries participate in the proceedings – and if not, why not? This chapter offers new evidence on this subject from the WTO official records for 2003. The data he put together show that the activity level is highly uneven and, further, is correlated closely with size and income levels. The poorest LDCs often lack WTO representation in Geneva. When it comes to active participation, the data are even more telling: the relative silence of smaller and poorer member states is especially telling at the technical level (Committees and Working Groups) where the substantive work is carried out. This paper suggests that there is a positive correlation between the income level of participants and the intensity of participation in the WTO in general. Jeffrey L. Dunoff, in his comment, first congratulates Nordstr¨ om for making at least two important contributions to the literature on developing state participation at the WTO. First, in his view, the author correctly directs our attention away from developing state participation in WTO dispute settlement and toward developing state participation in the WTO’s legislative processes; second, the empirical research provides a large and suggestive body of data that can usefully
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inform discussions of developing state participation. In the author’s view, Nordstr¨om’s data and his richly suggestive analysis could support an entire research agenda on developing state participation at international organizations. The comment further addresses the paradox that lies at the heart of Nordstrom’s analysis and notes that elucidating that paradox points toward important methodological and normative questions that his paper does not address: Nordstr¨om’s data perhaps misleadingly suggest that developing states played a relatively minor role in WTO processes during 2003, even though it would seem that they played a critical role then in the lead-up to the Ministerial Conference in Cancun. It is difficult to square these two accounts, and the tension between them suggests that there are difficult methodological questions about how to measure participation and influence at the WTO. Cancun’s failure does suggest the need to think carefully about both the virtues and the drawbacks of increased developing state participation at the WTO. Marc L. Busch and Eric Reinhardt discuss developing countries’ participation in WTO dispute settlement proceedings. It has long been observed that developing countries made scant use of dispute settlement under the GATT. Some observers go so far as to suggest that developing countries will have greater recourse to the WTO dispute settlement system because of its more legalistic architecture compared with the GATT’s power-based diplomatic system. Busch and Reinhardt argue that this conventional wisdom is wrong. In assessing how developing countries have fared in dispute settlement, two questions beg empirical attention. First, have developing countries secured more favorable trade policy outcomes in WTO versus GATT dispute settlements, and second, what explains any differences in the outcomes realized by developing, as opposed to developed countries? The authors dissent from the well-accepted view that the ushering in of a rules-based dispute settlement system would result in greater participation of developing countries than in the GATT power-based system. They argue that the Dispute Settlement Understanding (DSU) only serves to reinforce the (1) inability of developing countries to extract concessions from (mostly) developed country defendants in WTO litigation in light of the incentives to litigate and (2) developing countries’ lack of capacity to push for early settlement. The authors argue that “early settlement” offers the greatest likelihood of securing full concessions from a defendant at the GATT/WTO, a pattern that has been less evident in cases involving developing countries. The data provided bear out their argument: on the one hand, poorer countries have not secured significantly greater concessions under the WTO than under GATT, and, on the other, the increasing gap between rich and poor Members in the performance of the dispute settlement stems from a lack of legal capacity, not a lack of market power with which to threaten retaliation. The main implication of their argument is that developing countries need more assistance before litigation commences. Niall Meagher’s chapter sets forth some thoughts based on the author’s personal experience in representing developing countries in WTO dispute settlement
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proceedings. There have been very many thorough statistical studies relating to the dispute settlement system and, in particular, developing country participation in it. This paper is not intended to duplicate that work. Rather than trying to draw empirical conclusions from the statistics about which developing countries have participated in the system and the rate at which they participate, the paper proposes instead to discuss some practical aspects of the resource constraints facing developing countries in participating in WTO dispute settlement. Any discussion of representing developing countries in WTO dispute settlement proceedings must probably begin and end with the question of the resources available to them and whether these resources enable them to participate on equal terms with developed countries. The question of resources is frequently approached simply from the point of view of developing countries’ financial ability to obtain adequate legal advice. This is, of course, an important factor – and perhaps is the most important factor – but resource constraints are not limited simply to the ability of a developing country to retain good legal counsel. Instead, they can manifest themselves in many other ways and influence every aspect of the decision of whether to participate in dispute settlement proceedings. These resource constraints condition developing countries’ ability to participate in and benefit from not just the dispute settlement system but all aspects of the WTO. This paper therefore reviews some of the practical ways in which these constraints – financial and otherwise – impede developing country participation in the dispute settlement system on an ongoing basis. Chad P. Bown in his comment on Meagher’s paper presents a very interesting, accessible, and poignant account of some of the practical problems facing poor countries (and the individuals who advise them) in WTO dispute settlement litigation. The comment focuses on three areas related to the provision of WTO litigation assistance to poor countries. It uses an economic perspective to expand on (and complement) some of the points that Meagher’s analysis touches on only briefly. It first highlights the role that economics could play, before advocating for an increased role for the complementary and necessary services that economists should contribute to the lengthy process of WTO litigation. If the purpose of subsidized intervention on behalf of poor country governments is to more fully inform (as opposed to simply guide) the client’s consideration of the WTO litigation tool, the author argues that providing poor country litigants with more economic information is extremely important. Finally, the comment considers a somewhat broader perspective by discussing some of the benefits to expanding legal assistance center services like the Advising Centre on WTO Law (ACWL), relative to alternative sources that might provide basic legal services to developing countries. Mateo Diego-Fern´andez’s contribution concerns the current remedies in the WTO. An unpopular remedy, retaliation is the last resort by which to enforce a WTO ruling and has often been criticized as being trade-disruptive and one that affects the Member that exercises it in the first place. It could also be an unworkable
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tool in the hands of many, because of its associated costs. However, retaliation (or the threat thereof ) is a key element for compliance or for reaching mutually acceptable solutions. In addition, it is the only tool for rebalancing the level of rights and obligations in the absence of compliance. The author collaborated in preparing Mexico’s proposal to formally introduce tradable retaliation (remedies) in the WTO dispute settlement understanding (DSU), whereby the entitled-toretaliate Member could auction off to another Member its right to do so. Mexico’s proposal to amend the DSU aims at solving what it believes to be the central problems in the functioning of the DSU; namely, the period of time during which a WTO-inconsistent measure can be in place without consequences and the fact that retaliation is an empty shell in the hands of many. Accordingly, the proposal contains the following four suggested ways of dealing with this problem: first, early determination and application of nullification or impairment; second, retroactive (as opposed to prospective) determination and application of nullification or impairment so that retaliation is exercised taking into account the time that has elapsed since imposition of the measure; third, an injunction-like mechanism that allows Members to obtain relief where a measure causes or threatens to cause damage that would be difficult to repair; and, fourth, negotiable remedies, which offer the possibility of transferring the right to retaliate to third Member(s) that may use it more effectively. The paper also addresses the issue of how enhancing rules on retaliation would benefit developing countries above all and elaborates on how the Mexican proposal to amend the DSU might contribute to this end. Gene M. Grossman and Alan O. Sykes deal with the most notorious GSPrelated dispute submitted to the WTO so far. The WTO case brought by India in 2002 to challenge aspects of the European Community GSP brings fresh scrutiny to a policy area that has received little attention in recent years – trade preferences for developing countries. Preferential tariff treatment is inconsistent with the MFN obligation embedded in Art. I GATT. However, the legal authority to deviate from the MFN obligation was incorporated into the law of the WTO along with the GATT itself with the adoption of the so-called Enabling Clause by the GATT contracting parties in 1979. Although trade discrimination favoring developing countries is the essence of any GSP scheme, India’s WTO complaint raised the question of what type of discrimination is permissible – must all developing countries be treated alike, or can preference-granting nations discriminate among them based on various sorts of criteria? The WTO Appellate Body formally affirmed the ruling in India’s favor in early 2004. However, in substance, by modifying the Panel’s findings in a way that seemingly authorizes some differential treatment of developing countries based on their “development, financial and trade needs,” this ruling gave India a pyrrhic victory, if at all. The purpose of this paper is to review the current state of the law in the WTO system and to ask whether economic analysis can offer any wisdom about the proper extent of “discrimination” through GSP measures. The issues are challenging ones, both from a legal and an economic standpoint. There are good economic reasons to
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be concerned about discrimination and reciprocity in GSP schemes, as well as respectable legal arguments that they should be strictly limited. GSP benefits are “gifts” of a sort; however, tight limitations on their terms may put an end to them altogether. It is exceedingly difficult to say whether discrimination and reciprocity in GSP schemes make the trading community worse off or better off over the long haul. The authors take the view that, in the India case, Pakistan was paid by India’s money due to the ensuing trade diversion. They go one step further though, and argue that, in light of substantial empirical evidence, it is probably the case that the candle (income) is not worth the flame (GSP schemes). Jeffrey Dunoff also comments on the contribution by Grossman and Sykes. In his view, the authors provide an insightful analysis of the GSP dispute. Their contribution generates a number of conclusions, nearly all of which emphasize the difficulty of the issues raised by this dispute. The ultimate question raised by the authors’ analysis is whether the GSP dispute is one of those hard cases that make bad law. The comment examines why conventional analyses cannot inform us as to whether the Appellate Report created good law and raises the following three questions about the report: first, the relationship between the exceptions to GATT disciplines found in the Enabling Clause and Art. XX GATT; second, the institutional role of the Appellate Body in “hard cases” like the GSP dispute; and, third, the purpose of GSP programs. As to the first question, the comment raises the point that there is possibility of a serious tension between the logic of Art. XX GATT and the logic of the Enabling Clause, which reflects a larger, unresolved tension over whose preferences count in the context of measures related to labor, environment, and other forms of conditionality. With respect to the second question, the comment states that it seems the Appellate Body’s “middle course” effectively positions WTO adjudicatory bodies as the arbiters of evaluating preference programs, and as such they address fundamental policy questions on a case-by-case basis. Accordingly, the comment suggests that from an institutional standpoint the Appellate Body may have created bad law by carving out a continuing and primary role for itself in the highly politicized field of GSP. As regards the final question, the GSP dispute is a hard case because at some level it pits against each other two plausible approaches of international law: international law in general and international trade law in particular help states solve collective action problems, address externalities, and generate public goods, whereas the other approach, which the comment supports, is that a primary function of international law is to influence and improve the functioning of domestic institutions. In the final analysis, the comment concludes by stating that the Appellate Body may have avoided speaking to these conflicting visions of international law by deciding the case on procedural grounds and may have thus minimized the extent to which the GSP dispute was a hard case that made bad law. In his comprehensive comment, Jeffrey Kenners first begins by tracing the contested provisions of the European Communities (EC) GSP scheme to the emergence, in the early 1990s, of a broader conception of EC development policy that
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incorporated the promotion of democracy and human rights, including labour rights. Against this background, his comment evaluates the extent to which it has been possible for the European Community to confirm that there is now an objective process for granting special trade preferences in its reformed GSP following the Appellate Body rulings in EC – Tariff Preferences. In its remodeled GSP+ scheme, the EC, in principle, currently offers special incentives to an unspecified number of applicant countries for the purposes of encouraging “sustainable development” and “good governance” with reference to a list of international conventions. The GSP+ is open to all developing countries with “the same development needs.” Accordingly, the European Community believes, and the author agrees, that it is able to demonstrate that it is pursuing its development policy priorities in a WTO-consistent manner. Anastasios Tomazos’ contribution aims at providing a critique of the Appellate Body’s reasoning and its ultimate conclusion in the EC – Tariff Preferences dispute. After putting forth the argument that the Appellate Body’s ruling cannot be supported on either legal and economic grounds, the paper advances the argument that the decision is also untenable on broader political/systemic grounds primarily because it maintains the status quo and squanders an opportunity to give WTO Members the impetus to thoroughly review whether the Enabling Clause, in whole or in part, still fulfills its original mandate. Finally, Patrick Low, as the title of his paper suggests, argues that the contribution of the WTO to developing countries, be it negative or positive, is in the hands of others. The additional question posed in this paper presupposes that developing countries can also influence the contribution that the WTO makes to their growth and development. Both of these questions inform the paper’s analysis. It has become increasingly obvious that important differences in interests and priorities exist among developing country WTO Members: they are different in fundamental ways and these differences are bound to be reflected in their priorities and interests. Accordingly, developed countries will not agree to uniform policy treatment for all developing countries in the multilateral trading system, and many developing countries have similar reservations. The paper employs the following four-fold characterization of the WTO for the practical purpose of ordering questions about potential and actual benefits derived by developing countries from the multilateral trading system: first, a system of rules; second, a negotiating forum; third, a dispute settlement mechanism; and fourth, a vehicle for reducing information asymmetries among nations with respect to trade policy. Before going into the details, the paper considers, at a slightly more abstract level, the theoretical cost-benefit set for developing countries arising from involvement in the WTO. The following basic questions are posed and subsequently addressed. Why does it make sense for developing countries to embrace a legally binding set of rights and obligations internationally? Why do countries simply not act autonomously in policy formulation? What are the supposed benefits of
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international cooperation in trade policy matters? The paper attempts to address and provide some insight to some of these issues and questions raised. Wilfred J. Ethier takes the view that Low’s contribution is a thoughtful and comprehensive discussion of the relationships and prospective relationships of developing countries to the WTO. The purpose of his comment is to place this discussion in the context of how the global economy has been changing in recent decades. The comment briefly examines the following three fundamental historical developments that emerged during the Uruguay Round: first, the South and the East undertook fundamental reform and now are trying hard to become part of that multilateral trading system; second, free-trade areas and customs unions were formed; and, third, foreign direct investment (FDI) began to accelerate and also began to flow into the South and the East (selectively) in significant amounts. Against this background, Ethier also looks at the question addressed by Low: what do the developing countries want from the WTO? The author concludes by asserting that in the final analysis the question is not whether the WTO is doing enough for developing countries, but rather what the developing countries are doing for themselves.
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1 The Legal Status of Special and Differential Treatment Provisions under the WTO Agreements
I. Introduction Since the creation of the multilateral trading system about sixty years ago, developing countries as a group have not benefited significantly from it. Although their share in world trade has increased to 25 percent, the major beneficiaries are such countries as Brazil, Chile, China, India, and South Korea.1 The majority of developing countries, especially the least-developed countries (LDCs), have seen their share in world trade stagnate or decline. According to the WTO Secretariat, the share of world trade held by the forty-nine countries making up this group has continuously declined over the years to less than 0.5 percent, confirming their marginalisation in the multilateral trading system.2 The lack of active participation of LDCs and of most developing countries in the multilateral trading system and the global economy has been a source of concern for the WTO. This concern is reflected in the second indent to the preamble of the WTO Agreement, which relevantly provides that Members of the WTO “[recognize] that there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development.” The Director-General of the WTO, Dr. Supachai Panitchpakdi, has on numerous occasions expressed his commitment to the integration of developing countries into the multilateral trading system and the global economy. In that context, he has expressed support for improved market 1
2
See generally (WTO Secretariat), International Trade Statistics (2005). See further, Pascal Lamy, Director-General of the WTO, “The Perspectives of the Multilateral Trading System,” delivered in Lima Peru (31 January). UNCTAD, Statistical Profiles of Least-Developed Countries (2005).
The views expressed in this chapter are those of the author and do not represent the views of the WTO.
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access for products of export interest to developing countries, particularly the LDCs.3 Historically, special and differential (S&D) treatment and technical cooperation have been at the forefront of the efforts of the GATT to facilitate the integration of developing countries into the multilateral trading system.4 In recent times, however, doubts have been expressed by some commentators on the effectiveness of S&D as a tool for facilitating the integration of developing countries into the multilateral trading system. Critics often point to the fact that after being in force for almost 30 years, the Lom´e/Cotonou Convention, which offers more generous concessions than most GSP schemes, has failed to improve the trade performance of most of the beneficiary countries5 ; hence, the decision by the European Communities (EC) to discard the non-reciprocal preferences under the Convention in favour of regional partnership agreements.6 Developing countries dispute the assessment that preferences have not been helpful and that their integration into the multilateral trading system would be achieved at a faster pace, were they to eschew most of the preferences given to them under bilateral and multilateral trade agreements.7 They argue that there is nothing inherently wrong with S&D and that several reasons account 3
4
5
6
7
See Pascal Lamy, Director-General of the WTO, “The Doha Development Agenda: Sweet Dreams or Slip Slidin’ Away,” delivered to the Institute of International Economics, Washington (17 February 2006). See further “Review of Developments and Issues in the post Doha Work Programme of Particular Concern to Developing Countries,” delivered to the Trade and Development Board of UNCTAD (6 October 2005). According to one author, there are several conceptual premises underlying the concept of S&D treatment: The fundamental one is that developing countries are intrinsically disadvantaged in their participation in international trade, and therefore, any multilateral agreement involving them and developed countries must take into account this intrinsic weakness in specifying their rights and responsibilities. A related premise has been that the trade policies that would maximize sustainable development in developing countries are different from those in developed economies and hence that policy disciplines applying to the latter should not apply to the former. The final premise is that it is in the interest of developed countries to assist developing countries in their fuller integration and participation in the international trading system: Michalopoulos Constantinos, “Trade and Development in the GATT and WTO: The Role of Special and Differential Treatment for Developing Countries,” paper presented at the WTO Seminar on Special and Differential Treatment for Developing Countries held in Geneva on 7 March 2000, p. 15. M. Davenport, A. Hewitt, and A. Koning, “Europe’s Preferred Partners? The Lom´e Countries in World Trade” (5–6 1995). See, for example, European Centre for Development Policy Management, “Lom´e 2000 – Into the New Millennium” 3 (1999). The authors note, “The EU’s position is that the trade advantages it provides through Lom´e have not sufficiently benefited the ACP countries. Something different must be tried, something compatible with WTO rules.” Robert Sharer, “Special and Differentiated Treatment and Economic Reforms in Developing Countries,” paper presented to the WTO Conference on Special and Differential Treatment for Developing Countries, Geneva (7 March 2000). The author asserts that “successful integration of many developing countries in the world economy is linked to their own reforms, and that provisions and exemptions in international agreements which could retard necessary economic adjustments do not promote such integration” (p. 1).
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for the low or non-utilisation of preferences by some developing countries. These reasons include “too many complications pertaining to restrictive, complex and varying rules of origins, quotas, designation criteria, exclusion of sensitive products which are of export interest to developing countries, mismatch between exports of beneficiaries and coverage of preferences, and non-economic conditionalities.”8 It is not the objective of this paper to take a position on whether or not preferences are beneficial to developing countries,9 but rather to determine the legal status of S&D provisions under the WTO Agreements. Developing countries have always insisted on the legal enforceability of all S&D provisions, whereas developed countries have mostly taken a contrary view.10 For some developing countries, all the WTO Agreements are indivisible and should be seen as a package that strikes a careful balance between the rights of developing countries and those of developed countries. In other words, they argue that S&D provisions are an integral part of the WTO Agreements and as such are enforceable like all the other provisions. They argue further that if the true intention was that the provisions should not create any justiciable rights, then there would have been no point in inserting those provisions into the WTO Agreements in the first place. Furthermore, nothing prevented the drafters from stating clearly that S&D provisions are merely “best-endeavour” clauses that were not capable of being enforced. Some have even argued that they agreed to sign the Marrakesh Agreement because they believed that developed countries would honour the commitments they had assumed would be in their favour. For their part, developed countries have argued that S&D provisions should be seen for what they are: voluntary commitments assumed by developed countries in favour of developing countries. They also argue that there is nothing in the language in S&D provisions that evinces the intention that they should create justiciable rights and that it would be inappropriate to coerce developed countries to grant preferential treatment to developing countries. In effect, the granting 8
9
10
Onguglo, Bonapas, “Developing Countries and Unilateral Trade Preferences in the New International Trading System,” in Trade Rules in the Making: Challenges in Regional and Multilateral Negotiations 119 (eds Mendoza M. R., Low P., and Kotschwar B.) 1999. See, for example, Edwini Kessie, “Developing Countries and the World Trade Organization – What Has Changed?” (1999) 22 (2) World Competition 83 at pp. 92–94. See further Murray, Gibbs, “Special and Differential Treatment in the Context of Globalization,” revised paper presented to the WTO Conference on “Special and Differential Treatment for Developing Countries,” Geneva (7 March 2000). See, for example, the Working Party Report on United States Temporary Import Surcharge, L/3573, adopted on 16 September 1971, 18S/212, (1972) paras 37–38 at pp. 221–222, where a number of developing countries expressed the view that Article XXXVIII of GATT 1994 had legal force: “A number of representatives of developing countries . . . drew the conclusion that Article XXXVII was not being respected and stressed the fundamental importance to developing countries of this Article – the sole commitment of developed countries towards developing countries. In the view of some of these delegations, this Article should be considered as being parallel in application to other Articles in the GATT.”
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of S&D treatment should be seen as an altruistic measure. Finally, developed countries make the argument that, if the position of developing countries were to prevail, it would harden the negotiating positions of developed countries in the Doha Development Agenda (DDA) negotiations and make them insist on full reciprocity. To some extent, the failure to make any substantive progress on the S&D issue in the DDA negotiations could be attributed to the philosophical differences between developed and developing countries over the nature and role of S&D in the multilateral trading system. Paragraph 44 of the Doha Ministerial Declaration mandated that “all [S&D] provisions shall be reviewed with a view to strengthening them and making them more precise, effective and operational.” The deadline of July 2002 for recommendations to be made by the Special Session of the Committee on Trade and Development was missed. The extension of the deadline to December 2002 did not help them bridge the differences among Members. Further attempts to reach agreement in 2003 all failed to produce the ´ developing countries refused to join the consensus to desired results. At Cancun, harvest the proposed decisions on 28 proposals that they had tabled, arguing that they lacked any economic value and would not facilitate their integration into the multilateral trading system. They expressed dissatisfaction with the loose language and accused their developed-country counterparts of holding up progress on the remaining 60 proposals, which had economic value and the potential for helping them increase and diversify their exports and safeguard their interests in the multilateral trading system. This chapter is divided into four parts. Section II briefly examines the concept of S&D treatment and how it has evolved in the multilateral trading system. Section III identifies five classes of S&D provisions and discusses how they have been interpreted by GATT/WTO panels and the Appellate Body. Section IV offers some concluding remarks.
II. The Concept of Special and Differential Treatment 1. Background The cornerstone of the WTO Agreements is the non-discrimination principle, under which there are two main rules. The first is the most-favoured-nation (MFN) rule, which prohibits the granting of any benefit, favour, privilege, or immunity affecting customs duties, charges, rules, and procedures to a particular country or group of countries, unless they are made available to all like products originating in other WTO Members. The second rule is the national treatment principle under which WTO Members are prohibited under certain conditions from discriminating between imported products and domestic products. It follows from the non-discrimination principle that no group of countries may be favoured within the GATT/WTO legal framework. Indeed, the original GATT strictly observed this
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principle, notwithstanding the fact that out of the original 23 countries, 11 were developing countries.11 It appeared to be the view of the signatory states that all countries that acceded to the GATT could gain from the multilateral trading system if they identified the sectors in which they had comparative advantage. The idea of giving trade preferences to developing countries did not have universal support because of the concern that the preferences could distort trade and reward inefficient producers. Increasing global welfare necessitated a rules-based non-discriminatory system in which all countries could compete on a level playing field. It was the assumpion that the CONTRACTING PARTIES to the GATT would, to the fullest extent possible, maintain outward-oriented trade policies and resort sparingly to policies that restricted imports or exports. The very fact that 11 developing countries were among the original members of the GATT indicates, to some extent, that they did not initially strenuously oppose the basic thrust of the philosophy underlying the GATT. Had they done that, their interests would have probably been accommodated by the developed countries, which must have been conscious that, without their support, it would have been extremely difficult to establish the GATT and expect it to become the principal international institution responsible for regulating international trade.12
2. The Origins of Special and Differential Treatment In the initial years of the GATT (1948–1955), developing countries participated in tariff negotiations and other aspects of the work of the organisation as equal partners. They were subjected to the same rules as their developed counterparts and had to justify the introduction of trade-restrictive measures.13 The idea of relaxing the normal rules of the GATT and granting S&D treatment within the GATT legal framework gained force after the accession of a number of newly independent developing countries to the GATT in the 1950s. Most of these countries challenged the very basis on which the GATT was built; that is, as a rules-based, nondiscriminatory multilateral trading system. They argued that it was not realistic 11
12
13
The countries are Brazil, Burma (Myanmar), China, Ceylon (Sri Lanka), Chile, Cuba, India, Lebanon, Pakistan, Southern Rhodesia (Zimbabwe), and Syria. The WTO does not have any set criteria for determining whether a country is developed or developing. In other words, it is a self-selection process. As regards least-developed countries, the WTO follows the classification of the United Nations, which currently indicates that there are 48 LDCs in the world. The view has been proffered that developing countries did not have much choice at that time and grudgingly accepted the General Agreement. Furthermore, the GATT disciplines at that time were not too onerous and permitted developing countries, inter alia, to have high and unbound tariffs and maintain quotas in a variety of situations. WTO Secretariat, “Developing Countries and the Multilateral Trading System: Past and Present,” Background document for the High Level Symposium on Trade and Development, Geneva (17–18 March 1999), p. 11.
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to expect newly independent countries with fragile economies to compete on a level playing field with established industrial countries at that time. To create a more equitable multilateral trading system, developing countries initially pressed for measures that would enable them to nurture and protect their domestic industries. Their persistent demands led to the redrafting of Article XVIII at the 1954–1955 GATT Review Session. The revamped Article permitted developing countries to disregard, under certain conditions, their tariff commitments and to implement non-tariff measures, such as quotas and other restrictive measures, to promote the establishment of particular industries within their territories and also deal with their balance-of-payment difficulties. The S&D treatment of developing countries within the GATT legal framework was extended by two other provisions: Article XVI:4 and Article XXVIII bis. The former exempted developing countries from the prohibition on export subsidies for manufactured goods, and the latter permitted a more flexible use of tariff protection. A significant number of developing countries took advantage of these measures to erect high tariff walls to discourage imports and thereby encourage the growth of domestic industries. With time, developing countries started pressing for further concessions within the GATT legal system. They argued that, although previous S&D provisions had enabled them to build and shield their domestic industries from competition, they did not grant them preferential access in the markets of their trading partners. Therefore, internal measures taken by them to boost production of tradable products should be complemented by external measures to guarantee their easy access in the markets of their major trading partners. There was some hesitation on the part of developed countries regarding the new demands by developing countries, as the demands had the potential to undermine further the rules-based, non-discriminatory multilateral trading system. The establishment of the United Nations Conference on Trade and Development (UNCTAD) as an alternative international trade and economic forum in 1964, however, influenced them to seriously consider those demands. UNCTAD derided the GATT rules and called for new multilateral trade rules that took account of the special position of developing countries. It argued that the status quo was inequitable and primarily served the interests of developed countries. As noted by Pillinini and Sampson, UNCTAD “confronted the developed members of the GATT with the idea of paying a higher price for attracting and keeping developing countries in the GATT system.”14 The result of the persistent demands of developing countries led to the adoption of Part IV of the General Agreement, which was entitled “Trade and Development.” Part IV was quite significant for it formalised acceptance by developed countries of the non-reciprocity principle under which developed countries gave 14
Pillinini M., and G. Sampson, “What of Special Treatment for Developing Countries,” unpublished paper with the authors, 1994, p. 5.
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up their right to ask developing countries to offer concessions during trade negotiations to reduce or remove tariffs and other barriers to trade. In other words, this principle elevated and legitimised “free-riding.” Insofar as developing countries could benefit from the concessions made by other countries through the application of the MFN principle, they did not see the need to offer reciprocal concessions. Offering reciprocal concessions was seen as anathema as it would have diluted the effects of the import substitution policies that were being pursued by them.15 Part IV also exhorted developed contracting parties of the GATT to implement measures to increase the trading opportunities of developing countries. Subsequent to the incorporation of Part IV into the General Agreement, the contracting parties to the GATT mandated the Committee on Trade and Development (CTD), which had been established in 1964, to monitor the application of the provisions of Part IV.16 To improve the trading opportunities of developing countries, three waivers were granted from the provisions of Article I between 1966 and 1971. The first was the authorisation given to Australia to offer tariff preferences to developing countries on a specific list of products. The second was the permission granted to all developed countries to maintain Generalised System of Preferences (GSP) schemes in favor of developing countries, and the third was the permission granted pursuant to the Protocol for Trade Negotiations among Developing Countries for 16 developing countries to exchange trade concessions among themselves. To have a secure legal basis for the granting of preferences to, and among, developing countries, the contracting parties adopted the “Enabling Clause” during the Tokyo Round of Trade Negotiations. The Clause is important as it placed the concept of S&D treatment at the heart of the GATT legal system. It created a permanent legal basis for the following: (i) special and differential treatment with respect to tariff preferences accorded under GSP schemes; (ii) non-tariff measures governed by the Tokyo Round codes; (iii) tariff and, subject to the approval of the contracting parties, non-tariff preferences among developing countries, in the framework of regional or global trade arrangements; and (iv) deeper preferences, in the context of GSP schemes, for LDCs. The extension of S&D treatment to developing countries under the Enabling Clause failed to increase the participation of a majority of developing countries 15
During the Kennedy Round, the phrase was interpreted as follows: [t]here will, therefore, be no balancing of concessions granted on products of interest to developing countries by developed participants on the one hand and the contribution which developing participants would make to the objective of trade liberalization on the other and which it is agreed should be considered in the light of the development, financial and trade needs of developing countries themselves. It is, therefore, recognized that the developing countries themselves must decide what contributions they can make: GATT, Com.TD/W/37, p. 9.
16
Part IV, which was drafted by the Committee on Legal and Institutional Framework of GATT in Relation to Less-Developed Countries, was finalized in a Special Session of the contracting parties between November 17, 1964 and February 8, 1965. It went into effect on a de facto basis on February 8, 1965, but legally on June 27, 1966.
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in the multilateral trading system. This failure prompted the question, first in academic circles, whether it was worth retaining this concept in the GATT legal system. A number of commentators argued that S&D treatment had failed to achieve its basic objective and should be discarded, as in the following comment: [T]he developed countries have been allowing, or encouraging, the developing countries to become contracting parties to the GATT without requiring them to abide by the more important obligations of membership. What is more, they have acquiesced in the formal derogation from the principle of non-discrimination, which is the keystone of the GATT, to permit the Generalized System of Preferences (GSP) in favour of developing countries to be established and maintained.17
III. Legal Status of S&D Provisions under the WTO Agreements Before reviewing the legal status of S&D provisions in the various Uruguay Round Agreements, it is in order to discuss the fundamental shift in the attitudes of several developing countries toward S&D treatments during the negotiations. By the 1980s, a number of developing countries had started to question the overall effectiveness of import substitution and other restrictive policies. Although some held the view that these policies had assisted them in establishing and protecting some important industries, others felt that the associated costs far outweighed the benefits. The view was expressed in that context: the erection of high tariff walls and the imposition of quotas and other prohibitive restrictions had largely sheltered these economies from global competitive forces and in the process led to their stagnation and decline.18 Developing countries no longer seriously questioned the contribution that could be made by international trade in assisting countries to achieve sustainable growth and development. Before the Uruguay Round negotiations, a fair number had already implemented wide-ranging reforms under Structural Adjustment Programmes administered by the International Monetary Fund and the World Bank and had largely overcome their scepticism towards trade liberalisation.19 The notable successes of countries, such as Korea, Singapore, and Hong Kong, China, made them reassess the value of pursuing protectionist policies that discouraged trade. 17
18
19
Hugh Corbet, in Hudec, Developing Countries in the GATT Legal System (Hampshire: Gower Publishing Company Ltd; 1987), p. xvi. This is not to suggest that developing countries were very critical of the concept of S&D treatment. Although they were prepared to accept the shortcomings of import substitution policies, they have always defended the need for preferential access into developed country markets. See further Rohini, Hensman, “World Trade and Workers’ Rights: To Link or Not to Link,” Economic & Political Weekly, April 8, 2000, at p. 1249. Robert Sharer, supra note 7 at 3. See further, Murray, Gibbs, supra note 9 at 3.
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The developed countries reasoned as followed: If the imposition of import substitution policies had failed to reverse their marginalisation from the multilateral trading system, then it was probably the appropriate time to consider narrowing the scope of the concept of S&D by limiting the application of the non-reciprocity principle and giving reciprocal concessions, where appropriate, to advance their trading interests.20 The idea of developing countries giving reciprocal concessions to their trading partners was foreseen in the Punta del Este Declaration, which officially launched the negotiations in 1986. Although this declaration made it clear that the negotiations would take into account S&D treatment and non-reciprocity, it also stated that developing countries would be expected to undertake more obligations as soon as their capacity to do so improved. One important factor that influenced developing countries to become active in the Uruguay Round negotiations was the effect the trade policies of some developed countries were having on their exports. They were concerned about the rampant resort to contingency protection measures – (grey-area measures, such as voluntary export restraints, orderly marketing arrangements, anti-dumping measures, countervailing measures, and safeguard measures – and the proliferation of regional trade agreements. To curb these abuses and level the playing field, developing countries saw the Uruguay Round as an opportunity to reinforce the multilateral trading system: [W]hile seeking to preserve the differential treatment in their favour, they also began to defend the integrity of the unconditional MFN clause, obtaining MFN tariff reductions, and strengthening the disciplines of GATT . . . so as to prevent the restriction and harassment of their trade. Particular emphasis was laid on an improved dispute settlement mechanism, as a means of defense against bilateral pressures from their major trading partners. At UNCTAD VI (Belgrade, 1983), all countries recognized the need to strengthen the international trading system based on the MFN principle.21
1. S&D Provisions in the Uruguay Round Agreements As previously noted, it was a negotiating objective of developing countries during the Uruguay Round to accept a dilution of S&D treatment in exchange for better market access and strengthened rules. They had realised that they had nothing much to gain from keeping all the preferences accorded them in the GATT system by developed countries. They had implicitly accepted the view of the eminent 20
21
The eminent group of persons were of the view that S&D treatment had done nothing to advance the interests of developing countries in the multilateral trading system. Rather it had encouraged “the tendency to treat them as being outside the system”: F. Leutwiler et al., Trade Policies for a Better Future: Proposals for Action (Geneva: GATT Secretariat), p. 34. Gibbs, supra note 9 at 3.
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group of persons that they had “allowed themselves to be distracted by the idea of preferences . . . and [that] developed countries [had] used preferences as an easy substitute for action in more essential areas.”22 Bolstered by the exceptional performance of some Asian and Latin American countries, such as Chile, South Korea, Singapore, and Hong Kong, China, developing countries were convinced that they could gain more benefits from the multilateral trading system if developed countries abolished barriers to their trade. The perceived benefits of the S&D provisions in the GATT paled into insignificance when compared with the potential benefits that could be gained from improved access to products of export interest to them, especially agricultural and textile and clothing products. Furthermore, developing countries became convinced that liberalisation at the multilateral level under the auspices of the GATT was much more secure than the unilateral preferences that were given them under GSP schemes. Benefits under such schemes and other arrangements such as the Lom´e Convention were temporary and were linked to a country’s level of economic development. Countries that showed economic promise were likely to be monitored and later graduated from such schemes, as soon as they reached a certain level of development. Bearing in mind all these considerations, developing countries did not seek exemption from any of the multilateral trade agreements. In fact, the “single undertaking” approach adopted during the Uruguay Round foreclosed the possibility of developing countries picking and choosing which WTO Agreements they wanted to abide by.23 Membership in the WTO entailed the acceptance of all the multilateral trade agreements, meaning that the concept of S&D was weakened from the very start by the approach that was chosen. According to the WTO Secretariat, Uruguay Round provisions conferring S&D treatment could be grouped under five main headings: The development dimension continues to be reflected in the WTO Agreement through provisions for special and differential treatment . . . [which] could be classed in five main groups: provisions aimed at increasing trade opportunities through market access; provisions requiring WTO Members to safeguard the interest of developing countries; provisions allowing flexibility to developing countries in rules and disciplines governing trade measures; provisions allowing longer transitional periods to developing countries; and provisions for technical assistance.24 22 23
24
Supra note at 44. The view has been expressed that developing countries did not have much of a choice. The “single undertaking” approach was an invention of the developed countries that was imposed on them. Thus, it is not entirely correct to assert that they voluntarily accepted a dilution of S&D treatment in exchange for better market access and strengthened rules. Supra note 12 at 18.
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Before examining the legal status of these provisions, it is necessary to examine the relevant provisions of the Vienna Convention on the Law of Treaties and how they have been interpreted by WTO panels and the Appellate Body.25
2. Vienna Convention on the Law of Treaties Articles 31 and 32 of the Vienna Convention on the Law of Treaties (Vienna Convention) provide in relevant parts, as follows: Article 31 General rule of interpretation 1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. ... Article 32 Supplementary means of interpretation Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) (b)
leaves the meaning ambiguous or obscure; or leads to a result which is manifestly absurd or unreasonable.
In United States – Standards for Reformulated and Conventional Gasoline, the Appellate Body held that it was enjoined by the provisions of Article 3.2 of the Dispute Settlement Understanding (DSU) to apply the provisions of the Vienna Convention so as to clarify the provisions of the General Agreement and the other covered agreements. The Appellate Body stressed that the direction given in Article 3.2 of the DSU reflected “a measure of recognition that the General Agreement is not to be read in clinical isolation from public international law.”26 In Turkey – Restrictions on Imports of Textile and Clothing Products, in which the Panel had to interpret the provisions of Article XXIV of GATT 1994, it observed the following: [T]he Panel is [to be] guided by the principles of interpretation of public international law (Article 3.2 of the DSU) which include Articles 31 and 32 of the Vienna Convention on the Law of Treaties. . . . As provided for in these articles and as applied by panels and the Appellate Body, we interpret the provisions of Article XXIV using first the ordinary meaning of the terms of that provision, as elaborated upon by the 1994 Understanding on Article XXIV, 25
26
Vienna Convention on the Law of Treaties, Vienna, 23 May 1969, 1155 U.N.T.S. 331 (1969) 8 Int. L. Legal Materials 679. WT/DS2/AB/R, adopted by the DSB on 20 May 1996: see DSR, 1996:I, 16.
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in their context and in the light of the object and purpose of the relevant WTO Agreements. If need be, to clarify or confirm the meaning of these provisions, we may refer to the negotiating history, including the historical circumstances that led to the drafting of Article XXIV of GATT.27
It follows from the established case law of the WTO that, in interpreting provisions in the WTO Agreements conferring S&D treatment on developing countries, regard should first be had to the ordinary meaning of the words used, taking into account their context and in the light of the object and purpose of such provisions in the overall context of WTO Agreements. It is only when recourse to this basic principle does not lend itself to easy application or would produce manifestly absurd results that recourse may be had to supplementary means of interpretation, including the negotiating history of the provisions conferring S&D treatment on developing countries.28 We now turn to examine the legal status of each group of S&D provisions.
3. The Five Classes of S&D Provisions 3.1. Provisions Aimed at Increasing Trade Opportunities A number of provisions in the various WTO Agreements encourage WTO Members to adopt measures that would increase trade opportunities for developing countries, particularly the LDCs. Others also permit developed countries to grant preferences only to developing countries so as to stimulate their export industry. Most of these provisions were carried over from GATT 1947 into GATT 1994. Article XXXVII of GATT 1994, for example, relevantly provides that [t]he developed . . . [Members] shall to the fullest extent possible . . . accord high priority to the reduction and elimination of barriers to products currently or potentially of particular export interest to . . . developing countries]. (emphasis added)
Given the language used, it can be plausibly argued that developed countries are not under a legal obligation to reduce or eliminate barriers to products of current or potential export interest to developing countries. The use of the words “shall to the fullest extent possible” indicates that the obligation on developed countries is qualified. If WTO Members had wanted the obligation to be mandatory, they could have dispensed with the words “to the fullest extent possible,” as 27
28
WT/DS34/R, p. 122. The DSB adopted the Appellate Body report together with the modified panel report on 19 November 1999. See United States – Sections 301–310 of the Trade Act of 1974, WT/DS152/R; report of the Panel circulated on 22 December 1999, para 7.21–7.22 at 305–306. See further Canada – Patent Protection of Pharmaceutical Products, WT/DS114/R; report of the Panel circulated on 17 March 2000, at para 7.13–7.15 at 149–150.
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was suggested by some delegations.29 Moreover, the use of the words “accord high priority to” confirm that the obligation imposed on developed countries under this Article is not absolute. The relevant case law on the legal status of S&D provisions falling under this heading is inconclusive. In United Kingdom – Dollar Area Quotas, the United States challenged the compatibility of the imposition of quantitative restrictions by the United Kingdom on certain products, including fresh grapefruit, grapefruit juice, and orange juice. The restrictions had originally been imposed for balanceof-payment reasons, but were being maintained on the grounds that they afforded valuable protection for the economic interests of the developing Commonwealth Caribbean countries. In support of the measures, the Caribbean countries argued that “the restrictions must be viewed in the context of the General Agreement as a whole and with particular regard to Part IV of the Agreement. . . . [T]he continued application of the quotas was justified in the light of Part IV which was designed to deal with the special circumstances of developing countries.”30 The Panel refrained from ruling on the complaint, but “strongly requested the parties concerned to actively seek a mutually acceptable solution to the problem which especially would pay due regard to the importance to the Caribbean countries and territories.”31 It is arguable that, by suggesting that the parties seek a mutually satisfactory result, the Panel was inclined to rule in favour of the United States. Had it accepted the argument of the Caribbean countries as valid and legally plausible, it would have probably held that, notwithstanding the incompatibility of those measures with Articles and XIII, the measures could be justified under Part IV of the General Agreement. In Norway – Restrictions on Imports of Certain Textile Products, Hong Kong challenged Norway’s imposition of quantitative restrictions on certain textile products. Norway argued, inter alia, that the preferences that it had accorded to six developing countries were in conformity with the spirit and objectives of Part IV as it facilitated their exports. The Panel rejected Norway’s argument by
29
A number of developing country representatives opposed the inclusion of the words “to the fullest extent possible” in the draft Article, as they thought the words could be relied upon by developed countries to evade their obligations. The words were inserted only into the Article after the opposition by developed countries, which argued for flexibility. A 1976 GATT Secretariat note on the application of Part IV observes the following: The draft model chapter on trade and development prepared initially by the secretariat on the basis of proposals from delegations for incorporation as Part IV of the General Agreement did not contain any qualifying clause. The words, to the fullest extent possible, appear to have been inserted in the draft later as most of the developed countries considered that they would not be in a position to accept commitments in this area unless there were provisions for exceptions in appropriate cases. The developing countries, on the other hand, were concerned that the phrase . . . might be used by developed contracting parties ‘in a way that would considerably detract from the effectiveness of this paragraph: see WTO, Analytical Index (Geneva, 2nd ed; 1995), Vol. 2 at 1061.
30
31
GATT, Basic Instruments and Selected Documents (1974), 20th Supplement, para. 1, at 235. L/3843, adopted on 30 July 1973. Id., para. 6 at 236.
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noting that Part IV cannot be relied upon by a country to circumvent its obligations under Part II of the GATT.32 In European Economic Community – Restrictions on Imports of Desert Apple, the Panel approached the issue differently. Chile had argued, inter alia, that the European Community had infringed the provisions of Articles XXXVI and XXXVII of Part IV of GATT 1994, particularly Article XXXVII:1(b), which provides that “the developed contracting parties shall to the fullest extent possible . . . refrain from introducing, or increasing the incidence of, customs duties or non-tariff import barriers on products currently or potentially of particular export interest to less developed contracting parties”; and Article XXXVII:3(c), which requires developed contracting parties to “have special regard to the trade interests of less-developed contracting parties when considering the application of other measures permitted under this Agreement to meet particular problems and explore all possibilities of constructive remedies before applying such measures where they would affect the essential interests of those contracting parties.” After reviewing the parties’ arguments and the evidence, the Panel concluded that the import measures of the European Economic Community (EEC) on desert apples had negatively affected the export interests of Chile. It pertinently noted that, although the EEC had held consultations with affected suppliers and had amended its regulations, “these consultations and amendments had been general in scope and had not related specifically to the interests of less-developed contracting parties in terms of Part IV.” The Panel went on further to hold that there was no evidence to indicate that the EEC had made “appropriate efforts to avoid taking protective measures on apples originating in Chile” and that obligations contained in Part IV were additional to those under Parts I to III of the GATT. The Panel failed, however, to state expressly whether the EEC was in breach of its obligations under Part IV: [T]he commitments entered into by contracting parties under Article XXXVII were additional to their obligations under Parts I–III of the General Agreement, and that these commitments thus applied to measures which were permitted under Parts I–III. As . . . the EEC’s import restrictions [were] inconsistent with [its] specific obligations . . . under Part II of the General Agreement, it . . . [was unnecessary] to pursue the matter further under Article XXXVII.33
Although the Panel found it unnecessary to rule on whether the EEC was in breach of its obligations under Part IV on the grounds of judicial economy, it could be inferred that it was inclined to hold that the EEC had not fulfilled its obligations under Part IV. Given the fact that the Panel comments were obiter dicta, no weight could be attached to them. In any case, subsequent panels are 32
33
GATT, Basic Instruments and Selected Documents (1981), 20th Supplement, para. 15, 126. L/4959, adopted on 18 June, 1980. GATT, Basic Instruments and Selected Documents (1990), 36th Supplement, para. 12.32, 134. L/6491, adopted on 22 June, 1989.
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not bound by interpretations of prior panels. As was observed by the Appellate Body, Adopted panel reports are an important part of the GATT acquis. They are often considered by subsequent panels. They create legitimate expectations among WTO Members, and, therefore, should be taken into account where they are relevant to any dispute. However, they are not binding, except with respect to resolving the particular dispute between the parties to that dispute.34
Article IV of the GATS also contains similar language to that used in Article XXXVII of GATT 1994. It relevantly provides that [t]he increasing participation of developing country Members in world trade shall be facilitated through negotiated specific commitments . . . relating to . . . the strengthening of their domestic services capacity and its efficiency and competitiveness, inter alia, through access to technology on a commercial basis; . . . the improvement of their access to distribution channels and information networks; and . . . the liberalization of market access in sectors and modes of supply of export interest to them. (emphasis added)
At first sight, it would appear that the language used in Article IV of the GATS is tighter than that used in Article XXXVII of GATT 1994. However, on further reflection, it could be argued that it does not impose any positive obligations on developed countries. Perhaps, the only obligation it imposes on developed countries is to enter into negotiations with developing countries that specifically request market access in certain specific sectors. Apart from the fact that this right is generally available to all Members of the WTO under the GATS, it cannot be said with any certainty that negotiations would succeed in opening a developed country’s market to services provided by the developing country. It is highly unlikely that an action under the dispute settlement mechanism of the WTO would succeed on the charge that negotiations failed to produce the results anticipated by a developing country. Another issue that has been discussed is whether developed countries are obliged to give trade preferences to developing countries. Whereas the Enabling Clause permits developed countries to disregard their obligations under Article I of GATT 1994 to confer preferences on developing countries, it does not contain any language that suggests that is mandatory. In other words, the decision whether or not to give trade preferences to developing countries is entirely at the discretion of the developed country Member. In EC – Conditions for the Granting of Tariff Preferences, this right was recognised by both the Panel and the Appellate Body.35 In this case, the Appellate Body held that the Enabling Clause did not 34
35
Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted by the DSB on 1 November 1996, DSR, 1996:1, 108. WT/DS246/AB/R and WT/DS246/R.
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require preference-giving countries to make available identical tariff preferences to all developing countries and that it was permissible for these countries to be distinguished on the basis of an objective criteria. Put differently, preference-giving countries are required to provide identical treatment to only “similarly-situated GSP beneficiaries.” 3.2. Provisions That Require WTO Members to Safeguard the Interests of Developing Countries Quite a number of WTO Agreements require developed country Members of the WTO to take into account the special situation of developing countries before imposing any measures that might affect their trade interests. Some of these obligations are worded in legally enforceable language, whereas others do not create any rights in favour of developing countries. Among the legally enforceable obligations is Article 9.1 of the Safeguards Agreement, which provides as follows: Safeguard measures shall not be applied against a product originating in a developing country Member as long as its share of imports of the product concerned in the importing Member does not exceed 3 percent, provided that developing country Members with less than 3 percent import share collectively account for not more than 9 per cent of total imports of the product concerned.
In the Line Pipe case, both the Panel and the Appellate Body held that this provision was legally enforceable and found that the United States had acted inconsistently by not exempting the required amount of Korea’s exports from the application of its safeguard measure: [W]e start by observing that Article 9.1 obliges Members not to apply a safeguard measure against products originating in developing countries whose individual exports are below a de minimis level of three percent of the imports of that product, provided that the collective import share of such developing countries does not account for more than nine percent of the total imports of that product . . . we find that the line pipe measure has been applied against products originating in those developing countries whose imports into the United States are below the de minimis levels set out in Article 9.1. And, consequently, we uphold the Panel’s findings in paragraphs 7.180 and 7.181 of its Report, that the United States acted inconsistently with its obligations under Article 9.1 of the Agreement on Safeguards.36
Among the provisions that may not be legally enforceable is Article 10(1) of the Agreement on Sanitary and Phytosanitary Measures, which provides, “In the preparation and application of sanitary or phytosanitary measures, Members 36
United States – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea, WT/DS202/AB/R.
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shall take account of the special needs of developing country Members, and in particular of the least-developed country Members.” It could be argued that this provision obliges developed country Members to consider the effects that their intended sanitary or phytosanitary measures may have on developing countries, but does not compel them to change those measures even if there is the probability that they may have a negative impact on the interests of developing countries. The major issue, however, relates to this case: what if it is alleged that the developed country failed to consider the effects that its measures may have on developing countries before implementing the measures? Arguably, if evidence could be adduced to establish that such a failure occurred, then in principle it could be argued that the developed country may have breached the provisions of Article 10.1. It would be extremely difficult, however, to positively prove in a case that a developed county had not taken into consideration the interests of developing countries before implementing its measures. A mere statement by a developed country that it had done so would be difficult to rebut, unless it is required to give a reasoned opinion why it believes that the imposition of the measures was warranted, notwithstanding the special circumstances of the developing country. It would appear that there is nothing in the language of Article 10.1 that would require developed countries to give such a reasoned opinion. Even assuming for the sake of argument that evidence is adduced to establish that the developed country did not take into account the interests of developing countries, the question remains as to the appropriate remedy that could be given by the panel. By virtue of Article 19 of the DSU, a panel or the Appellate Body may recommend that “the Member concerned bring the measure into conformity with that agreement.” Because the measure at issue may be in conformity with the SPS Agreement, the only option reasonably open to a panel may be to recommend to the developed country to make a mutually satisfactory adjustment. The Agreement on Technical Barriers to Trade (TBT) contains a similar provision. Article 12.3 of the TBT Agreement provides as follows: Members shall, in the preparation and application of technical regulations, standards and conformity assessment procedures, take account of the special development, financial and trade needs of developing country Members, with a view to ensuring that such technical regulations, standards and conformity assessment procedures do not create unnecessary obstacles to exports from developing country Members.
Whereas the language used appears not to be hortatory, it is doubtful if a successful action can be initiated against a developed country that asserts that it took into account the interests of developing countries in the preparation of its standards and technical regulations, but nevertheless the challenged measure was necessary to fulfill a legitimate objective within the meaning of Article 2 of the TBT Agreement.
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The major problem with the two provisions that have been examined is that both the SPS and TBT Agreements only impose a duty on developed countries to consider what the impact of their measures would be on developing country Members. They do not specify that developed Members should refrain from implementing or withdraw their measures when it has been demonstrated by a developing country Member that the measures would harm its trade interests. A duty to consider something cannot be equated with a duty to accept it. In the Hormones case, the Appellate Body rejected the claim by the European Communities that the Panel did not take into account the evidence before it: We note that the Panel considered in detail each of the arguments and related evidence referred to by the European Communities on this particular point. Although the Panel did not agree with the arguments advanced by the European Communities, we do not believe that in doing so, the Panel arbitrarily ignored or manifestly distorted the evidence before it.37 (emphasis added)
Another example of such provisions is Article 15 of the Anti-Dumping Agreement, which provides as follows: It is recognized that special regard must be given by developed country Members to the special situation of developing country Members when considering the application of anti-dumping duties. Possibilities of constructive remedies provided for by this Agreement shall be explored before applying anti-dumping duties where they would affect the essential interests of developing country Members.
Here too, developed country Members have an obligation to consider, for example, accepting price undertakings, instead of imposing anti-dumping duties. However, it appears that there is no positive obligation on them to accept such alternative remedies. In European Communities – Anti-Dumping Duties on Imports of Cotton-Type Bed-Linen from India, the Panel held as follows: In our view, Article 15 imposes no obligation to actually provide or accept any constructive remedy that may be identified and/or offered. It does, however, impose an obligation to actively consider, with an open mind, the possibility of such a remedy prior to imposition of an anti-dumping measure that would affect the essential interests of a developing country. . . . In light of the expressed desire of the Indian producers to offer undertakings, we consider that the EC should have made some response upon receipt of the letter from counsel for TEXPROCIL dated 13 October 1997. The rejection expressed in the EC’s letter of 22 October, does not, in our view, indicate that the possibility of an undertaking was explored, but rather that the possibility was rejected out of hand.38 37 38
WT/DS26/AB/R, adopted by the DSB on 13 February 1998, para. 145 at p. 57. WT/DS141/R.
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The same conclusion was reached in the earlier GATT case of EC– Imposition of Anti-Dumping Duties on Imports of Cotton Yarn from Brazil.39 The Panel held that the first sentence of Article 13 of the Tokyo Round Anti-Dumping Code did not create any positive obligations on developed countries, whereas the second sentence only imposed a conditional obligation on them: The Panel was of the view that Article 13 should be interpreted as a whole. . . . Assuming arguendo that an obligation was imposed by the first sentence . . . , its wording contained no operative language delineating the extent of the obligation. Such language was only to be found in the second sentence of Article 13. . . . It was clear from the words “possibilities” and “explored” that the investigating authorities were not required to adopt constructive remedies merely because they were proposed.40
The Panel concluded that the EC had not breached its obligations under this Article, as it had “considered whether it could enter a quantitative undertaking and had considered that such an undertaking would not eliminate the injury caused by the dumped imports.”41 3.3. Provisions Permitting Developing Countries to Assume Lesser Obligations As previously noted, instead of seeking a total exemption from the WTO disciplines, developing countries demanded and obtained the right to assume fewer obligations under several agreements. Under the Agreement on Agriculture, for example, developing countries were required to undertake lesser commitments than their developed counterparts and were also given a longer time frame during which to implement their obligations. Under this agreement, developing countries are obliged to reduce their tariffs on average by 24 percent over 10 years, whereas developed countries are required to reduce theirs by 36 percent over 6 years. Whereas developing countries are required to make at least a 10 percent reduction on each tariff line, developed countries are expected to make a minimum reduction of 15 percent on each tariff line. With respect to trade-distorting domestic support measures, developing countries are expected to reduce such measures by 13.3 percent over 10 years, whereas developed countries are required to reduce theirs by 20 percent over 10 years. Regarding export subsidies, developing countries are expected to reduce their value and volume by 24 percent and 14 percent, respectively, over 10 years, whereas developed countries are expected to reduce theirs by 21 percent and 36 percent, respectively, over 6 years. LDCs were exempted from making any reduction commitments.42 It is clear that the above provisions in the Agreement on Agriculture have legal force, in the sense that a developing country cannot be compelled to undertake more obligations than are actually provided for under the Agreement. By the same token, developing 39 41
ADP/137; 4 July 1995. Id., para. 589 at 136.
40 42
Id., para. 582–584 at 128–129. Article 15 of the Agreement on Agriculture.
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countries cannot be compelled to implement their obligations earlier than the time envisaged under the agreement. The Agreement on Subsidies and Countervailing Measures (SCM) also confers S&D treatment on developing countries, but only to a limited extent. LDCs and developing countries whose GDPs per capita are less than $1,000 are exempted from the prohibition against export subsidies, provided that they do not attain export competitiveness in a particular product for two consecutive years.43 Other developing countries are expected to phase out export subsidies within eight years of the coming into force of the WTO Agreement, although upon request, they could be granted a further two-year extension. Developed countries were given three years within which to phase out their export subsidies, whereas countriesin-transition were given seven years to do so. With respect to import substitution subsidies, LDCs, developing countries, countries-in-transition, and developed countries were given eight years, five years, seven years, and three years, respectively, to phase out such subsidies after the coming into force of the WTO agreement. Regarding actionable subsidies, although there is a presumption of serious prejudice in the case of certain subsidies provided by governments of developed countries, there is no such presumption in the case of similar subsidies provided by governments of developing countries. Serious prejudice in cases involving subsidies allegedly provided by governments of developing countries has to be proved by positive evidence. The enforceability of the S&D provisions in the Agreement on Subsidies and Countervailing Measures was examined by the panel and the Appellate Body in Brazil – Export Financing Programme for Aircraft. Brazil, as a developing country, was alleged to have given prohibited export subsidies to a civilian aircraft manufacturer, Embraer. Brazil argued, inter alia, that even if it was providing prohibited export subsidies, it had a right under Article 27 of the SCM agreement to provide such subsidies for a period of eight years from the date of entry into force of the WTO agreement. The only obligation it had to satisfy was that it had not increased its level of export subsidies since 1991. Canada disagreed and argued that Brazil was in breach of Article 3 of the SCM agreement, and because Article 27 was an exception to the former, Brazil had the burden of proof in establishing that it was in conformity with the provisions of Article 27. Brazil responded to the Canadian submission as follows: [T]hat the clearly stated object and purpose of Article 27 is to provide special and differential treatment to developing country members. Its context is made clear from its first paragraph which states without qualification that, “Members recognise that subsidies may play an important role in economic development programmes of developing country Members.” The Article consists of carefully negotiated language that reflects a carefully drawn balance of 43
A country will be deemed to have attained export competitiveness in a given product when its share reaches 3.25 percent of world trade for two consecutive years.
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The panel upheld Brazil’s argument on this point. It held as follows: Naturally, there will be no inconsistency with a given provision if a Member is explicitly excluded from its scope of application or a situation is explicitly identified in the text of the Agreement as falling outside the scope of application of a particular provision. In this regard, we recall that Article 27.2(b) states that: “The prohibition of paragraph 1(a) of Article 3 shall not apply to: . . . other developing country Members for a period of eight years from the date of entry into force of the WTO Agreement, subject to compliance with the provisions in paragraph 4. (emphasis added) Clearly, on the basis of the plain meaning of the text of the provision, developing country Members falling within Article 27.2(b) – that is, developing country Members (other than those referred to in Annex VII) that are in compliance with the provisions of Article 27.4 – do not fall within the scope of application of the prohibition contained in Article 3.1(a) until 1 January 2003.45
The import of this decision is that S&D provisions of this kind can be successfully relied on by developing countries to defend themselves against allegations of breaches of the WTO agreement.46 3.4. Provisions Relating to Transitional Time Periods With the notable exception of the Anti-Dumping Agreement and the PreShipment Inspection Agreement, almost all the WTO Agreements contain longer transitional periods for developing countries to comply with their obligations. The flexibility takes the form of an agreed delay, on the part of developing countries, of compliance with certain or all the provisions of the agreement concerned.47 Under the Agreement on Agriculture, for example, developing countries were given ten years to implement their obligations, whereas developed countries were given six years. Under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), LDCs, developing, and developed countries were given, respectively, eleven years, five years and one year to bring their legislation into conformity with WTO disciplines.48 Developing countries not providing 44
45 46
47 48
WT/DS46/R, para. 4.157 at 44. The panel report, together with Appellate Body report, were adopted by the DSB on 20 August 1999. Id., para. 7.50 at 92. Canada was successful in this case because it was able, inter alia, to establish that Brazil had not complied with the conditions set out in Article 27.4 of the SCM Agreement. Brazil was found to have increased the overall level of its exports subsidies above that prevailing in 1994. WTO Secretariat, supra note 13 at 21. It should be noted that the transitional period for LDCs has been extended to 2016.
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product patents under their legislation were given an additional five years to comply with their obligations under the TRIPS Agreement. The Agreement on Trade-Related Aspects of Investment Measures gave least-developed countries, developing countries, and developed countries seven years, five years, and two years, respectively, after the entry into force of the WTO Agreement to phase out all their inconsistent trade-related investment measures. The Customs Valuation Agreement gave developing countries that were not parties to the Tokyo Round Code on Customs valuation five years within which to comply with their obligations under the Agreement. Developing countries were also given the possibility of delaying the application of the “computed value” method of valuation for an additional three years. Provisions falling under this grouping are legally enforceable in the sense that, if a developing country is within the transitional period, it is, in principle, insulated from any actions that may be brought by a developed country. In India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, the issue was not whether India could avail itself of the provisions of Article 65 of the TRIPS Agreement, but whether it complied with the conditions specified in the Article 70.8. As noted by the panel, A critical part of the deal struck was that developing countries that did not provide product patent protection for pharmaceuticals and agricultural chemicals were permitted to delay the introduction thereof for a period of ten years from the entry into force of the WTO Agreement. However, if they chose to do so, they were required to put in place a means by which patent applications for such inventions could be filed so as to allow the preservation of their novelty and priority for the purposes of determining their eligibility for protection by a patent after the expiry of the transitional period.49
3.5. Provisions Relating to Technical Assistance A number of WTO agreements require the WTO Secretariat or its developed country Members to provide technical assistance to developing countries to enable them to comply with their obligations under the various WTO Agreements and also to assist them to participate effectively in the multilateral trading system. Article 9 of the Agreement on Sanitary and Phytosanitary Measures, for example, provides as follows: Members agree to facilitate the provision of technical assistance to other Members, especially developing country Members, either bilaterally or through the appropriate international organizations. Such assistance may be, inter alia, in the areas of processing technologies, research and infrastructure, including in the areas of processing technologies, research and infrastructure, including for the purpose of seeking technical expertise, training 49
WT/DS50/R, para 7.29 at p. 51. The panel report and the Appellate Body report were adopted by the DSB on 16 January 1998.
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Edwini Kessie and equipment to allow such countries to adjust to, and comply with, sanitary or phytosanitary measures necessary to achieve the appropriate level of sanitary or phytosanitary protection in their export markets . . . Where substantial investments are required in order for an exporting developing country Member to fulfill the sanitary or phytosanitary requirements of an importing Member, the latter shall consider providing such technical assistance as will permit the developing country member to maintain and expand its market access opportunities for the product involved. (emphasis added)
The issue has been raised whether or not this Article contains binding legal language. Some developing countries seem to be of the view that it does and that failure by developed countries to provide targeted assistance in this area could be a cause of a complaint under the DSU. However, the use of the words “agree to facilitate” and “shall consider” would seem to indicate that the Article was not intended to make the provision of technical assistance obligatory. In other words, it is up to a developed country Member to decide whether or not it is going to provide assistance to a particular developing country. The same applies to technical assistance provided by WTO and other multilateral institutions. The provision of technical assistance is usually dependent on the availability of staff and funds.
IV. Conclusion One of the most vexed questions confronting trade policymakers in recent years is whether or not developing countries should be given effective S&D treatment within the GATT/WTO legal framework to facilitate their integration into the multilateral trading system. On the one hand, some developed countries and analysts seem to be of the view that S&D has not worked in the past and that the way forward is to let developing countries assume full responsibilities at the WTO. Implementing these disciplines, it has been argued, will help developing countries lock in their domestic reforms, demonstrate their commitment to policy reform, and assist them to achieve sustainable growth and development. A majority of developing countries do not agree with the view that S&D has failed to achieve its basic objective and should be eliminated. They argue that S&D treatment has helped them increase and diversify their exports and attribute the reason why most of them have not been able to take advantages of the preferences to supply-side constraints and the rigidity in the conditions usually attached to S&D provisions. Unlike the past, developing countries are now willing to play a major role in the multilateral trading system. They have accepted a dilution of the non-reciprocity principle and sought S&D measures that would improve market access for products of current and potential export interest to them. They also want longer time frames during which to implement their obligations, as well as
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improved and targeted technical assistance to comply not only with their WTO obligations but also to facilitate their effective participation in the multilateral trading system. Developing countries have particularly been concerned about the uncertain legal status of S&D provisions in the WTO Agreements. They are of the view that all S&D provisions should have the force of law and not be regarded as “bestendeavours” clauses. Although the Doha Ministerial Declaration mandated that all S&D provisions should be reviewed with a view to making them more precise, effective, and operational, it is clear that agreement on the use of S&D provisions cannot be reached easily, given the philosophical differences in the views of developed and developing countries. The present situation is unsatisfactory, and every effort should be made to clearly delineate which provisions should have legal force and which should not. It is recalled in that context that the Ministerial Decision on Implementation Issues and Concerns instructs the Committee on Trade and Development to identify which S&D issues should be made mandatory and the implications for doing so. Maintaining the status quo is neither in the interests of developed countries nor those of developing countries. It could slow down progress in the DDA negotiations and exacerbate the divide between developed and developing countries.
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˜ AND MARCELO OLARREAGA NUNO LIM AO
2 Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization
abstract: The proliferation of preferential trade liberalization over the last 20 years has raised the question of whether it slows down multilateral trade liberalization. Recent theoretical and empirical evidence indicate that this is the case, even for unilateral preferences that developed countries provide to small and poor countries, but there is no estimate of the resulting welfare costs. This stumbling-block effect can be avoided by replacing the unilateral preferences by a fixed import subsidy, which we argue generates a Pareto improvement. More importantly, we provide the first estimates of the welfare cost of preferential liberalization as a stumbling block to multilateral liberalization. By combining recent estimates of the stumbling-block effect of preferences with data for 170 countries and over 5,000 products we calculate the welfare effects of the United States, European Union, and Japan switching from unilateral preferences to least-developed countries (LDCs) to an import subsidy scheme. Even in a model with no dynamic gains to trade, we find that the switch produces an annual net welfare gain for the 170 countries that adds about 10 percent to the estimated trade liberalization gains in the Doha Round. It also generates gains for each group: the United States, European Union, and Japan ($2,934 million), LDCs ($520 million), and the rest of the world ($900 million).
Introduction One of the main pillars of the multilateral trading system is supposedly nondiscrimination across trading partners: the most-favored-nation (MFN) principle in Article I of the GATT. However, currently nearly all GATT/WTO Members also participate in preferential trade agreements (PTAs). The potential for PTAs being a stumbling block to multilateral trade liberalization was an important concern during the Uruguay Round (Bhagwati, 1991). In this paper, we focus on quantifying the welfare effects of the more recent concern within the Doha Round that even unilateral trade preferences provided to small and poor developing countries can
Part of this research was conducted while the author visited the World Bank Research Group in the summer of 2004.
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slow down multilateral liberalization by the large developed countries that provide them. This problem prompted the IMF to create a special lending program aimed at developing countries “to mitigate concerns ( . . .) that their balance of payments positions could suffer, albeit temporarily, as multilateral liberalization changes their competitive position in world markets. Chief among these concerns is that broad-based tariff liberalization might erode the value of their preferential access to important export markets.”1 The concern with preference erosion has the potential for affecting the level of liberalization, particularly in the Doha Round, for two reasons. First, the preference beneficiaries oppose MFN liberalization by those countries that grant preferences. Even though erosion is only of critical importance for a specific set of goods and countries, many others perceive such losses to be important. These countries can influence the current round because it was designated a “development round,” creating an expectation that it would benefit developing countries.2 The second reason why preference erosion concerns may affect multilateral trade liberalization (MTL) is that the developed countries providing preferences may want to maintain them, as they can be used as a side payment for cooperation on non-trade issues. Here are two examples. First, in 2000 the Commission of the European Union (EU) argued that a cut in its price support for sugar was untenable because it would lower income for developing countries that export sugar to the EU under preferences. Second, the United States recognizes that its MFN tariff reductions hinder its ability to extract concessions in terms of enforcing labor, environmental standards, and the like from the countries that export under a preference to the United States.3 1
2
3
IMF Press Release No. 04/73, 13/04/04. See IMF, 2004, for details. According to the WTO’s Director-General, the IMF’s program is “a welcome contribution to the Doha Round, in particular to attaining ambitious market access results.” April 24, 2004 speech at the International Monetary and Financial Committee. For an interesting discussion, see Winters (2004). The possibility that preference erosion would reduce MFN liberalization was actually noted long ago; it was a concern voiced by opponents of the GSP when it was originally proposed (Johnson, 1967, p. 166). This points to the importance of further research and dissemination of basic facts about gains from preferences. There is some debate regarding the effectiveness of preferences in generating additional exports. Haveman and Shatz (2003) provide evidence that the unilateral preferences of the TRIAD countries considerably increased their imports from LDCs in 2000. Sapir (1981) and Sapir and Ludenberg (1984) provide earlier estimates of the GSP scheme of the EU and United States, respectively. UNCTAD (2003); Hoekman, Michalopoulos, and Winters (2004); and Stevens and Kennan (2004) propose several recommendations to realize the potential net benefits of preferences for LDCs, including ways to improve utilization rates, relax and harmonize rules of origin, and increase the predictability of preferences through binding them in the WTO. Many of these recommendations also apply to our proposed alternative of import subsidies. European Commission (2000), “Commission proposes overhaul of sugar market.” Brussels, 10/4/2000. IP/00/1109, and Trade Director of the U.S. General Accounting Office Testimony before the Subcommittee on International Trade, in “International Trade: Issues Concerning the Generalized System of Preferences,” GAO/T-GGD-94-174, June 20, 1994.
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Lim˜ao (2002) provides a model in which preferences that are extended to small countries can cause large countries to maintain higher MFN tariffs. This stumbling-block effect arises because of an important feature of U.S. and EU preference schemes: they require cooperation in non-trade issues, such as labor and environmental standards, intellectual property protection, drug enforcement, emigration, human rights, and so on. In the Appendix to this chapter, there are references to these and other side conditions in various PTAs. Thus, the preferential margins extended to small countries are often a payment for cooperation, which implies that a reduction in MFN tariffs that reduces the preferential margin will be resisted by the country that receives preferences and the one that grants them.4 The following example illustrates the intuition behind the problem and the solution explored. The U.S. MFN tariff on flowers is 10 percent, but Colombia can export them at a preferential tariff equal to zero (i.e., it has a 10 percent preference margin in the United States). If the United States set its MFN tariff on flowers equal to zero in the Doha Round, it would be unable to provide a preference margin to Colombia in order to extract cooperation on a non-trade issue. Thus, the model predicts that the United States will not reduce this MFN tariff to zero. There is a simple solution to this problem: allow a preferential import subsidy set at a fixed rate; for example, at the level of the current preference margin, 10 percent. If the United States charges the MFN tariff on Colombian flowers but pays a fixed subsidy rate of 10 percent to the Colombian producers, all participants are initially indifferent. However, the United States could now maintain the fixed subsidy rate and reduce its MFN tariff without the opposition that arises from preference erosion and the United States’s desire to extract cooperation through such preferences. In this chapter we calculate the welfare costs of preferences in terms of lost MTL. We employ the recent estimates from Lim˜ao (forthcoming) of the stumblingblock effect generated by U.S. preferences. Similar estimates are obtained for the EU by Karacaovali and Lim˜ao (2005). We combine these estimates with data for 170 countries and approximately 5,000 goods to provide the first welfare estimates of PTAs as a stumbling block. We calculate the welfare effects from a baseline 33 percent MFN reduction expected in the Doha Round relative to the subsidy counterfactual, which entails additional reductions by the TRIAD countries: the United States, EU, and Japan. Using the results in Lim˜ao (forthcoming) we estimate this additional liberalization to be about 8 percent for goods in which the TRIAD offers preferences. We focus on the preferences that the TRIAD extends to LDCs: a subset of PTAs that fit the assumptions of the theory well. We estimate total annual welfare gains 4
The fear that PTAs could be a stumbling block to MTL has generated a considerable theoretical literature but no consensus. See Bagwell and Staiger (1998), Levy (1997), and Krishna (1998). Winters (2001) provides an excellent review.
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for the 48 LDCs of $520 million, from which all except one gain. The maximum gain is 6.7 percent of GDP, and the average is 0.38 percent. Importantly, the countries that most oppose MTL because of its preference erosion effect are the ones that we estimate will gain the most from the switch. Welfare for the TRIAD would increase by nearly $3 billion per year, due mainly to the additional MFN tariff reductions allowed by the subsidy. For the same reason, the rest of the world experiences an annual welfare gain of $900 million, which is significant because an important concern with PTAs is that they do not internalize any costs on outsiders (see Chang and Winters, 2002). In relative terms the LDCs as a group gain the most: more than 0.5 percent of GDP per year. We also find similar gains for the LDCs, even if the subsidy caused only 2.8 percent of extra liberalization. Both the TRIAD and the rest of the world continue to gain under this last scenario. The aggregate annual welfare gain of $4354 million adds almost 10 percent to the gains that our model predicts from goods’ liberalization in the Doha Round in the absence of a switch to subsidies; that is, relative to the baseline 33 percent reduction. Moreover, we argue that this estimate is likely to be a lower bound of the stumbling-block effect of PTAs. At one extreme the concern with preference erosion could prevent the completion of the Doha Round, costing an additional $47 billion. In Part I, we discuss recent theoretical and empirical evidence on how preferential treatment to small countries can generate a stumbling block and how it can be addressed by an import subsidy. In Part II, we calculate the welfare effects. In Part III we address issues related to the implementation of the import subsidy. In the final part we discuss the results, and in the Appendix we provide details on the theoretical model and discuss side conditions in PTAs. In the Appendix (available at http://wber.oxfordjournals.org/), we provide details regarding the trade model we used to simulate the effects, discuss data sources, and provide some descriptive statistics.
I. Preferences as a Stumbling Block to MTL PTAs can affect MFN tariffs through various channels. They can divert scarce negotiation resources and alter the number of negotiating parties and their bargaining power. In the context of unilateral preferences that we analyze, however, these effects are not as relevant as the concern with preference erosion. That concern has created an important stumbling block to MTL, which can be shown in a model in which unilateral preferences are exchanged for cooperation in nontrade issues. In the Appendix we provide such a model based on Lim˜ao (2002) that shows two effects. First, the unilateral preferences that large countries use can cause them to maintain higher multilateral tariffs, even if those preferences are extended to countries that are small from a trade perspective. Second, an import subsidy resolves this problem.
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We used the following criteria to choose the counterfactual to analyze the cost of preferences as a stumbling block. It should remove the stumbling block and generate a Pareto improvement in the context of a well-defined model, so we can expect it to be supported by WTO Members and be simple enough to permit estimation and implementation. When the import subsidy is designed to mimic the preferences, it fulfills these criteria. Eliminating unilateral preferences or replacing them with direct transfers to reward cooperation would remove the stumbling block. However, eliminating preferences altogether is opposed by several countries, so it is not as interesting as a counterfactual. Using cash transfers may also not be the most efficient way either to transfer resources to other countries, as the aid versus trade literature highlights, or to reward their cooperation.5 Political economy constraints that reduce the effectiveness of cash transfers relative to preferences are present in practice; otherwise, it would be difficult to explain the existence of many preference schemes. For example, preferences may trigger investment in a particular area and create a longer lasting constituency within that country that lobbies its government to do whatever is necessary to maintain the preferences. Lump-sum transfers could end up in anonymous bank accounts in Switzerland. So, as an alternative to preferences, the subsidy scheme may also dominate direct transfers. Before estimating the welfare costs of preferences, we provide some direct evidence for PTAs as a stumbling block to MTL, which we subsequently use in our quantification. The model generates specific testable predictions. At an extreme, if the MFN tariff is zero, no tariff preference can be offered, and so no preferential agreement is possible in the absence of subsidies. Therefore, to the extent that the United States and EU value the cooperation in the side conditions in those agreements, reductions in MFN tariffs on products imported from the preferential partner are more costly than reductions in similar products. Lim˜ao (forthcoming) estimates the effect of the U.S.’s PTAs on its MFN tariffs by exploring the fact that this effect should be present in the goods the United States imports from its PTA partners, but not in those goods it imports only from the rest of the world. Using tariff data for over 5,000 products, Lim˜ao finds that the U.S.’s PTAs generated a stumbling block in the Uruguay Round. He estimates that the U.S.’s average MFN cut for goods exported by any of its PTAs was about half that of other goods. The effect is stronger for products that are exported under all PTAs or constitute relatively larger shares of a given PTA’s exports to the United States. These estimates control for several determinants of U.S. tariff changes and carefully establish the direction of causality from the PTA to the MFN tariff changes using instrumental variables.
5
Thus our proposal differs from others that suggest that temporary development assistance be offered to the governments of developing countries that are hurt by preference erosion (e.g., Hoekman, 2004). See McCulloch and Pinera (1977) on the issue of trade and aid issue and Adam and O’Connell (2004) for a more recent analysis.
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A switch by the TRIAD toward a subsidy in the Doha Round would cause them to reduce their tariffs by an additional 8.3 percent in the goods in which they provide preferences to LDCs. This figure is calculated by assuming a 33 percent MFN liberalization in Doha on all goods – the average for developed countries in the Uruguay Round – and dividing it by a stumbling block factor of 0.8 calculated from Lim˜ao (forthcoming). According to his estimates the reductions in MFN tariffs for goods that the United States imports from its GSP beneficiaries were only about 0.8 percent of what they would have been in the absence of such preferences. Thus under the subsidy scheme we estimate the TRIAD liberalization in goods for which they provide a preference to LDCs to be 41.3 percent, an additional 8.3 percent relative to the 33 percent baseline. We analyze the sensitivity of the welfare results with respect to this estimate.6 Karacaovali and Lim˜ao (2005) provide similar estimates for the stumbling block effect that apply to the EU’s PTAs. The EU’s average cut for goods exported by any of its PTAs was about half that of other goods. They also provide evidence that directly supports the use of an import subsidy as a solution when preferential tariffs are close to zero. The model predicts that if the preferential tariff is positive then the MFN tariff can still be reduced without affecting the preference margin, by simply lowering the preferential tariff by the same amount. This prediction is tested and confirmed for the EU, which strongly supports the argument that an import subsidy, by removing the non-negativity constraint for preferential tariffs, would indeed eliminate the stumbling block effect.
II. Welfare Estimates of Preferences as a Stumbling Block to MTL We first describe the methodology we use to quantify the welfare costs of preferences as measured by the gains obtained from switching to an import subsidy. Once the measures we compute are conceptually clear, the estimation used to estimate them is relatively standard, and so we provide the formal details in the Appendix available at http://wber.oxfordjournals.org/. We then discuss the empirical results. 6
More specifically, the stumbling block factor we require is defined as f = (tp/t0 )/(ts /t0 ), where tp/t0 is the growth in the MFN tariffs of a TRIAD country when preferences are in place and ts /t0 when they are absent. Lim˜ao (forthcoming) takes the non-PTA good tariff changes as the counterfactual for the outcome in PTA goods if PTAs were absent and calculates ln(1 + tp)/ ln(1 + ts ) ≈ tp/ts = f . Using his estimates we then calculate ln(1 + t p)/ ln(1 + ts ) = (a˜ + ρ ∗ TOTLIB + φ)/(a˜ + ρ ∗ TOTLIB) = 0.8. The variable TOTLIB represents the liberalization by U.S. partners, so ρ captures the reciprocity effect; TOTLIB was −51.3 on average in his sample and so ρ ∗ TOTLIB = 0.018∗ (−51.3). The estimates for ρ = 0.018 and φ = 0.658 are from the last column of Table 1 in Lim˜ao (forthcoming) where he controls for the existence of other PTAs. Using his estimate for GSP in Table 2.2, 0.74, we obtain a˜ = −2.53 = 0.658/(0.74 − 1). The 95 percent confidence interval for the stumbling block factor described above is (0.697, 0.923), which we use to calculate the high and low scenarios of additional liberalization of 14.3 percent and 2.8 percent used in Table 2.2.
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Table 2.1. Budgetary impact of moving toward the subsidy scheme in Doha (millions of US$)a
Subsidy (current MFN)b
Subsidy (post-Doha MFN)c
Cost of switch (post-Doha MFN)d
Preference erosion (post-Doha MFN)e
EU Japan United States
669 31 63
674 32 64
208 6 21
441 17 166
Total
763
768
235
624
a
A decomposition of subsidies and preference erosion by SRC is provided in Table A1 of the Appendix. Calculated using a subsidy rate for each good equal to the current preference margins in each SGC using current prices, quantities, and MFN tariffs; see equation S1 in the Appendix. c Assumes a 33 percent reduction in MFN tariffs by all WTO Members; see equation S2 in the Appendix. d Assumes a 33 percent reduction in MFN tariffs by all WTO Members; see equation S3 in the Appendix. e Uses current preferences and assumes a 33 percent reduction in MFN tariffs by all WTO Members; see equation S12 in the Appendix. Source: Authors’ analysis based on data discussed in the Appendix. b
Methodology First, we calculate the budgetary cost for each subsidy-granting country (SGC). This is the amount paid to each subsidy-receiving country (SRC), which is an input into the welfare calculation and a measure that may pre-empt concerns with the budgetary costs of implementation. For this calculation, we must choose an import subsidy rate for each good and each SGC. We take this rate to be the current preference margin, which provides a convenient benchmark to calculate welfare changes because the initial switch leaves all prices and quantities unchanged. Naturally, alternative subsidy rates are possible and would deliver different results. In Table 2.1 the first two columns provide the cost of this subsidy over all goods under current levels of tariffs and trade and those predicted after the Doha Round, which we assume to be 33 percent lower. The key budgetary measure is the cost of the switch to the subsidy. To obtain this cost, we must subtract the foregone tariff revenue under the current preferences, as done in column 3 of Table 2.1. Second, we calculate the preference erosion measure for each SRC in each SGC market. If current preferences were maintained, this measure is simply the difference between the extra export revenue due to preferences before and after a 33 percent reduction in MFN tariffs. These are the values shown in the last column of Table 2.1 and by country in Table 2.A1 of the Appendix.7 7
Currently, these preferences are not fully utilized (Inama, 2003), so it is likely that would also be the case under the subsidy. Therefore, our estimates of the cost of the subsidy and preference erosion are likely to be an upper bound for the true effects. However, this should not have a large effect on the net welfare calculations because the qualitative effect of imperfect utilization is similar under the subsidy and preference scenarios and the net welfare effects calculate the difference between the two.
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Third, and most importantly, we calculate the welfare cost of preferences by country, which are reported in Table 2.1 and Table 2.A2 (by country in the Appendix). This welfare cost is measured by the additional welfare gains that would be obtained in the Doha Round if the TRIAD switched to an import subsidy. To calculate all three measures, we must estimate the changes in world prices and quantities imported and exported associated with the tariff reductions in the 170 countries in the sample. We do so by combining estimates of import demand and export supply elasticities with a simple trade model, which we describe in detail in the Appendix. We employ a simple partial equilibrium model for each of the six-digit tariff lines existing in the Harmonized System classification. It assumes that each tariff line includes a homogeneous good and that the world market for each is in equilibrium. We do not model substitution effects across goods or income effects on the demand or supply side. Although such effects could be incorporated here, there is recent work that suggests they have a small impact on aggregate welfare gains.8 We also note that our aggregate welfare estimate is not too different from those generated using more complex Computable General Equilibrium (CGE) models.9
Empirical Results We focus on the GSP preferences granted by the TRIAD to 49 LDCs. Although 49 countries are classified as LDCs, there are no data available to compute welfare gains for Kiribati. These LDCs are not the only small countries to which the TRIAD provides preferences, but they form an interesting subgroup, which receives somewhat similar preferences in each of the TRIAD countries. We use data on which six-digit Harmonized Standard products receive TRIAD preferences. We also require bilateral trade flows and MFN tariffs for all countries to calculate changes in prices and quantities due to the liberalization. The import and export elasticities at the tariff line for every country are from Kee, Nicita, and Olarreaga (2004). The exact data sources and years can be found in the Appendix. To provide an idea of the trade coverage, we note that imports from LDCs amounted to $8 billion for the EU (2001), $1 billion for Japan, and $7 billion for the United States. According to UNCTAD (2003), 99.8 percent of dutiable EU imports from LDCs are covered by preferences; the comparable figures are 44 percent for the United States and 53 percent for Japan. Bangladesh and Cambodia are the top 8
9
Hoekman, Nicita, and Olarreaga (2006) find that the world welfare gains from a 40 percent cut in MFN tariffs among WTO Members is $51 billion without cross-price effects and $59 billion with them. This difference is statistically insignificant when they account for the standard errors associated with the measurement of the elasticities of import demand and export supply. Thus we maintain the exposition of the model in the Appendix in a simple and clear manner by abstracting from cross-price effects. For example, assuming a 33 percent liberalization for all WTO Members, we find a yearly gain of about $47 billion. Francois, van Mejil, and van Tongeren (2005) estimate it to be $45 billion when they apply a 50 percent cut in bound tariffs using a CGE static constant returns-to-scale model with an Armington set up.
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beneficiaries of tariff preferences among LDCs in the EU and Japan. Madagascar and Malawi are the main beneficiaries of U.S. preferences. In the first column of Table 2.1, we see that the cost of the subsidy for the TRIAD is $763 million in the absence of tariff reductions. This value is equal to the tariff revenue currently forgone due to preferences, and it is mostly borne by the EU because of three factors. First, the EU imports larger quantities from LDCs. Second, European preferences to LDCs tend to be more generous, as we can see from Table 2.A3. Third, the MFN tariffs of the EU on the type of goods exported by LDCs tend to be higher. The second column of Table 2.1 provides the amount of the subsidy after a 33 percent reduction in bound tariffs by all WTO members: $768 million. It is higher than the currently foregone tariff revenue because exports from SRCs increase due to the world price rise, which is itself caused by the multilateral tariff reductions. The third column of Table 2.1 provides an estimate of the budgetary cost implied by the switch toward the subsidy scheme. This cost arises because the tariff charged on the imports from the SRC falls, but the subsidy rate does not. Moreover, this shortfall applies to a larger volume of imports because the MFN tariff reductions increase world prices. The total budgetary cost for the TRIAD is only $235 million, and the fraction borne by Japan and the United States is minimal. This value excludes the impact of any additional MFN tariff reduction that may be possible under the subsidy. The estimates in the fourth column show the preference erosion costs that SRCs suffer in each TRIAD market under a 33 percent reduction in MFN tariffs without a subsidy. These erosion costs would be much larger than the budgetary costs for the TRIAD of moving toward a subsidy. The LDCs’ loss is $624 million, mostly incurred in the European market. Previous estimates were around $530 million (e.g., Subramanian, 2004). There are two main reasons for our larger numbers. First, our estimated elasticities of export supply in LDCs are on average 5, which is larger than the value assumed by Subramanian (2004) for all goods. Second, our MFN tariffs include ad valorem equivalents of specific tariffs, leading to larger preference erosion. Estimates by country are provided in Table 2.A1. We calculate this figure not simply because it is a common measure but because it is significant for the purposes of identifying the countries that are, or should be, most opposed to MTL liberalization on the basis of its impact on preference erosion. If these countries gain considerably from switching to the subsidy, a large obstacle to MTL may be removed. The three countries that would face the largest losses due to erosion in absolute terms are Bangladesh ($202 million), Malawi ($151 million), and Madagascar ($63 million). As a share of GDP, the top three losers would be Malawi (8.6 percent), Lesotho (2.7 percent), and Sao Tome (1.6 percent). Finally, the results show that the losses from preference erosion are concentrated, in that for 26 of the 48 countries they would represent less than 0.1 percent of GDP.
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Table 2.2. Annual welfare cost of LDC preferences as a stumbling block a,b
TRIAD countries (total) EU Japan United States LDCs (total)e Bangladesh Cambodia Lesotho Madagascar Malawi Maldives Mauritania Mozambique Myanmar Sao Tome Senegal Sierra Leone Solomon Isl. Tanzania Uganda Other LDCs Rest of the World Total
Percent of GDPc intermediate
Millions US$d intermediate
Low
High
0.013 0.027 0.006 0.004 0.518 0.36 0.60 2.09 1.16 6.66 0.47 0.61 0.25 1.23 1.32 0.33 0.65 0.67 0.32 0.11
2934 2336 237 361 520 176 24 18 53 117 3 6 9 20 1 17 5 2 30 7 33 900 4354
1048 849 79 120 513 173 22 18 53 117 3 6 9 19 1 17 5 2 30 7 31 315 1888
5045 4023 415 607 526 179 25 18 53 117 3 6 10 21 1 17 5 2 30 7 32 1721 7270
0.010 0.010
a
See Table 2.A2 in the Appendix for welfare estimates for other LDCs. Estimates based on equations S6 and S11 in the Appendix. c Intermediate welfare gains/GDP, where the GDP is for 2002 and is in current US$. d The estimates assume a baseline reduction in MFN tariffs of 33 percent by all WTO Members plus an additional amount by the TRIAD in the products in which they provide preferences to LDCs. The additional amount is 8.3 percent for the columns labeled Intermediate and 2.8 percent and 14.3 percent for the columns labeled Low and High, respectively. These three figures are calculated using the estimates in Lim˜ao (forthcoming); 8.3 percent is calculated from a point estimate and the extremes represent the 95 percent confidence interval. See the text for details. e The estimates for LDCs are insensitive to different scenarios because most of their welfare gain is due to the avoided preference erosion under the 33 percent baseline reduction, which is common to the three scenarios. Source: Authors’ analysis based on data discussed in the Appendix. b
The budgetary cost for the TRIAD of switching to a subsidy does not mean it should oppose it because the switch will also allow extra liberalization. Table 2.2 provides the estimate of the net welfare impact, including this extra liberalization by the TRIAD on products subject to LDC preferences. We focus on the intermediate estimates in the first two columns – which use an estimated additional 8.3 percent of liberalization – and discuss the sensitivity of the results to alternative estimates below. The annual gain for the TRIAD is $2934 million, and those governments should therefore be in favor of the switch. The largest gain is for the
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EU, $2,336 million, although Japan and the United States would also gain – $237 million and $361 million, respectively.10 Importantly, the group of LDCs also benefit from a switch to the subsidy. The aggregate gain for LDCs per year is $520 million. The changes in welfare are much larger for LDCs when measured relative to GDP – around 50 times larger than for the TRIAD. All but one LDC gain. Twenty-seven LDCs will remain indifferent, with net welfare changes below 0.1 percent of GDP. Djibouti has a marginal loss of $0.07 million due to a deterioration of its terms of trade associated with the extra TRIAD liberalization. Table 2.2 also lists the 15 LDCs that are in the top 10 group that gain either the most in absolute value or as a share of GDP, as there is some overlap between these two measures. These countries also span the top 10 that gain the most per capita. The remaining 33 countries gain only $33 million. The largest absolute gains for individual LDCs are for Bangladesh ($176 million), Malawi ($117 million), and Madagascar ($53 million). The largest gains in relative terms occur in Malawi (6.7 percent), Lesotho (2.1 percent), and S˜ao Tom´e (1.3 percent). Recall that these were exactly the countries that stood to lose the most from preference erosion. So, if faced with a choice between the preference and the subsidy scheme, the LDCs should support the latter and the additional MTL it entails. The aggregate welfare gain for LDCs is lower than the preference erosion value in Table 2.1 because the latter is a measure of the change in export revenues and ignores any extra costs of production. For individual countries the gains in Table 2.2 may also be lower than the preference erosion effect in Table 2.A2 because the additional MTL by the TRIAD occurs in many goods, some of which the SRC may actually import, which implies it will face a deterioration in their terms of trade (e.g., Djibouti and Rwanda). The rest of the world gains $900 million; 108 countries experience a gain and 11 a loss. The largest loss is experienced by Nigeria, but it is only $0.6 million. On the other hand, welfare gains are as high as $167 million for China. The gains for the rest of the world occur as a result of the additional liberalization made possible by the switch to the subsidy.11 The aggregate welfare effect of $4,354 million adds nearly 10 percent to the gains that our model predicts from goods’ liberalization in the Doha Round in the absence of this switch. Nonetheless, this estimate is likely to be a lower bound of the cost of PTAs as a stumbling block for MTL because we focus only on preferences to LDCs. The estimates in Lim˜ao (forthcoming) suggest that the stumblingblock effect is greater when it applies to several PTAs: if the additional liberalization was about 14 percent, the aggregate gains increase to over $7 billion, as 10
11
The results do not appear to be driven by specific products, such as sugar, which as we discuss in the introduction provides an important example of the effects we discuss. Excluding sugar, the welfare gain for the EU is only $72 million less. For non-LDC countries our estimates do not include the preference erosion effect caused by the extra 8.3 percent liberalization in the TRIAD markets.
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shown in the last column of Table 2.2. Even for the 8.3 percent scenario, our welfare estimates are likely to be a lower bound for several reasons. First, we recall that the welfare effect refers to a yearly effect. Given the static model that we use, if there were no further shocks after the implementation of the subsidy scheme the discounted welfare effect would be several times higher. Second, to calculate the welfare effects we employ a static perfect competition model with no externalities, which is well known to provide relatively small gains from trade liberalization. Third, when we compute the effect of the additional liberalization by the TRIAD, we do not add any reciprocity effects. In practice, we expect that the TRIAD would attempt to negotiate further reductions from other countries.12 Because the additional liberalization of 8.3 percent is an estimate, we analyze how sensitive the results are to it by considering two extreme alternatives that represent its confidence interval: 2.8 percent and 14.3 percent. Two points stand out from the last two columns of Table 2.2. First, most of the change in the aggregate gains, which now range from about $2 to $7 billion, are due to the TRIAD, which is not surprising because these are the countries that are liberalizing.13 Second, the estimates for the LDCs are nearly unchanged because most of their gains arise from the avoided preference erosion under the 33 percent baseline reduction, which is common to all scenarios. Therefore, from the perspective of LDCs our proposal should be attractive, even if the amount of additional liberalization by the TRIAD is very small.14 12
13
14
Note also that under the preference scheme the MFN reductions would result in a lower level of cooperation in non-trade issues by the small countries; this would entail an additional cost to the TRIAD that we do not compute. The TRIAD’s total welfare change can be decomposed into an efficiency and a budgetary effect. The budgetary effect has two components: the first captures the cost of the subsidy relative to the preference under a 33 percent MFN tariff reduction (equation S.5 in the Appendix) and the second the extra cost of the subsidy due to the additional liberalization (the term in the last parenthesis of equation S.8 in the Appendix). The efficiency component is given by the remaining terms on the right-hand side of equation S.8. Under the intermediate scenario of 8.3 percent the first component of the budgetary cost accounts for 8 percent of the $2,934 million welfare change of the TRIAD. This figure increases to 14 percent for the total budgetary cost (14 percent for the EU, 5 percent for Japan, and 24 percent for the United States). Thus, most of the change in their welfare is driven by the efficiency effect. To understand the insensitivity in the welfare effect for the LDCs, we note that it can be decomposed in two terms. As we can see from equation S.11 in the Appendix the first effect arises from the additional liberalization that occurs only under the subsidy; this is given by equation S.10 in the Appendix. The second effect is given by the second term in equation S.11, and it captures the difference in welfare changes under the subsidy vs. the preference when tariffs fall by 33 percent. Under the preferences a reduction in MFN tariffs causes a reduction in the welfare for the LDCs because of erosion, as seen in Table 2.1. Thus the second effect captures the role of the subsidy in avoiding preference erosion. In our estimates this last effect dominates the effect from additional MTL by the TRIAD, which accounts on average for only about 2 percent of the total welfare change for individual LDCs. But there is some heterogeneity across countries in this effect, and for a few LDCs the effect of additional liberalization by the TRIAD is actually negative because the additional MTL occurs in many goods, some of which the SRC may import.
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III. Implementation, Scope, and Refinement of the Subsidy Scheme We analyzed the small budgetary cost of switching to the subsidy. The logistical costs of running it are similar to those for preferences because many of the procedures are already in place. However, we now discuss some potential differences in running each scheme and possible refinements to the subsidy proposal. When the values of the subsidy and tariff rate are identical, they are exactly equivalent in terms of their effects on prices, quantities, and actual implementation. When the preferential tariff is zero, the exporter receives the domestic price in the preference-granting country, pw + t, where pw is the world price and t is the MFN tariff. This is also the price that the importer pays. Under the subsidy the preferential exporter receives pw + s, which is the same as before when t = s. The importer pays pw + t + s before receiving the rebate equivalent to the amount of the subsidy per unit, s. If this is done at customs, then the buyer’s price is simply pw + t. Here the subsidy is implemented as an immediate drawback scheme, which already exists in the TRIAD to rebate import duties when the imported good is re-exported or used as an input in the production of an exported good. This discussion should also make clear that the subsidy is as transparent as are the current preferences, as long as t = s (i.e., the subsidy is offset by the tariff). Therefore, political economy arguments that the subsidy is a more transparent instrument than a preference, and therefore less likely to be adopted by governments that would need to justify to their constituencies the subsidization of a foreign producer, are not convincing. However, transparency may be an issue after an MFN reduction (i.e., when t < s). Two differences arise when the MFN rate falls. The first is the direct budgetary cost: customs collects t per unit and must rebate s. As our estimates show, this cost is small. However, when the subsidies involve expenditures above the tariff collected on the product from that country, they may need to be reflected in the budget. Note that this cost could be financed directly from the tariff revenue collected on imports from other countries. Moreover, from the domestic legal perspective of the SGC, the budget implications of a subsidy are no different from those associated with the preferences.15 The second issue that may arise when t < s is re-exports. The buyer in the SGC can ship the good back to an agent in the SRC, which will re-export it to collect the subsidy again. This is profitable if the excess subsidy, s – t , is sufficiently high to offset the transaction cost. This cost includes the expense of forging the certificate of origin of the good and the two-way transport cost, which in most 15
In the United States, for example, any forgone tariff revenue from a new preference must be estimated and a replacement in the budget suggested. There are also precedents for the use of import subsidies in the EU; for example, “Where the supplies [of sugar] available within the Community or a major consuming region are no longer sufficient, import subsidies may be granted.” In Council Regulation (EC) No 1260/2001 of 19 June 2001.
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goods will make it unprofitable. This is particularly true if the origin country is an LDC because they have high transport costs as shown by Lim˜ao and Venables (2001). If we add to this cost the forgone interest on the sale of the good because of the time that the two-way shipment takes, it is unlikely that re-exports would be profitable. If re-exports were a problem, one solution would be to implement the subsidy rebate only when the good is sold to the final consumer in the SGC. Because internal sales often incur a sales tax, implementing the subsidy rebate in this way would serve as an additional wedge that would have to be overcome for re-exports to be profitable. In fact, exempting the imports from LDCs from paying such a tax could, under certain conditions, mimic the subsidy and thus could be an alternative.16 It is possible that our proposal applies better to certain countries that are “strategically large” (i.e., those whose cooperation in certain non-trade issues is important). Proposals for a buy-out of preferences, either through a lump sum payment or temporary adjustment assistance through grants (Hoekman, 2004) or loans (IMF, 2004), are unlikely to work for those countries.17 For example, the United States had the opportunity to offer only cash for Colombia’s cooperation on the war on drugs and it chose not to. However, skeptics of the subsidy scheme may want to first experiment by switching in only one or a subset of a sector; for example, there may be a stronger case for U.S. preferences to Colombia in the agricultural sector as a way to provide alternatives to growing coca. Moreover, such sector-specific experimentation can show whether there are unexpected implementation problems. By choosing a fixed subsidy rate equal to the current preference margin, we obtain a convenient benchmark to evaluate the welfare effects of a switch. But alternative subsidy rates can help address other problems with preferences. Preferences may have caused investment in sectors in which the countries did not have a comparative advantage (Tangermann, 2002) A modified subsidy scheme addresses this problem. To align the pattern of export specialization with relative world prices, we could use a fixed subsidy rate that is equal for all products
16
17
A sufficient condition for this exemption to work exactly in the same way as a subsidy rate of value s is for the existing sales tax rate to be at least as high as the subsidy rate. This condition is not satisfied for some goods with high preference margins (which we chose as the initial subsidy rate). The IMF’s proposed program is in the form of loans to finance temporary adjustment costs if the MFN tariff reductions cause a significant balance-of-payment effect on the beneficiary countries. Even if this program compensated for the full amount of preference erosion, it would not be able to deliver the same MFN tariff reduction as the subsidy proposed. The reason for this is that after the MFN tariff reduction is granted, the granting countries can only threaten to remove a smaller amount of preferences. Thus they will be able to extract less in the form of side conditions than before the MFN reduction (or subsidy scheme). This implies that the granting countries themselves will offer fewer MFN reductions under the IMF program than under the subsidy scheme.
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exported to all SGCs. This rate maintains the relative prices in the SRC equal to the world’s relative prices.
IV. Conclusion The recent wave of PTAs suggests that policymakers think they are desirable. Nonetheless their potential costs on multilateral liberalization must be estimated and taken seriously. In this chapter we described recent theoretical and empirical evidence that PTAs can slow down multilateral liberalization, even when the countries receiving the preference are small. We argued that decoupling preferences from MFN liberalization can be done using import subsidies and that such a scheme would be supported by the countries receiving and those granting preferences. We provide the first estimates of the welfare costs of PTAs as a stumbling block to multilateral liberalization. This cost is $2,934 million per year for the TRIAD if they switched from their preferences to LDCs to fixed import subsidies in the context of the liberalization anticipated in the Doha Round. This cost occurs because under the subsidy TRIAD countries can further reduce their MFN tariffs. The switch would also increase annual welfare costs in the rest of the world by $900 million. For LDCs receiving TRIAD preferences, the gain is $520 million, which is mostly due to the avoided preference erosion under the subsidy. The aggregate annual welfare estimate of over $4 billion adds about 10 percent to the gains that our model predicts from goods’ liberalization in the Doha Round. As we argued, this is likely to be a lower bound of the stumbling block effect of PTAs. At one extreme the concern with preference erosion could prevent the completion of the Doha Round, costing an additional $47 billion per year. In terms of implementation, we have argued that the budgetary costs of the subsidy are small and the logistical costs are in principle not significantly higher than the ones associated with the current preferences. However, two questions must be addressed: the legality in the WTO and its scope. From a legal perspective the subsidies conflict with the MFN principle, but this conflict could be addressed in the same way as have preferences: through waivers, the Enabling Clause, or Article XXIV, for example. In terms of the scope of the subsidy, the question is whether the proposal should extend to all countries that receive unilateral preferences. The basic argument should apply to them as well. Naturally the budgetary cost for the TRIAD would be higher, but the additional MFN liberalization that would result may be sufficient to offset it. Even more broadly, we could consider extending the scheme to all PTAs. The concern with preference erosion also applies to them, and there is evidence that they have slowed down the U.S. and EU MFN liberalization. Future research should address this broader question and calculate the welfare costs of other PTAs.
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Appendix We first present a simplified version of the model in Lim˜ao (2002) to show how unilateral preferences to small countries can cause states such as the EU and United States to maintain higher multilateral tariffs and how this incentive disappears when an import subsidy is allowed. We then discuss the role of side conditions in preferential trade agreements.
Preferences to Small Countries as a Stumbling Block to MTL Assume that each regional bloc contains a large and a small country, which we denote by L and S. There exist two externalities within each bloc. First, L is affected by the level of an action e that S can undertake at a cost. This is a general way to capture the demand that L has for cooperation in labor, environmental, emigration issues, improvements in governance, etc. Second, there is a terms-of-trade externality; that is, L can use a tariff to depress the price of S’s exports. The countries in a bloc can internalize these effects via a PTA in which L lowers its tariffs on S’s exports in exchange for an increase in the latter’s provision of e. The PTA is modeled such that its only direct trade effect is to increase the price that S receives for its exports. There are two import tariffs that L chooses: t, the multilateral tariff that it applies to the rest of the world, and t p ≤ t, the preferential tariff on that good applied to imports from S. The good that L exports to the rest of the world faces a tariff t r . So, the objective function that L maximizes is W L = W L (e, t p, t, t r )
(1)
where the partial effects are WeL > 0 and, due to terms-of-trade effects, WxL > 0 for x = t p, t when evaluated at x = 0 and WtrL < 0. The objective maximized by S depends on e and the tariffs set by L, which affect the price that S receives for its exports: W S = W S (e, t p, t)
(2)
Under a PTA, S receives an export price of pw (t) + t – t p , where pw (t) is the equilibrium world price, so pw (t) + t is the price in L. Therefore, WtpS < 0 and W S > 0. But, in the absence of a PTA, S faces the multilateral tariff and receives only pw (t), which falls when t is raised and so WtS < 0. For simplicity we assume that S has no trade in the good exported by L to the rest of the world and thus is indifferent about the level of tr . The balance-of-payments condition is satisfied through a numeraire good that enters utilities in a quasi-linear way and that L uses to pay for its imports from S. The crucial assumption that generates a motive for L’s preferential treatment for S is that it values e. We take the neutral case in which S places neither a positive nor a negative weight on the direct effect of e on itself and simply
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assume that this action requires some expenditure on the part of S, which implies a negative marginal benefit in terms of the numeraire. So, if S and L do not cooperate, S does not supply e, and L does not provide a preference. They can improve on this outcome through a bargain where L sets tp < t and S supplies e.18 In most of the agreements that we analyze in the data, L has nearly all the bargaining power relative to S. Therefore, it is sensible to focus on the outcome of a take-it-or-leave-it offer that leaves S at the status quo welfare level. If S is a WTO Member, then the maximum tariff that L can set is t p = t, because of the MFN rule. Therefore, the status quo welfare will be determined by evaluating tp at t and e at the level that is optimal for S. More specifically, the bargain that L offers must at least satisfy W S (e = eb, t p = tb < t, t) ≥ W S (e = 0, t p = t, t). So, for a given level of t and t p, we can write the equilibrium level of eb as a function eb (tp ,t). This function is decreasing in the preferential tariff and increasing in the MFN tariff because either movement raises W S and thus allows L to extract a higher level of e. In the simple case, the net exports of S are constant, and it can be shown that this implies that, in the function eb(tb, t), S cares only about the preferential margin t − tp
so
b etb = −etp > 0.
Under the GATT/WTO, countries negotiate reciprocal tariff reductions with their principal suppliers. So, if the rest of the world (ROW) is the main supplier of the good that L also imports from S, then L negotiates with the ROW. To capture this negotiation, we model the equilibrium multilateral tariffs as the solution that maximizes the joint objective of L and the ROW. Moreover, here we assume that L chooses the preferential tariff simultaneously and further simplify by assuming that the ROW is a mirror image of L, although neither of these assumptions is essential for the result. This implies that we can focus on solving for t because it will be equal to t r and that the effect of t on W r is identical to that of t r on W L . Imposing the equilibrium conditions of symmetry, t = t r , and e = e b (t p ,t), the joint optimum for L and the ROW under a PTA is given by the following program and necessary first-order conditions (FOC): {t˜, t˜p} ≡ argt,t p max W L (e = eb(t p, t), t p, t, t r = t) 18
(3)
Note that, for given t, this bargain may be just as efficient as a lump-sum transfer from L given that we assume preferences are quasi-linear so that the tariff revenue that L is giving up through the preference has the same effect as an equivalent lump-sum transfer. This would not be the case if S had an upward-sloping export supply as we assume in the simulation. However, there can be realistic political economy constraints that would deliver the preference instead of the lump-sum transfer as the constrained first-best policy to be used in exchange for e. Here, we simply assume that the preference is the only available instrument and analyze the implications for the multilateral tariff.
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WtLp + WeL etbp ≤ 0
(4)
WtL + WtrL + WeL etb ≤ 0
(5)
To see how a stumbling block can arise when import subsidies are not allowed, let’s contrast this with the condition for the tariff in the absence of a PTA. Now L has no incentive to provide a preference to S so t = t p and e = 0, which yields the following solution: t ≡ argt max W L (e = 0, t p = t, t, t r = t)
(6)
Using the FOC derived for this last problem, WtL + WtLr + WtLp = 0, to evaluate the FOC for t when a PTA is present, (5), we can determine if t˜ > t . That will be so if the following expression is positive:
WtL
+
WtLr
+
WeL etb
t ,t p=0
etb − b ≥ + + et p t ,t p=0 et b = WtL + WtrL 1 − − b =0 et p t ,t p =0
WtL
WtLr
WtLp
(7)
where the inequality in the first line reflects the use of (4). If import subsidies were allowed then t p could continue to be lowered below zero, and the inequality above would disappear because an interior solution could be found. But otherwise it is possible to obtain a corner solution in the PTA; that is, a situation in which, at tp = 0, L would like S to increase e. In this case, (4) holds with a strict inequality. The second line of (7) is zero in the case we consider where −etbp = etb (i.e., when an increase in the MFN tariff has the same effect as a decrease in the preferential tariff ), both simply increase the preferential margin. This implies that t˜ > t if and only if [WtLp + WeL etbp ]t p < 0. Therefore, import subsidies completely eliminate the need to distort the MFN tariff to maintain a preference margin.
Side Conditions in Preferential Agreements GSP and other unilateral preferences provided by the United States and the EU often have side conditions attached that are valued by the preference-granting country and are potentially costly to the recipient. That is, these unilateral preferences are not free of cost to developing countries. GSP, for example, was designed to promote the development of poorer countries based on an infant industry argument (UNCTAD, 1964), but “during the last twenty-five years or so the experience of the GSP in the GATT system has been that for a number of reasons the preference-granting national entities (i.e., the industrialized countries) often succumb to the temptation to use the preference systems as part of ‘bargaining
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Table 2.A1. Preference erosion and subsidy by beneficiary country (millions of US$)a European Union
Japan
United States
Name
SRC Code
Pref. erosion subsidy
Pref. erosion subsidy
Pref. erosion subsidy
Afghanistan Angola Bangladesh Benin Bhutan Burkina Faso Burundi Cambodia Cape Verde Central Afr. R. Chad Comorros Congo Djibouti Eq. Guinea Eritrea Ethiopia Gambia Guinea Guinea-Bissau Haiti Kiribatib Lao Lesotho Liberia Madagascar Malawi Maldives Mali Mauritania Mozambique Myanmar Nepal Niger Rwanda Samoa S˜ao Tom´e & P. Senegal Sierra Leone Solomon Isl. Somalia Sudan Tanzania Togo Tuvalu Uganda Vanuatu Yemen Zambia
AFG AGO BGD BEN BTN BFA BDI KHM CPV CAF TCD COM CON DJI GNQ ERI ETH GMB GIN GNB HTI KIR LAO LSO LBR MDG MWI MDV MLI MRT MOZ MMR NPL NER RWA WSM STP SEN SLE SLB SOM SDN TZA TGO TUV UGA VUT YEM ZMB
0.28 3.08 193.61 0.61 0.04 0.55 0.03 20.80 0.37 0.56 0.02 0.04 0.27 0.05 0.02 0.29 0.87 0.58 2.59 0.22 0.23 N.A. 6.77 0.25 0.79 45.42 40.77 3.84 1.22 5.91 11.17 20.55 4.78 0.48 0.03 0.03 0.77 19.68 5.33 2.01 0.04 0.84 28.22 0.55 0.02 8.12 0.03 1.12 6.38
0.00 0.07 6.55 0.00 0.00 0.00 0.00 5.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.03 0.05 0.00 0.00 0.01 N.A. 0.12 0.00 0.00 0.08 0.01 0.03 0.00 1.28 0.00 1.79 0.72 0.00 0.00 0.02 0.00 0.06 0.00 0.20 0.00 0.00 0.04 0.00 0.00 0.00 0.08 0.02 0.00
0.00 0.00 1.90 0.00 0.01 0.00 0.00 0.17 0.07 1.55 0.00 0.00 0.01 0.00 0.00 0.00 0.06 0.00 0.03 0.00 1.08 N.A. 0.00 22.90 0.01 18.14 110.28 0.00 0.03 0.00 0.02 0.12 0.37 0.02 0.00 0.00 0.00 0.02 0.02 0.00 0.01 0.00 8.29 0.01 0.00 0.01 0.01 0.00 0.40
a b
0.64 4.10 346.86 1.19 0.11 1.19 0.05 41.74 0.75 0.79 0.07 0.10 0.47 0.11 0.04 0.45 2.04 0.87 3.27 0.25 0.37 N.A. 13.02 0.29 2.27 63.52 39.64 4.31 1.58 8.75 14.21 37.85 11.55 0.90 0.09 0.04 0.93 28.41 11.27 2.14 0.06 1.41 30.98 0.96 0.04 7.82 0.08 1.42 9.72
Source: Authors’ calculations. We do not have any export, import, or tariff data on Kiribati.
0.00 0.20 11.17 0.00 0.00 0.00 0.00 10.76 0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.00 0.06 0.08 0.00 0.00 0.01 N.A. 0.30 0.00 0.00 0.15 0.01 0.04 0.01 2.60 0.00 3.59 1.88 0.01 0.00 0.02 0.00 0.13 0.00 0.34 0.00 0.01 0.09 0.00 0.00 0.00 0.17 0.04 0.00
0.00 0.00 2.48 0.00 0.01 0.01 0.00 0.33 0.15 0.85 0.00 0.00 0.02 0.00 0.00 0.00 0.18 0.01 0.04 0.00 2.61 N.A. 0.00 18.78 0.02 15.18 25.42 0.00 0.05 0.00 0.04 0.33 0.62 0.04 0.01 0.01 0.01 0.05 0.04 0.00 0.02 0.00 3.15 0.04 0.00 0.03 0.02 0.00 0.63
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Table 2.A2. Changes in net welfare by least-developed countriesa SRC name
SRC code
Afghanistan Angola Bangladesh Benin Bhutan Burkina Faso Burundi Cambodia Cape Verdec Central Afr. R. Chad Comorrosb Congo Djibouti Eq. Guinea Eritrea Ethiopia Gambiab Guinea Guinea-Bissau Haitib Kiribatid Lao Lesothob Liberia Madagascar Malawi Maldives Mali Mauritania Mozambique Myanmar Nepal Niger Rwanda Samoab Sao Tome & P.b Senegal Sierra Leone Solomon Isl. Somalia Sudan Tanzania Togo Tuvalu Uganda Vanuatu Yemen Zambia
AFG AGO BGD BEN BTN BFA BDI KHM CPV CAF TCD COM COG DJI GNQ ERI ETH GMB GIN GNB HTI KIR LAO LSO LBR MDG MWI MDV MLI MRT MOZ MMR NPL NER RWA WSM STP SEN SLE SLB SOM SDN TZA TGO TUV UGA VUT YEM ZMB
a
Total (US$ million) 0.26 2.59 175.72 0.53 0.05 0.48 0.01 23.55 0.4 1.67 0.01 0.04 0.19 −0.07 0.01 0.25 0.87 0.55 2.21 0.17 0.78 N.A 6.16 18.14 0.78 53.06 116.94 3.05 1.01 6.13 9.47 19.96 5.43 0.45 0.01 0.05 0.65 17.06 4.83 1.84 0.04 0.53 29.82 0.53 0.01 6.65 0.08 0.84 5.95
Welfare change per capita (US$ per capita) 0.01 0.2 1.31 0.08 0.06 0.04 0 1.8 0.88 0.44 0 0.07 0.05 −0.1 0.02 0.06 0.01 0.4 0.29 0.12 0.1 N.A. 1.13 10.26 0.24 3.27 11 10.76 0.09 2.36 0.52 2.6 0.23 0.04 0 0.29 4.26 1.73 0.93 4.21 0 0.02 0.86 0.11 0 0.27 0.39 0.05 0.59
Over GDPb (percent) 0.01 0.02 0.36 0.02 0.01 0.02 0 0.6 0.06 0.16 0 0.02 0.01 −0.01 0 0.04 0.01 0.14 0.07 0.08 0.02 N.A 0.34 2.09 0.15 1.16 6.66 0.47 0.03 0.61 0.25 1.23 0.1 0.02 0 0.02 1.32 0.33 0.65 0.67 0 0 0.32 0.04 0 0.11 0.03 0.01 0.16
Source: Authors’ calculations. GDP is for the year 2002 and is measured in current US$. c Excludes changes in tariff revenue due to lack of tariff data. The direction of the bias is unclear, but it is probably small because changes in tariff revenue represent on average less than 1 percent of the total welfare change. d We do not have any export, import, or tariff data on Kiribati. b
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chips’ of diplomacy” (Jackson, 1997, p. 160). International trade lawyers have also warned of the possibility that GSP will retard the MTL of the developed countries that grant such preferences because of a similar mechanism (Trebilcock and Howse, 1999, pp. 462–463). Failure by the GSP beneficiaries to comply with some of the non-trade issues has cost them their preferential access to the United States market.19 Both the United States and the EU explicitly offer reductions in trade barriers in exchange for cooperation on various non-trade issues, such as labor, environment, drug trafficking and intellectual property. Examples of these agreements have included the Eastern European and Mediterranean agreements signed by the EU; the U.S.’s agreements with Jordan, Mexico, and other Latin American and Caribbean countries; and the preferential treatment that the EU and the United States extend to most developing countries through GSP. This type of agreement is increasingly prevalent, as the new U.S. preferences to Middle Eastern countries make clear.20
Acknowledgments We thank Stephanie Aaronson, Piyush Chandra, Bernard Hoekman, Kyle Bagwell, George Bermann, Bill Davy, Aaditya Mattoo, Petros Mavroidis, Stefano Inama, Chris Stevens, and Alan Winters, as well as three anonymous referees and participants in the seminar on the WTO and developing countries (Columbia Law School) for their helpful comments and discussions. The usual disclaimer applies. We also thank the United Kingdom’s Department for International Development for financial support. The findings, interpretations, and conclusions expressed in this chapter are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. 19
20
For example, according to the U.S. GSP handbook some countries have lost eligibility for trade preferences under that program “because of worker rights or intellectual property concerns” (p. 6). Accessed at <www.ustr.gov/assets/Trade Development/Preference Programs/ GSP/asset upload file267 8359.pdf> In 2005 the United States revoked Cˆote d’Ivoire’s eligibility for trade preferences under the AGOA program because of its failure to comply with the UN’s cease-fire resolution. Morocco enacted a comprehensive new labor law recently, and according to U.S. trade negotiators it was “the prospect of a free trade agreement with the United States [that] helped to forge a domestic consensus for labor law reform in Morocco, spurring reform efforts that had been stymied for more than 20 years.” Accessed at <www.ustr.gov/Document Library/Fact Sheets/2004/Morocco FTA Leads to Progress on Labor Reform.html> See USITC (1994, 1996) for conditions applying to the ATPA. See Bayard and Elliot (1994) and UNCTAD (2000) for details on conditionality in the GSP program. See Perroni and Whalley (2000) for details on conditionality in NAFTA. See Winters (1993) for details on the EU’s Eastern European, Mediterranean, and GSP programs; the latter is also described by UNCTAD (2002).
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references Adam, C. and S. O’Connell. 2004. “Aid Versus Trade Revisited,” The Economic Journal 114: 150–73. Bagwell, K. and R. Staiger. 1998. “Regionalism and Multilateral Tariff Cooperation.” In International Trade Policy and the Pacific Rim, ed. John Piggott and Allan Woodland. London: MacMillan. Bayard, T. and K. Ann Elliott. 1994. Reciprocity and Retaliation in US Trade Policy, Washington, DC: Institute for International Economics, xiv, 503. Bhagwati, J. 1991. The World Trading System at Risk. Princeton, NJ: Princeton University Press. Chang, W. and A. Winters. 2002. “How Regional Blocs Affect Excluded Countries: The Price Effects of Mercosur,” American Economic Review 92(4): 889–904. Francois, J., H. van Mejil, and F. van Tongeren. 2005. “Trade Liberalization in the Doha Development Round,” Economic Policy 20(42): 349–91. Havemann, J., and H. Shatz. 2003. “Developed Country Trade Barriers and the Least Developed Countries: The Economic Results of Freeing Trade,” World Institute for Development Economics Research Discussion Paper No. 2003/46. Hoekman, B. 2004. “Overcoming Discrimination against Developing Countries: Access, Rules and Differential Treatment,” mimeo. Hoekman, Michalopoulos, and Winters. 2004. “Special and Differential Treatment of Developing Countries in the WTO: Moving Forward after Cancun,” The World Economy, (27): 4. Hoekman, B., A. Nicita, and M. Olarreaga. 2006. “Estimating the Effects of Global Trade Reform.” In Global Trade Liberalization and Poor Countries: Poverty Impacts and Policy Implications, ed. B. Hoekman and M. Olarreaga. Paris: Institut de Sciences Politiques. IMF. 2004. “Fund Support for Trade-Related Balance of Payments Adjustments,” mimeo. at www.imf.org/external/np/pdr/tim/2004/eng/022704.pdf. Inama, S. 2003. “Trade Preferences and the World Trade Organization Negotiations on Market Access,” Journal of World Trade 37(5): 959–76. Jackson, J. 1997. The World Trading System: Law and Policy of International Economic Relations, 2nd ed. Cambridge, MA: MIT Press. Johnson, Harry G. 1967. Economic Policies Toward Less Developed Countries. Washington, DC: Brookings Institution. Karacaovali, B., and N. Lim˜ao. 2005. “The Clash of Liberalizations: Preferential vs. Multilateral Trade Liberalization in the European Union,” Policy Research Working Paper No. 3493, Washington, DC: World Bank. Kee, H. L., A. Nicita, and M. Olarreaga. 2004. “Import Demand Elasticities and Trade Distortions,” Policy Research Working Paper No. 3452. Washington, DC: World Bank. Krishna, P. 1998. “Regionalism and Multilateralism: A Political Economy Approach,” Quarterly Journal of Economics 113(1): 227–51. Levy, P. 1997. “A Political-Economic Analysis of Free-Trade Agreements,” American Economic Review 87(4): 506–19. Lim˜ao, N. 2002. “Are Preferential Trade Agreements with Non-Trade Objectives a Stumbling Block for Multilateral Liberalization?” University of Maryland Center for International Economics WP 02–02. Lim˜ao, N. (2006). “Preferential Trade Agreements as Stumbling Blocks for Multilateral Trade Liberalization: Evidence for the US,” American Economic Review 96:4, 896–914.
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Lim˜ao, N. and Anthony Venables. 2001. “Infrastructure, Geographical Disadvantage, Transport Costs and Trade,” World Bank Economic Review 15(2): 451–79. McCulloch, R. and J. Pinera. 1977. “Trade as Aid: The Political Economy of Tariff Preferences for Developing Countries,” American Economic Review 67(5): 959–67. OECD. 2003. Tariffs and Trade: OECD Query and Simulation Package. Paris: OECD. Perroni, C. and J. Whalley. 2000. “The New Regionalism: Trade Liberalization or Insurance?” Canadian Journal of Economics 33(1): 1–24. Sapir, A. 1981. “Trade Benefits under the EEC Generalized System of Preferences,” European Economic Review 15(3): 339–55. Sapir, A. and L. Lundberg. 1984. “The US Generalized System of Preferences and Its Impacts.” In The Structure and Evolution of US Trade Policy, ed. A. O. Krueger and R. E. Baldwin. Washington, DC: NBER. Stevens, C. and J. Kennan. 2004. “Making Preferences More Effective,” Institute for Development Studies briefing paper. Subramanian, A. 2004. “Financing of Losses From Preference Erosion,” issued by the WTO as WT/TF/COH/14. Tangermann, S. 2002. The Future of Preferential Trade Arrangements for Developing Countries and the Current Round of WTO Negotiations on Agriculture. Rome: FAO. Trebilcock, M. J. and R. Howse. 1999. The Regulation of International Trade, 2nd ed. London: Routledge, xii, 599. UNCTAD. 1964. “Towards a New Trade Policy for Development,” Report by the Secretary General of UNCTAD, United Nations, New York. UNCTAD. 2000. “Generalized System of Preferences, Handbook on the Scheme of the USA,” UNCTAD, Geneva, UNCTAD/ITCD/TSB/Misc.58. UNCTAD. 2002. “Handbook on the Scheme of the European Community,” UNCTAD, Geneva, UNCTAD/ITCD/TSB/Misc.25/Rev.2. UNCTAD. 2003. “Trade Preferences for LDCs: An Early Assessment of Benefits and Possible Improvements,” UNCTAD/ITCD/TSB/2003/8, Geneva. USITC. 1994, 1996. “Andean Trade Preference Act Report,” Washington, DC. Winters, A. 1993. “Expanding EC Membership and Association Accords: Recent Experience and Future Prospects.” In Regional Integration and the World Trading System, ed. K. Anderson and R. Blackhurst: Harvester Wheatsheaf, 104–25. Winters, A. 1999. “Regionalism vs. Multilateralism.” In Market Integration, Regionalism and the Global Economy, ed. R. Baldwin, D. Cohen, A. Sapir, and T. Venables. Cambridge: CEPR. Winters, A. 2001. Preferential Trading Arrangements and Excluded Countries: Ex-Post Estimates of the Effects on Prices, The World Economy 24(6): 797–807. Winters, A. 2004. “Adjustment assistance for trade liberalization,” mimeo, World Bank, Washington, DC.
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3 China in the WTO 2006: “Law and Its Limitations” in the Context of TRIPS
I. Introduction China’s transition from a statist to market economy over the past 15 years and its successful establishment of globally competitive industry are unprecedented historical events. Although China’s entry into the WTO is not responsible for that transformation, it has played an important role. Accession to the WTO was used by the government as a means not only to stabilize access to foreign markets and increase the attractiveness of China to foreign investors but also to reorient internal policies in a way that deemphasized a profound shift in government attitudes. One of the main reasons why the Organization for Economic Cooperation and Development (OECD) encouraged China’s entry into the WTO was to enhance China’s external economic linkages, thereby moderating its potential politicalmilitary adventurism. So far, the premise that a China highly integrated into the global economy would encourage moderate Chinese political policies appears to have been a sound one.1 And, so far, informed predictions that China would act as a responsible Member of the WTO, as it has acted as a member in other international organizations, such as the United Nations and IMF, have also proven sound.2 However, the law of unintended consequences is always at work, and the rate of China’s growth and success in world markets may have been unanticipated.
1
2
China’s cooperation with the United States on resolving tensions with North Korea is an example of how improved political relations between the countries may encourage stability in Asia. Although there is no direct correlation between China’s membership in the WTO and the situation in North Korea, it appears reasonable to suggest that China’s increased stake in global economic growth increases its interest in avoiding serious political disruptions. See James A. Kelly, Assistant U.S. Secretary of State for East Asian and Pacific Affairs, U.S. Policy on China and North Korea, Remarks to the World Affairs Council, Wash., DC, Jan. 30, 2003 available at http://www.state.gov/p/eap/rls/rm/2003/17164.htm, discussing U.S.China cooperation with regard to North Korea and China’s participation in the WTO. See Harold K. Jacobsen and Michel Oksenberg, China’s Participation in the IMF, World Bank, and GATT 124–25 (1990).
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Developing countries that for many years had pressed in the WTO for an agreement to eliminate textile quotas found themselves seeking to re-impose restrictions in the face of highly efficient Chinese producers.3 China is absorbing a large and increasing share of the world’s natural resources, including oil and minerals, and Chinese demand is adding to global price and availability pressures. China’s trade relations with the rest of the world are not without friction. China maintains a large trade surplus with the United States and European Union. Politicians and economists express concern that this surplus is due, at least in part, to a Chinese policy of deliberately undervaluing its currency.4 In late 2005, largely in response to U.S. political pressures, China moved from a fixed currency conversion rate for the Yuan to a limited floating rate tied to a basket of currencies.5 This move provided modest relief from currency-related confrontation with the United States, which continues at a somewhat more subdued level.6 Significant conflicts have erupted between China, on one side, and the European Union and United States on the other, relating to the imposition of quotas on the importation of certain textile products.7 China’s Protocol of Accession, in conjunction with its Working Party Report, specifically contemplated the imposition of temporary safeguards with respect to textiles during the period up to December 31, 2008. China, the European Union, and the United States have disputed compliance with processes mandated by the WTO instruments and the 3
4
5 6
7
See, e.g., Global Alliance for Fair Textile Trade (GAFTT), Global Alliance Presses Governments and WTO to Halt Chinese Monopolization of Global Trade in Textiles and Clothing, press release of January 26, 2005. Until late 2005, China maintained a fixed exchange rate for the Yuan at a level that is argued to artificially promote exports. This is a controversial issue among economists, and there is some reason to discount the level of political attention focused on the issue. See Hufbauer and Wong, China Bashing 2004, International Economics Policy Briefs, IIE (Sept. 2004). China has argued that a build-up of exchange reserves is important to shoring up its weak state-run banks, and Alan Greenspan has advocated a cautious approach on China’s exchange rate policy. See Remarks by Chairman Alan Greenspan before the World Affairs Council of Greater Dallas, Dallas, Texas, Dec. 11, 2003, available at http://www.federalreserve.gov/boarddocs/speeches/2003/20031211/default.htm. James T. Areddy, China Widens Yuan’s Trading Band, Wall St. J., Sept. 24, 2005, at A6. Neil King Jr., U.S. Takes Patient Tack On Yuan As China Talks Are Set to Open, Wall St. J., Oct. 10, 2005, at A2. However, given the high level of foreign exchange reserves presently held by China (Zhang Dingmin, Forex reserves jump 39.2 percent to US$439.8b, China Daily, available at http://www.chinadaily.com.cn/english/doc/2004-04/14/content 323362.htm), there was good reason to believe that it could begin to tackle the undercapitalization of the state-run banks and gradually relax controls on the Yuan, which would help reduce tensions with the United States. See, e.g., Peter Mandelson, EU Trade Commissioner, EU – China Textiles: “Manage change and adjustment, not trade,” SPEECH/05/325, 6 June 2005; American Manufacturing Trade Action Coalition, National Council of Textile Organizations, National Textile Association, Press Statement, Textile Talks Break Off Again Between the United States and China, U.S. Government Approves Two Safeguards on Textile and Apparel Products from China, Sept. 1, 2005, available at http://www.insidetrade.com (citing paragraph 242 of China Working Party Report).
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basis for the determinations of compliance. China’s potential dominance in the world textile supply market raises significant long-term questions regarding the distribution of gains from trade, particularly for developing countries. The textile disputes with the European Union and the United States involve application of a short-term adjustment mechanism and are not of special systemic interest. This paper focuses on the legal and WTO governance implications of China’s alleged failure to fulfill its obligations under the Agreement on Trade-Related Intellectual Property Rights (TRIPS Agreement). The significant escalation of interest by the United States and other developed countries in China’s intellectual property rights enforcement activity merits special attention because of its systemic implications. This subject matter forms a critical part of China’s continuing WTO dialogue with the United States, European Union, Japan, and Switzerland, and it tests the capacity of the WTO dispute settlement system to constrain state behaviors. China appears to perceive that its national interest is not aligned with its TRIPS Agreement and Accession Protocol obligations. Though the United States may well initiate a WTO dispute settlement action, it seems unlikely that doing so will result in near-term changes to China’s conduct. WTO dispute settlement is not designed to force immediate changes to government behaviors, particularly when the complained-against party is not overly concerned about the potential for withdrawal of concessions. Politicians and industry leaders who are demanding changes by China will almost certainly be frustrated at the WTO. This response will raise two questions: (1) will the United States be justified in imposing extra-WTO legal sanctions on China, and (2) if this is justified, will it be a good idea? The answers to these questions, explored in this paper, are “probably yes” and “probably no,” respectively. To paraphrase the title of Olivier Long’s classic work on the GATT,8 this case may help define the limits of the law in the WTO system.
A. Commitments on Accession In general, a country or autonomous customs territory seeking to join the WTO must reach agreement on the terms of its accession with all WTO Members, thereby establishing a consensus.9 The agreement is negotiated in a Working Party on the accession and is ultimately embodied in a Protocol of Accession. A report of the Working Party, including a recommendation regarding acceptance of the Protocol, is provided to the WTO General Council. The General Council in 8
9
Olivier Long, Law and Its Limitations in the GATT Multilateral Trading System (1985) (Martinus Nijhoff). See Frederick M. Abbott, Reflection Paper on China in the World Trading System: Defining the Principles of Engagement, in China in the World Trading System: Defining the Principles of Engagement 1 (F. M. Abbott, ed. 1998). Article XIII of the WTO Agreement technically permits the acceding country and another Member to opt out of the consensus and not apply that WTO Agreement between themselves. Id. 6.
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turn makes a recommendation on accession to the Ministerial Conference. There is no defined limit on the commitments that may be included in a Protocol of Accession. Acceding countries may be required to accept commitments different from and more extensive than those required by the WTO Agreement(s). The Protocol of Accession incorporates schedules of concessions by the acceding country that are intended to reflect a balance with existing concessions by WTO Members in comparable economic circumstances.10 The terms of China’s accession to the WTO were approved by the Ministerial Conference at Doha on November 10, 2001.11 China notified the WTO of its acceptance of the Protocol one day later, and its accession became effective on December 11, 2001.12 China agrees, as do other WTO Members, to application of the multilateral trade agreements (MTAs) – the GATT 1994, GATS, and TRIPS Agreement – and to application of the WTO Dispute Settlement Understanding (DSU).13 China’s Protocol of Accession incorporates Schedules of Concessions and Commitments under GATT 1994 and GATS, as well as commitments in the Working Party Report.14 Except as otherwise expressly provided, China agrees that WTO transition timetables apply to it as if it had joined on January 1, 1995.15 Prior to the Doha Ministerial Conference, the U.S. Congress had voted to grant Permanent Normal Trade Relations status to China, conditional on completion of accession negotiations on terms satisfactory to the United States.16 The legislation expressly removed China from countries subject to the JacksonVanik Amendment review process. The legislative package prescribed as a U.S. 10
11
12
13 14
In other words, an acceding country with a high level of national and/or per capita income would face different expectations than a least-developed acceding country. Accession of the People’s Republic of China, Ministerial Conference, Decision of 10 November 2001, WT/L/432 WT/L/432, 23 November 2001. See Protocol of Accession, Part III. See USTR, 2003 Report to Congress on China’s WTO Compliance, available at http://www. ustr.gov, at 3 & 13 (hereinafter “USTR 2003 Report”), noting November 11 date of China’s acceptance of Protocol and accession 30 days following, and Canada, Department of Foreign Affairs and International Trade, Summary of the Terms of China’s Accession to the WTO, Mar. 2002. But see, Note by the WTO Secretariat, Technical Note on the Accession Process, WT/ACC/10, 21 Dec. 2001, at Table 1 (suggesting, presumably inaccurately, December 1, 2001 membership date, which appears inconsistent with terms of Protocol prescribing 30 days post notification of acceptance). Protocol, Part I., inter alia, sec. 1.3. See Protocol, Part II and Article 1.2. Cross-reference is made to paragraph 342 of the Working Party Report, which in turn provides: 342. The Working Party took note of the explanations and statements of China concerning its foreign trade regime, as reflected in this Report. The Working Party took note of the commitments given by China in relation to certain specific matters which are reproduced in [enumerated paragraphs . . . of this Report and noted that these commitments are incorporated in paragraph 1.2 of the Draft Protocol.
15 16
See also Annex 1 to this paper. Id., sec. 1.3. Sections 101 & 102, Public Law 106–286 [H.R. 4444], Oct. 10, 2000, [Normal Trade Relations for the People’s Republic of China], 106 P.L. 286; 114 Stat. 880; 2000 Enacted H.R. 4444; 106 Enacted H.R. 4444.
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Trade Representative (USTR) negotiating objective that the Protocol of Accession provide for an annual review of China’s implementation of its commitments.17 Domestically, the USTR is required to annually prepare and transmit to Congress a report on China’s implementations of its WTO obligations, as well as its bilateral commitments to the United States.18 In addition, the approval legislation established a Congressional-Executive Commission on the Peoples’ Republic of China that is responsible for monitoring and making recommendations with respect to China’s human rights practices.19
B. Commitments on Intellectual Property As China began its transition to a social market economy, it took steps to protect intellectual property by joining the World Intellectual Property Organization (WIPO; 1980), the Paris Convention (1985), and the Berne Convention (1992).20 It adopted laws protecting trademarks (1982), patents (1983), and copyright (through the civil code; 1986), and in the 1990s it revised its trademark (1993) and patent (1994) laws and adopted a specific law protecting copyright (1992).21 In 1993, China adopted an unfair competition law that includes trade secret protection. China has joined several WIPO procedural conventions, including the Madrid Agreement (1989) and Protocol (1995) with respect to trademarks and the Patent Cooperation Treaty (PCT; 1994). However, the quality of China’s intellectual property protection system has been a subject of dispute with the United States throughout China’s economic transition. In the early 1990s, the U.S. Trade Representative twice designated China a “priority foreign country” in its Special 301 review of intellectual propertyrelated practices.22 This twice resulted in the negotiation of bilateral agreements on the protection of intellectual property rights (IPR).23 The 1992 bilateral, inter alia, transposed several TRIPS Agreement standards on China, including those with respect to the compulsory licensing of patents. In the 1992 agreement, China 17 19 20
21
22
23
18 22 USCS § 6931 (2004). See most recently, USTR 2003 Report. 22 USCS § 6911, et seq. (2004). See Gao Lulin, China’s Intellectual Property Protection System in Progress, in China in the World Trading System(F. M. Abbott ed. 1998), at 127–37. Treaty accessions confirmed at http://www.wipo.int. Some of this legislation has since been revised. See, e.g., Patent Law of the Peoples Republic of China, as amended August 25, 2000 (http://www.cecc.gov/pages/selectLaws/ WTOimpact/index.php). For a description of the “Special 301” mechanism, see F. Abbott, T. Cottier & F. Gurry, The International Intellectual Property System (1999), at 1576 et seq. now the (hereinafter “Abbott, Cottier and Gurry”). See 1992 Memorandum of Understanding Between the Government of the Peoples Republic of China and the Government of the United States of America on the Protection of Intellectual Property (1992), 34 I.L.M. 676 (1995) and China-United States: Agreement Regarding Intellectual Property Rights (1995), 34 I.L.M. 881 (1995), excerpts reprinted in Abbott, Cottier and Gurry, at 1592 et seq.
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agreed to extend patent protection to pharmaceutical products that were previously patented in the United States, notwithstanding that China’s patent law had not previously permitted such pharmaceutical inventions to be patented (1992 Bilateral, Article 2). The 1995 agreement included a detailed “Action Plan for Effective Protection and Enforcement of Intellectual Property Rights,” which specified the steps that China would take to increase the enforcement of its IP laws at various levels of government, including through the application of criminal penalties. It also provided for cooperation and technical training among U.S. and Chinese agencies responsible for granting and enforcement of IPR. By entering into bilateral agreements with the United States, China avoided the application of trade sanctions that otherwise should have followed from its designation as a priority foreign country.24 The USTR has a statutory obligation to review the intellectual propertyrelated practices of foreign countries on an annual basis, and since 1995 it has continued to report to Congress on China’s IPRs activities. China has not been redesignated a Special 301 “priority” country, which automatically triggers a Section 301 investigation by USTR, but it has consistently appeared on the USTR’s “watch lists.” China’s intellectual property laws and enforcement were among the issues considered during its accession negotiations with WTO Members. In its Accession Protocol, China agreed as follows: VI trade-related intellectual property regime (to be notified to the Council for Trade-Related Aspects of Intellectual Property Rights) (a)
(b)
amendments to Copyright, Trademark and Patent Law, as well as relevant implementing rules covering different areas of the TRIPS Agreement bringing all such measures into full compliance with and full application of the TRIPS Agreement and the protection of undisclosed information enhanced IPR enforcement efforts through the application of more effective administrative sanctions as described in the Report
China’s commitments in the Working Party Report are substantially more detailed, comprising 18 pages. In the Working Party Report, China commits itself to bringing all of its intellectual property laws into compliance with its TRIPS Agreement obligations and to provide effective enforcement of those laws. In some circumstances, such as rules regarding the protection of pharmaceutical and agricultural 24
Under the terms of U.S. Section 301 (which is invoked upon designation as a priority foreign country), the President maintains the discretion not to impose sanctions if, for example, this would be against the national interest. As Robert Hudec pointed out, the “mandatory” nature of Section 301 sanctions is generally not a legal absolute. See Robert E. Hudec, Thinking about the New Section 301: Beyond Good and Evil, in Aggressive Unilateralism: America’s 301 Trade Policy and the World Trading System 113, 122 (eds. J. Bhagwati and H. Patrick 1990) (hereinafter “Hudec on 301”).
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regulatory data, China commits itself beyond what is strictly required by the TRIPS Agreement (accepting so-called TRIPS-plus) standards. In fulfilling its annual reporting obligations to Congress,25 the USTR has consistently criticized China’s treatment of U.S. intellectual property interests in strong terms. The 2004 USTR Report to Congress stated the following: Overall, China’s efforts to bring its framework of laws, regulations and implementing rules into compliance with the TRIPS Agreement have been largely satisfactory, although some improvements still need to be made. Enforcement of these measures, however, remained ineffective in 2004. Indeed, some U.S. rights holders reported that IPR infringement worsened in 2004, and the United States used high-level meetings to strongly urge China to take immediate and substantial steps to put it on the path toward compliance with its critical TRIPS Agreement obligation to make available effective enforcement mechanisms.26
The conclusions expressed in the 2005 Congressional-Executive Commission on China Report are similar: The Chinese government tolerates intellectual property infringement rates that are among the highest in the world, and has not introduced criminal penalties sufficient to deter intellectual property infringement. Steps taken by Chinese agencies in the past 12 months to improve the protection of foreign intellectual property have not produced any significant decrease in infringement activity.27
U.S. IPRs-dependent industries allege IPRs enforcement failures on a dramatic scale.28 The International Intellectual Property Alliance (IIPA) alleges 25 26
See text at notes [], supra. USTR, 2004 Report to Congress on China’s WTO Compliance, available at http://www. ustr.gov. The harshest language in the USTR 2003 Report also is reserved for China’s treatment of IPRs. Although acknowledging that China has made considerable progress in the reform of its legal rules, USTR faults China for enforcement failures, stating inter alia: In 2003, IPR infringement in China continued to affect products, brands and technologies from a wide range of industries, including films, music, publishing, software, pharmaceuticals, chemicals, information technology, consumer goods, electrical equipment, automotive parts and industrial products, among many others. This situation not only has had an enormous economic impact, but also presents a direct challenge to China’s ability to regulate many products that have health and safety implications for China’s population and, as an increasing amount of counterfeit and pirated products are being exported from China, for others around the world.
27 28
USTR, 2003 Report to Congress on China’s WTO Compliance, available at http://www. ustr.gov, at 51. Congressional-Executive Commission on China, Annual Report 2005, at 6. See. e.g., presentations by C. K. Chow, Eric Smith, and James M. Zimmerman at CongressionalExecutive Commission on China, Roundtable on “Intellectual Property Protection as Economic Policy: Will China Ever Enforce its IP Laws?”, May 16, 2005, available at http://www.cecc.gov/pages/roundtables/051605/index.php?PHPSESSID= 4646c4dfd4ea4de24988b5b9d47a3d02.
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$2.5 billion in losses to copyright-dependent industries alone in 2004.29 Trademark counterfeiting is alleged to be rampant, with entire Chinese cities given over to the manufacturing and distributing of counterfeit trademark goods. Commentators have suggested that the problem of trademark counterfeiting is glaring to the naked eye.30 U.S. PhRMA has reported that 10 to 15 percent of potential annual revenues in China are lost to “counterfeit” pharmaceuticals.31 (As a caveat, at the outset of the GATT Uruguay Round, claims of financial loss by U.S. IPRs-dependent industry were less than objective.32 Having established a poor precedent, it should not be surprising if outsiders are hesitant to accept industry claims at face value.33 ) It is important to note that U.S. IPRs-dependent industries and the USTR express “on the whole” satisfaction with new intellectual property laws adopted by China. Moreover, these sources recognize that the frequency of civil infringement proceedings is increasing, particularly between domestic Chinese enterprises. The principal allegation is that China is not pursuing administrative penalties and criminal sanctions in the fields of trademark counterfeiting and copyright piracy that are sufficient to deter such conduct. In the few cases that have been pursued, the level of fines imposed is claimed to be trivial and unlikely to be viewed as any more than a routine cost of doing business to the counterfeiter or pirate.34 A recent judicial interpretation by the Supreme Peoples Court in Handling Criminal Cases of Infringing Intellectual Property is argued to be insufficiently aggressive.35 In February 2005, U.S. industry groups requested the USTR to initiate a WTO dispute settlement action against China based on its inadequate enforcement
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33
34
See presentation by Smith, id. See, presentation by Chow, supra. He noted, “[a] recent study by the PRC State Council Research and Development Center reported that in 2001 the PRC economy was flooded with between $19–$24 billion worth of counterfeit goods.” PhRMA 2004 Special 301 Submission to USTR, at 22. See discussion of ITC 1986 Report in Frederick M. Abbott, Protecting First World Assets in the Third World: Intellectual Property Negotiations in the GATT Multilateral Framework, 22 Vand. J. of Transnat’l L. 689, 699–702 of (1989). U.S. IPRs-dependent industries almost certainly are suffering significant “opportunity” losses as a result of Chinese trademark counterfeiting and piracy. USTR’s out-of-cycle review concludes as follows: Article 61 of the TRIPS Agreement requires a criminal IPR enforcement system with deterrent effect. Presently, however, criminal enforcement in China has not demonstrated any deterrent effect on infringers. China’s authorities have pursued criminal prosecutions in a relatively small number of cases, notwithstanding China’s commitment to the United States to impose more criminal penalties on the range of counterfeiting and piracy activities. While the number of criminal trademark prosecutions appears to be increasing, we have reports of very few, if any, criminal copyright prosecutions. When criminal prosecutions are pursued, a lack of transparency makes it difficult to ascertain whether they resulted in convictions and, if so, what penalties were imposed.
35
Interpretation by the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues of Concrete Application of Laws in Handling Criminal Cases of Infringing Intellectual Property, Dec. 21, 2004 (Adopted at the 1331st Session of the Judicial Committee of the Supreme People’s Court on November 2, 2004 and the 28th Session of the Tenth Procuratorial Committee of the Supreme People’s Procuratorate on November 11, 2004 and to be effective as of December 22, 2004).
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of intellectual property rights.36 The USTR declined, largely on grounds that the industry groups had not presented the kind of specific information that would be required to successfully pursue a WTO complaint. This was a significant decision reflecting a core problem the U.S. faces as it attempts to move forward at the WTO. In April 2005, the USTR announced the results of a so-called Special 301 out-of- cycle-review of China’s IPRs practices.37 In addition to elevating China to “Priority Watch” country status (which is significantly less serious than designating China a priority foreign country), the USTR indicated that it would invoke the provisions of Article 63 of the TRIPS Agreement that authorize a Member to formally request information from another Member regarding certain intellectual property-related matters. Article 63 provides in relevant part: 1. Laws and regulations, and final judicial decisions and administrative rulings of general application, made effective by a Member pertaining to the subject matter of this Agreement (the availability, scope, acquisition, enforcement and prevention of the abuse of intellectual property rights) shall be published, or where such publication is not practicable made publicly available, in a national language, in such a manner as to enable governments and right holders to become acquainted with them. Agreements concerning the subject matter of this Agreement which are in force between the government or a governmental agency of a Member and the government or a governmental agency of another Member shall also be published. . . . 3. Each Member shall be prepared to supply, in response to a written request from another Member, information of the sort referred to in paragraph 1. A Member, having reason to believe that a specific judicial decision or administrative ruling or bilateral agreement in the area of intellectual property rights affects its rights under this Agreement, may also request in writing to be given access to or be informed in sufficient detail of such specific judicial decisions or administrative rulings or bilateral agreements.
On October 25, 2005, in connection with a meeting of the TRIPS Council, the U.S. Ambassador to the WTO, Peter Allgeir, transmitted a detailed request to the Chinese Ambassador to the WTO, Sun Zhenyu, regarding China’s IPRs enforcement-related activities.38 China was requested to respond on or before January 23, 2006. Japan and Switzerland made similar requests.39 China’s delegate questioned at the TRIPS Council meeting whether Article 63.3 of the TRIPS Agreement provides the basis for the broad request made by the United States.40 On December 22, 2006, the Chinese Ambassador sent a request for 36
37 38 39
40
Bruce Zagaris, U.S. Business Associations Press U.S. Government to Act on PRC IPR Violations, 21 Int’l Enforcement L. Reptr., April 2005. Available at http://www.ustr.gov. Reprinted at http://insidetrade.com. IP-Watch: US, Switzerland, Japan Launch New WTO Probe on China’s IP Enforcement, October 30, 2005, http://www.ip-watch.org. It is reported that the Chinese delegate indicated that requests should be limited to specific cases affecting the Member making the request (id.). At the TRIPS Council meeting, the
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clarification of the legal basis of the request to the U.S. Ambassador. As of February 2006, China had declined to formally respond to the U.S. request for information at the WTO.41 On February 15, 2006, USTR Robert Portman reiterated U.S. concerns with China’s inadequate implementation of its IPRs-related commitments and referred to action taken under Article 63 of the TRIPS Agreement at the WTO.42
II. WTO Dispute Settlement A. Legal Rules Article 41.1 of the TRIPS Agreement provides as follows: Members shall ensure that enforcement procedures as specified in this Part are available under their law so as to permit effective action against any act of infringement of intellectual property rights covered by this Agreement, including expeditious remedies to prevent infringements and remedies which constitute a deterrent to further infringements.
Governments are obligated to provide fair and equitable procedures pursuant to which IPRs-holders may obtain redress.43 The preamble to the TRIPS Agreement indicates that the rights granted to holders under the TRIPS Agreement are “private rights.” This statement clarifies that right holders, not governments, are expected to enforce IPRs.44 Notwithstanding the general concept of private right holder responsibility, governments are obligated to establish and enforce criminal penalties, at least in the case of willful trademark counterfeiting and copyright piracy on a commercial scale. Article 61 of the TRIPS Agreement provides as follows: Members shall provide for criminal procedures and penalties to be applied at least in cases of wilful trademark counterfeiting or copyright piracy on a commercial scale. Remedies available shall include imprisonment and/or monetary fines sufficient to provide a deterrent, consistently with the level of
41
42
43 44
delegate of Switzerland sought to clarify that, contrary to the diplomatic portrayal by the United States, the Swiss request under Article 63.3 was a routine part of the TRIPS Council review of Member legislation (id.). See Letter from U.S. Amb. Peter Allgeier to China Amb. Sun Zhenyu, dated January 20, 2006, inter alia, responding to Ambassador Sun’s letter of December 22, 2005. Greg Hitt & Murray Hiebert, U.S. Trade Chief Pledges to Get Tougher on China, Wall St. J. online ed., Feb. 15, 2006, referring to press conference associated with release by USTR of U.S. – China Trade Relations: Entering a New Phase of Greater Accountability and Enforcement, Top-to-Bottom Review, Feb. 2006, available at http://www.ustr.gov. See, e.g., article 41.2, TRIPS Agreement. See e.g., Frederick M. Abbott, Technology and State Enterprise at the WTO, in 1 World Trade Forum: State Trading in the Twenty-First Century 121 (Thomas Cottier and Petros Mavroidis eds.1998). Governments are often the holders of IPRs, and the reference to “private rights” was not intended to foreclose its practice.
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penalties applied for crimes of a corresponding gravity. In appropriate cases, remedies available shall also include the seizure, forfeiture and destruction of the infringing goods and of any materials and implements the predominant use of which has been in the commission of the offence. Members may provide for criminal procedures and penalties to be applied in other cases of infringement of intellectual property rights, in particular where they are committed wilfully and on a commercial scale.
B. Application of the Legal Rules In essence, U.S. industry groups have presented to the USTR their prima facie case that China is failing to provide procedures for effective enforcement of IPR, including that China is failing to apply criminal penalties adequate to serve as a deterrent.45 The USTR has asked China to rebut to that prima facie case under Article 63 as a predicate to commencing a dispute settlement proceeding. From a tactical standpoint, this action appears to be a sound U.S. opening move to dispute settlement because it will bolster U.S. claims that it has attempted to resolve its concerns in good faith. However, the U.S. request for information raises an important evidentiary question. A claim by U.S. IPRs-dependent industry groups that China is failing to provide them with effective means to pursue infringement claims appears to presuppose that specific enterprises sought to bring such claims and were unable to do so effectively. If this is the case, it is not clear why the United States is seeking information about civil enforcement actions from the Chinese government. If U.S. enterprises have not, in fact, sought to exercise their rights under Chinese national law, it is difficult to understand how they can be in a position to complain about a lack of effective mechanisms. It is unlikely that the United States could proceed successfully with an argument that its industries did not pursue claims because they had concluded such claims would be unsuccessful based on a general impression. In this regard it is important to recall that U.S. industry has expressed on the whole satisfaction with the substance of Chinese IPRs rules; it is the implementation about which they complain. If U.S. enterprises cannot, in fact, point to specific cases in which they have been unable to exercise their legal rights, the United States will find it difficult to establish a prima facie case under Article 41 before a panel. If the USTR is able to present evidence regarding specific incidents in which claims by U.S. right holders were treated improperly by Chinese administrative authorities or courts, this would presumably establish a prima facie case and force China to present concrete rebuttal evidence. A conclusory statement from China is not likely to 45
In the India-Mailbox case, the Appellate Body articulated burden of proof standards under the TRIPS Agreement that are consistent with those applied in other subject matter areas. India– Patent Protection for Pharmaceutical and Agricultural Chemical Products, Report of the Appellate Body, AB-1997-5, WT/DS50/AB/R, 19 Dec. 1997.
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satisfy a panel or the Appellate Body. Such evidence presented by China could involve explanation of the circumstances in the specific cases referred to by the United States that would seek to defend the actions by its courts or administrative bodies. Alternatively, China could seek to portray individual cases as aberrational and therefore not reflective of systemic problems. There is no direct precedent to which a panel or the Appellate Body may refer regarding claims and counter-claims under Article 41 of the TRIPS Agreement. I have previously suggested that, as a matter of textual interpretation and the object and purpose of the TRIPS Agreement, a claim for failure to effectively enforce the Agreement should be based on a systemic failure by the complained-against Member or an identifiable “measure” that fails to be in conformity with TRIPS Agreement standards.46 The Dispute Settlement Body of the WTO is not intended to serve as a court of appeals in individual IPR-enforcement cases. So far, the U.S. approach to China does not appear to depart from this basic thesis about the intent of the TRIPS Agreement enforcement rules.47 The TRIPS Agreement broke new ground when it established a requirement for effective enforcement of intellectual property norms. There are no comparable requirements in the WIPO Conventions. Thus, a panel and the Appellate Body would need to establish new standards under which to assess a claim for failure to permit the effective enforcement of IPR. What quantum of enforcement failures would constitute a systemic failure? How would individual claims of judicial or administrative failure be assessed? Would a panel assess the decisions of judges in particular cases to determine whether the law was applied correctly? What would be the standard of review? Other trade agreements require countries to properly apply their own laws. For example, the NAFTA requires its parties to properly administer their antidumping and countervailing duty laws,48 and there have been a significant number of Chapter 19 panel decisions making assessments under those standards. But, the NAFTA Chapter 19 rules do not ask a systemic question. Each case is evaluated on its individual merits. The NAFTA Supplemental Agreements on Environment and Labor each require the parties to effectively enforce their respective laws in these subject matter areas and provide mechanisms for evaluating claims of non-compliance.49 The mechanisms for evaluation are different from 46
47
48
49
See Frederick M. Abbott, WTO Dispute Settlement and the Agreement on Trade-Related Aspects of Intellectual Property Rights, in International Trade Law and the GATT/WTO Dispute Settlement System 415 (Ernst-Ulrich Petersmann ed., 1997) (Studies in Transnational Economic Law, Kluwer Law International). Accord, UNCTAD-ICTSD Resource Book on TRIPS and Development (2005), at 580–81. Recall that USTR Zoellick advised U.S. industry groups that he would not pursue a claim against China for enforcement failure absent more concrete evidence of failure of Chinese enforcement authorities. See Frederick M. Abbott, Law and Policy of Regional Integration: The NAFTA and Western Hemispheric Integration in the World Trade Organization System, ch. 6 (1995). Id.
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traditional state-to-state dispute settlement mechanisms, as in the WTO. In the environmental sector, private parties are entitled to initiate claims before the Secretariat of the NAAEC Commission for Environmental Cooperation, which may ultimately result in the preparation and publication of a factual record. There is an alternative state-to-state dispute settlement mechanism for allegations of failure of effective enforcement of environmental law. This mechanism has never been used and raises questions similar to those raised under Article 41 of the TRIPS Agreement.50 It is doubtful whether a panel or the Appellate Body will refer to agreements outside the WTO to establish standards on effective enforcement under the TRIPS Agreement because there is no comparable context. The WTO dispute settlement system would be in uncharted jurisprudential territory. It seems unlikely that a dispute settlement claim by the United States against China will be grounded in Article 41 of the TRIPS Agreement because the United States appears to lack evidence of specific instances of defects in Chinese civil court or administrative proceedings involving U.S. complainants. It seems more likely that the United States will emphasize China’s obligation under Article 61 to “provide for criminal procedures and penalties to be applied at least in cases of wilful trademark counterfeiting or copyright piracy on a commercial scale. Remedies available shall include imprisonment and/or monetary fines sufficient to provide a deterrent, consistently with the level of penalties applied for crimes of a corresponding gravity.”51 This claim also raises jurisprudential questions. China is acknowledged to have criminal procedures and penalties that can be applied in cases of trademark counterfeiting and copyright piracy. Quite recently, the major U.S. copyright holder trade association made a point of highlighting several significant criminal enforcement actions by Chinese authorities.52 The principal complaints are that, from the standpoint of rules, penalties are not strict enough to deter misconduct and, from a standpoint of enforcement, Chinese authorities turn a blind eye to counterfeiting and piracy activities. In the absence of internationally agreed standards of criminal penalties, it may be difficult for the United States to make a case that Chinese penalties as a matter of law are insufficiently severe. It may, on the other hand, be possible for the United States to show that in a significant quantum of cases the actual penalties applied were so minor as to be obviously ineffective as a deterrent. It is of some interest that criminal actions against IPR violators represent a very small part of the overall IPRs enforcement scheme in the OECD countries, including the United States. In the United States in 2002, 405 IP-related cases 50
51 52
See Frederick M. Abbott, From Theory to Practice: The Second Phase of the NAFTA Environmental Regime, in Enforcing Environmental Standards: Economic Mechanisms as Viable Means? 451 (Rudiger Wolfrum ed., 1996) (Springer-Verlag). ¨ See note 11, supra, for full text of Article 61. See letter of February 13, 2006, from Eric Smith, International Intellectual Property Alliance, to Victoria Espinel, Acting Dep’t Assist. USTR for Intellectual Property, at p. 12–14.
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were referred to U.S. federal attorneys.53 In the same year, 134 defendants were sentenced for criminal IP offences. Less than half of those convicted received prison time, with the average term of imprisonment being 15 months. On the other hand, in 2002, plaintiffs in civil IPRs infringement cases filed 8,254 complaints in federal court. (Of some interest “less than 2 percent of the 7445 civil IP disputes disposed in 2002 were resolved by a trial verdict.”)54 Statistics from the United States with respect to criminal enforcement do not from a “numerical” standpoint suggest that a large number of actions are required to evidence compliance with WTO obligations. Given the maturity of the U.S. legal system it might not be surprising if China’s system, at this stage, reflected a lower number of criminal enforcement actions. The heart of the U.S. case may be that trademark counterfeiting and copyright piracy are rampant in China and that Chinese authorities are failing to implement the WTO commitments in good faith when they deliberately refuse to crack down on this activity. In other words, the United States may present concrete evidence of large-scale markets in which obvious counterfeit and pirate goods are being sold within sight of Chinese police authorities. The United States may argue that only a deliberate policy of government toleration would allow such activity to continue. The character of the specific legal rule or penalty available to Chinese enforcement authorities would not be central to such an approach by the United States and might therefore avoid some of the more difficult jurisprudential issues referred to above. China might try to place its IPRs enforcement efforts in the broader context of reforming its civil and criminal legal systems and suggest that, although its IPRs enforcement record could be improved, IPRs are not a special case. Some support may come from reference to Article 41.5, TRIPS Agreement, which provides as follows: 5. It is understood that this Part does not create any obligation to put in place a judicial system for the enforcement of intellectual property rights distinct from that for the enforcement of law in general, nor does it affect the capacity of Members to enforce their law in general. Nothing in this Part creates any obligation with respect to the distribution of resources as between enforcement of intellectual property rights and the enforcement of law in general.
However, although it is sometimes suggested that the second sentence of paragraph 5 means that governments can justify a lower level of IPRs enforcement funding on the basis of comparably low enforcement funding in other areas, that interpretation may read too much into this provision. On its face, the provision 53
54
US Department of Justice, Bureau of Justice Statistics, Special Report, Intellectual Property Theft, 2002, Oct. 2004, NCJ 205800. Id., at 1.
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suggests that a Member may provide more resources to other enforcement areas than IPRs, but without relieving the Member of its obligations under Article 61. More generally, China might be able to show that there is overall weakness in its criminal enforcement infrastructure and suggest to a panel that it is making good faith efforts in the IP area (notwithstanding the evident weakness of its efforts).55 Yet given that China is well known for maintaining a large and effective internal security apparatus, a panel might be justified in wondering whether Chinese claims of lack of capacity are justified. The WTO Agreement is interpreted in accordance with the Vienna Convention on the Law of Treaties (VCLT), which imposes an obligation to perform in good faith.56 International judicial bodies typically avoid determinations that governments are acting in “bad faith,”57 and a panel or the WTO Appellate Body would likely avoid any suggestions of bad faith conduct by the Chinese government. The WTO dispute settlement system would not likely make a finding that China willfully encouraged a policy of trademark counterfeiting and copyright piracy. A panel or the Appellate Body, on the other hand, might make a straightforward determination that China had failed to take steps to adequately implement its Article 61 obligations without treading too harshly on sovereign sensitivities.
C. Remedies The Appellate Body characteristically recommends that a Member bring its measures into conformity with its WTO obligations. If it found that China was failing to implement its Article 61 obligations to provide adequate criminal sanctions against trademark counterfeiting and copyright piracy, it would presumably recommend that China remedy that failure. This recommendation could predictably lead to additional rounds of dispute settlement arbitration regarding whether China had in fact remedied the situation and, if not, what level of concessions the United States was entitled to withdraw. Such arbitrations would raise questions as difficult as those facing the panel and Appellate Body in the main dispute. How much criminal enforcement activity is required? How quickly can such a situation be remedied? Would the adequacy of the remedial measures be judged on the basis of the steps the government had taken or whether trademark counterfeiting and copyright piracy had actually been reduced? Are there reliable figures regarding the economic costs of counterfeiting and piracy? 55
56
USTR has acknowledged that civil infringement actions are on the rise. It is common knowledge that China’s domestic legal infrastructure faces considerable obstacles in its transformation to a rule-of-law based system. The VCLT provides as follows: Article 26, Pacta sunt servanda Every treaty in force is binding upon the parties to it and must be performed by them in good faith.
57
See Switzerland v. United States (The Interhandel Case), Dissenting Opinion of Sir Hirsch Lauterpacht, 1959 I.C.J. Rep. 6.
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None of this is to suggest that answers are beyond the capacity of the WTO dispute settlement system, but rather that almost any result is bound to be controversial. And this has the potential to create tensions within and for the WTO, regardless which of the main protagonists considers itself aggrieved.
III. China, TRIPS, and the Maskus Curve A. China’s Economic Interests Over the past decade, economists and lawyers have devoted considerable attention to the role of IPRs in the economic development process. Among serious economists, it is generally accepted that IPRs play different roles at different stages of economic development and that the roles may vary depending on the particular characteristics of a country.58 One of the fundamental insights involves a common pattern of transition among countries that have successfully proceeded up the economic development curve from “appropriators” to “protectors” of IP. The pattern is reflected in U.S. policy during the Industrial Revolution, Japanese policy in the 1950s and 1960s, and Korean and Taiwanese policy in the 1980s and early 1990s. During the earlier stages of the industrial development cycle, for structural and cost reasons, the national interest lies in “borrowing” and imitating foreign technology. At a certain cross-over point, there are enough local innovators seeking to protect their investments in technology that the country’s interest in protection begins to outweigh its interest in appropriation, and industrial policy shifts. Keith Maskus has empirically illustrated this phenomenon in what may now be referred to as the “Maskus curve.”59 The WTO TRIPS Agreement is an effort by the OECD countries that are preponderant owners of technology to break the Maskus curve by forcing countries to implement high levels of IP protection before it is in their national interest to do so.60 To a significant extent the TRIPS Agreement has been successful in inducing developing countries to change their IPR regimes and accept the transfer of rents to IP owners located in the OECD. China has elected to follow a “passive-aggressive” strategy with respect to TRIPS and other IPRs commitments. It accepts international obligations, but moves slowly to implement them. Its domestic industries are appropriating OECD 58
59
60
See, e.g., Keith Maskus and Jerome Reichman. The Globalization of Private Knowledge Goods and the Privatization of Global Public Goods, 7 J. Intl. Econ. L. 279, at 314–16, and Maskus, infra note 59. See Keith E. Maskus, Intellectual Property Rights in the Global Economy (2000, IIE), Chpt. 4. This is discussed in Frederick M. Abbott, Toward a New Era of Objective Assessment in the Field of TRIPS and Variable Geometry for the Preservation of Multilateralism, in 8 J. Int’l Econ. L. 77 (2005).
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technology at a rapid pace and catching up on the development curve in a remarkably short period of time. The industrial policy of appropriation is combined with the aggressive promotion of scientific education, which is creating a vital technology infrastructure. How long will it take China to reach the cross-over point at which its national interest favors the protection of technology through implementation of conventional IPR mechanisms? Although the Chinese Patent Office is already flooded with patent applications from Chinese nationals, this does not appear to be sound evidence of reaching the cross-over point because at this stage there is no meaningful mechanism to separate significant Chinese industrial innovation from “patent office lottery tickets.” Answering the question requires informed guesswork. With this caveat, it would seem that, given the pace of Chinese industrialization and investment in education and research, the cross-over may well come within a decade, so that by 2015 China will have taken its place among the innovator-IP protector countries. What does this speculation suggest? That the United States, European Union, Japan, Switzerland, and other OECD countries should expect another decade or so of a Chinese passive-aggressive IPRs strategy, after which China’s industrial policy interests will have changed. Chinese innovators will then engage in the day-today battles over rights in technology that are common among OECD innovators and will invoke the aid of their government to defend their IP interests at the WTO and elsewhere.
B. The Timeline of WTO Dispute Settlement From a WTO standpoint, this suggests that China will seek to use the various elements of WTO law and procedure that will permit it to delay reform of its IPRs criminal enforcement mechanisms. (Similarly, China will move slowly to reform its domestic IPRs civil litigation infrastructure, with or without pressure from a WTO dispute settlement decision.) What does a timeline for reform look like? The United States might initiate formal dispute settlement before the end of 2006. Including an appeal to the Appellate Body, the initial dispute settlement proceeding will last about two years.61 The presumption of a reasonable time for China to bring its measures into conformity is 15 months.62 Assuming the United States is not satisfied and that China objects to the proposed suspension of concessions, there is another 60 days for arbitration.63 This means that in 61
62 63
See Report of the Panel, United States – Sections 301–310 of the Trade Act Of 1974, WT/DS152/R, 22 Dec. 1999, e.g., at note 648. From the request for consultation, most decisions by the Dispute Settlement Body have required longer than the 18-month period that the rules of the Dispute Settlement Understanding might suggest. Article 21.3, WTO Dispute Settlement Understanding (DSU). Article 22.6, DSU.
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addition to the two-year initial dispute settlement period, there is another 1 1/2year period before the United States begins to apply sanctions. The net result is that China does not face the threat of material trade sanctions if WTO rules are followed until mid-2010, and possibly substantially later if this case is on the outer end of the dispute settlement timeline. In the meantime, it will have moved up the Maskus curve and be closer to the position at which it would otherwise consider reforming its IPRs policies in its own national interests.
C. U.S. Interests and Constraints Although U.S. IPRs-dependent industries (e.g., films and music, software and video games, and pharmaceuticals) have a strong voice in external trade policy, other U.S. export industries (e.g., agriculture and civil aircraft) and investment interests (e.g., automobiles, telecommunications, banking and insurance, and tourism) may balance that voice. The United States is not the sole source supplier to China of investment capital or exports. The European Union and Japan compete with the United States for this trade, as do other developed and developing countries. The USTR is wary of antagonizing the Chinese government because it knows that China can shift its industrial policy in favor of European, Japanese, and other interests. IPRs-dependent industries are an important part of the U.S. economy and its export sector, but they are only one part. Moreover, winning a WTO TRIPS dispute against China would entitle the United States to withdraw concessions; for example, to raise tariffs on Chinaorigin imports. The imposition of sanctions would have an inflationary effect within the United States. U.S. retailers and domestic industries that are dependent on parts and supplies from China would not favor increased import prices. Nor is it clear that the U.S. Federal Reserve Bank would favor this result. Furthermore, U.S. IPRs-dependent industries are making claims about lost opportunities. They do not suggest that they are losing money in China. The U.S. pharmaceutical industry views China as a major area of future expansion. PhRMA is not complaining so loudly as the copyright industries.
IV. Policy Implications A. Law and Its Limitations Revisited? 1. Constraints on Unilateral Measures The course of IPRs diplomacy between the United States and China appears to demonstrate the value to China of becoming a WTO Member. Under WTO rules, the United States cannot unilaterally make a determination to impose trade sanctions, even though U.S. domestic law allows the imposition of IPRs-related
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sanctions in the absence of a TRIPS violation.64 Prior to conclusion of the Uruguay Round, the United States threatened and imposed IPR-related trade sanctions on other countries, notwithstanding a commitment to general MFN treatment under the GATT.65 It is plausible to argue that the measured pace of U.S. action with respect to China regarding its failure to protect IPRs is based on increased legalization of the multilateral trading system. 2. China Is Not Paraguay66 On TRIPS and other IPRs matters, China is distinguished from other developing countries by the size and dynamism of its domestic market. This gives it enormous bargaining leverage with the United States, EU, Japan, and others. Ecuador and Thailand do not enjoy this advantage. This bargaining power is held by few other emerging market countries. India shares some of the same characteristics as China. The U.S.’s response to India’s recent patent reforms is indicative of India’s growing status as an economic power. The USTR has been less vociferous than its PhRMA constituency would like it to be about the flexibilities that India has preserved. Again, this demonstrates that economic power does make a difference in how the law is applied by WTO Members. This finding is not new or surprising. It is an affirmation that legal rules are only one of the forces at work in governance at the WTO. Relative economic power remains a key determinant of how Members behave in their reciprocal relations. 3. The WTO TRIPS Council and Dispute Settlement Mechanism The WTO TRIPS Council and the dispute settlement mechanism do not provide immediate relief for an aggrieved country party. However, these institutions can be used to restore or bring a balance into the trading system over a significant period of time. From the standpoint of a private sector constituency seeking redress of a complaint, reliance on WTO rules will require patience and a long-term view. For American politicians demanding that China protect U.S. IPRs interests, the initiation by the USTR of a complaint at the WTO would provide a way of taking action that may satisfy the interests of the general public that its political leadership is doing something to redress the trade imbalance with China. But the business community presumably appreciates that the initiation of a complaint at the WTO is likely to affect the Chinese government only at the margins. WTO law over the next decade should become more consistent with Chinese self-interest, 64
65
66
As part of the Uruguay Round Agreements Implementation Act, Section 301 was amended to permit non-mandatory IPRs-related trade sanctions notwithstanding the absence of a TRIPS Agreement violation. See, e.g., sanctions imposed on Brazil for failure to provide pharmaceutical patent protection, described in Abbott, Protecting First World Assets, supra note [], at 707–12. With apologies to William Alford.
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not because that law has materially constrained the behavior of the Chinese government, but rather because of Chinese economic development.
B. Alternative Approaches 1. Better Negotiation at the WTO China’s accession to the WTO followed an extended period of negotiations conducted at the highest levels of government in China, the United States, and the European Union. During this period, the United States negotiated two comprehensive bilateral IPRs agreements with China. China accepted extensive TRIPS commitments in its Accession Protocol. Recognizing that it is always possible to debate small points, it would be very difficult to conclude that U.S. or European negotiators might have obtained a more extensive or secure set of commitments on TRIPS in the WTO context than they did. The dissatisfaction of the United States and its IPRs-dependent industries with their capacity to force IPRs reforms in China through the WTO reflects the basic nature of the WTO legal system and not some China-specific problem. 2. Alternative The European Union and Japan have made some recent proposals to negotiate an anti-counterfeiting agreement, either within the context of the WTO or outside it. Neither China nor developing countries as a whole have been receptive to these proposals. There have also been efforts at alternative forums like the World Customs Organization to strengthen border enforcement measures relating to trademark counterfeiting and copyright piracy. Because developing countries on the whole view IPRs enforcement regimes as negative rent transfer systems, it is doubtful that a new global anticounterfeiting regime that encompasses developing countries, including China, is a viable alternative to the TRIPS Agreement and WTO. More aggressive efforts to police China’s export markets, particularly the developed countries, will presumably have an impact on the level of China’s infringing activities. This is an alternative to controlling the problem at the source; that is, within China. The success of this alternative is dependent on the cooperation of national government enforcement authorities, which presumably already exists among the United States, European Union, Japan, and other OECD countries. It will not materially affect the large and dynamic internal Chinese market nor developing country import markets, which are willing to accept low-priced counterfeits. 3. Aggressive Unilateralism A fundamental question is whether the United States, with or without cooperation from the European Union and Japan, is willing to entertain “extra-WTO” legal measures against China to force it to reform its IPRs enforcement mechanisms.
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Will the United States return to the pre-WTO behavior that eventually culminated in the successful conclusion of the TRIPS Agreement? For example, in the 1980s the United States imposed unilateral sanctions on Brazil for failure to protect pharmaceutical patents before Brazil was under any international obligation to do so, and it threatened unilateral trade sanctions against Taiwan and Thailand if they did not reform their IPRs legislation and practices.67 These threats and sanctions were among the “sticks” that combined with the “carrots” of textile quota removal and agricultural reforms to persuade developing countries that the TRIPS Agreement was an unavoidable consequence of the Uruguay Round. Robert Hudec famously described certain U.S. extra-GATT legal “unilateral measures” taken prior to and during the Uruguay Round as “justified disobedience.” He suggested that the United States was justified in threatening or applying unilateral sanctions “based on the simple judgment that there are cases where the damage to the legal system caused by inaction in the face of deadlock will exceed the damage caused by some disobedient act trying to force a correction.”68 He noted that, in the earlier GATT context, dispute settlement procedures could be blocked and that enforcement depended almost entirely on normative pressure. Negotiations on reform were not always a viable alternative. “GATT’s legal imperfections often render it incapable of dealing effectively with legal claims made by member governments.”69 Hudec ultimately posited five substantive guidelines for the use of extra-legal GATT measures. 1. The objective of the disobedient act must be to secure recognition of the legal change that is consistent with the general objectives of the Agreement. . . . 2. Disobedience undertaken in support of a claim must be preceded by a good-faith effort to achieve the desired legal change by negotiation. This is a minimum condition of necessity. 3. Disobedience must be account accompanied by an offer to continue negotiate in good faith, with a pledge to terminate the disobedient action upon satisfactory completion of such negotiations. . . . 4. The extent of the disobedience must be limited to that which is necessary to achieve the negotiated legal reform of the kind needed to solve the problem. . . . 5. Finally, governments acting out of a concern to improve GATT law must necessarily respect that law as fully as possible, even when disobeying it. Accordingly, they must except the power of the legal process to judge their disobedient behavior, and must accept the consequences imposed by law. . . . 70
Would unilateral or plurilateral sanctions against China meet Hudec’s criteria for justified disobedience? In the present situation the WTO legal system does 67 68 70
See Frederick M. Abbott, Protecting First World, supra note [], at 707–12. 69 Hudec on 301, at 127. Id., at 126. Id., at 137–38.
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provide the United States with legal rights and remedies for the injury it claims. From the U.S. standpoint, the system is clearly imperfect. The problem of inadequate protection of IPRs in China is widely recognized by many external business communities, but assembling evidence of specific failures of justice appears to pose difficulties. In some sense, the most difficult of Hudec’s guidelines for the United States to meet may be that of demonstrating what change to the WTO legal rules it would seek by imposing unilateral measures on China. Would it be a reform of the Dispute Settlement Understanding that would permit the rapid imposition of sanctions to force changes in behavior so as to limit damages? That would represent a fairly dramatic step for the WTO and would, at least in current circumstances, work much in favor of the larger economies. Would it be to negotiate more concrete enforcement rules in the TRIPS Agreement such that the level of criminal penalties that would serve as a deterrent is specified? From the standpoint of U.S. industry this change might appear useful, but how many countries would be willing to turn the function of prescribing criminal penalties over to the WTO? Hudec’s guidelines leave room for subjective judgment. The case can be made that the United States could follow these guidelines and justify extra-WTO legal measures against China for its ongoing failure to protect IPRs. However, it is an earlier observation by Hudec that should be considered carefully. Would the systemic harm to the WTO legal system from such action be greater than the harm that the United States is suffering? Though this is a very difficult question, there is a good chance that the answer to this is “yes.” That is, by revealing a willingness to circumvent the WTO legal system when its important interests are implicated, the United States would send a signal that such behavior by the powerful economic actors is acceptable. We are entering a new era of international economic relations in which the trilateral economic powers (the United States, European Union, and Japan) are being joined by the emerging economic powers of China and India and to a somewhat lesser extent by Brazil, South Africa, and Russia. Hudec recognized a world in which only the United States and the European Community could effectively engage in justified disobedience. That may no longer be true. If so, a good case can be made that the threshold for justified disobedience should be raised. As the number of countries with the power to effectively employ unilateral measures moves from two to five or six, systemic risks are likely to become more frequent if the threshold of justification is not raised. The United States appears to recognize the risk of acting unilaterally against China and seems reluctant to do that. The caution is well placed. This does not mean that political pressures will not eventually force the USTR’s hand. If the hand is forced, we may confront a destabilized WTO legal system. This would not be the first time – or the last – that the system is threatened. But the alternative of waiting until late 2010 to decide whether the WTO legal system is capable of addressing the China intellectual property problem might be a reasonable price to pay for long-term global economic stability.
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Conclusion The TRIPS Agreement represented an effort to realign the curve of economic selfinterest. The economies of countries in earlier stages of development are induced to pay out technology rents in excess of their capacity to internally generate technology. The present question from the standpoint of the United States and other OECD countries is whether it is possible to artificially hasten a decision by Chinese government authorities that the country has reached a point where protecting technology makes better sense than allowing its appropriation. It seems likely that success at the WTO will be at the margins because its legal system is not designed to force rapid changes against the perceived national interest of a major economic power. The alternative of unilateral measures risks destabilizing the WTO system. It is questionable whether this is a price the United States and other OECD countries should elect to pay for Chinese IPRs reform. The law may play a stronger role in the new WTO than it did in the old GATT, but it still has its limitations. Wise political leaders with an interest in preserving the stability of the WTO system might be cautious in placing more weight on the legal rules than they can bear. This is not to suggest that China be placed above the law. It is rather to suggest that the law be invoked in a way that is mindful of the balance that needs to be struck between what may be desirable and what may be achievable. WTO dispute settlement may provide a safety valve for pressures that are building up to take action against China. Such an action may forestall demands for unilateral measures. But the success or failure of the WTO as an institution should not be judged on the basis of whether it forces China to rapidly modify its policies. This is not something the WTO is designed for or is particularly good at. The WTO is designed to maintain a long-run balance. That is what it should be used for here.
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JUAN A. MARCHETTI
4 Developing Countries in the WTO Services Negotiations: Doing Enough?
abstract: The aim of this paper is to analyze developing countries’ participation thus far in the current round of services negotiations under the Doha Development Agenda. The chapter analyzes developing countries’ negotiating positions, as evidenced by their multilateral negotiating proposals; their initial offers; and, to the extent allowed by the incomplete and sketchy information available, their participation in bilateral market access negotiations. Several basic themes are raised: the essential role of services for economic development, the high costs imposed by trade protection, the benefits of liberalization, the need to make use of the WTO forum to enhance credibility and sustain domestic regulatory reform programs, the challenges of regulatory reform and the importance of appropriate sequencing, and the benefits arising from seeking further market access overseas in those areas in which developing countries have a comparative advantage.
Introduction The Doha Round of multilateral trade negotiations seems to have entered a decisive phase. Meeting in Hong Kong in December 2005, WTO Members agreed to conclude the negotiations by the end of 2006. In the case of services, revised offers were to be in by end-July 2006, and the final draft schedule of commitments were to be submitted by end-October 2006.1 This past year was extremely busy for all WTO Members. The task was particularly challenging for developing countries, which have been active participants in the services negotiations since the very beginning in the early days of 2000. This is as good a time as any to assess what developing countries have done so far and what they should be doing to achieve a deeper integration of their economies into the world trading system and the advancement of higher and sustainable economic growth. It is worth remembering, however, that trade liberalization 1
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See WTO Secretariat, Doha Work Programme, Hong Kong Ministerial Declaration, adopted 18 December 2005, WT/MIN(05)/DEC (December 22, 2005), available at http://www.wto. org/english/thewto e/minist e/min05 e/final text e.htm.
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and integration into the world economy are not ends in themselves, but rather are powerful means to achieve the objective of sustainable economic growth and development. Powerful as it may be, trade liberalization is a necessary but not a sufficient condition to attain economic development. Many other factors, such as geography, resource endowments, the protection of property rights in its largest sense, and the quality of the institutional and regulatory frameworks, will be determinants of success. And it should be unfair to place all the expectations of success in only one aspect of any development policy – trade – and in only one section of the trade chapter (i.e., services). Therefore, all the arguments that follow have to be considered in that light, at the risk of course of oversimplifying certain elements. Before moving forward, a couple of caveats are necessary. First, there are such large differences among developing countries – from least-developed countries (LDCs), with scarcely any modern domestic service industry, to some highincome service economies, and many countries in between – that there may be little justification for generalizations. Second, although this chapter focuses on what, in my view, developing countries should do for their own benefit in the context of this round of negotiations, it is clear that it takes two to tango, so to speak. In other words, the focus on developing countries’ policies does not absolve developed countries from their own responsibility in ensuring an open trading system by providing enhanced access for services in which developing countries currently have a comparative advantage. Therefore, the recommendations made in this paper should be seen in that light. The paper is organized as follows. The next section briefly discusses the importance of services for development and the costs of protection. Section 2 analyzes the participation of developing countries in previous services negotiations by focusing in particular on the pattern of their commitments in the Uruguay Round and extended negotiations. Section 3 describes developing countries’ negotiating positions thus far in the current round, as evidenced by their multilateral negotiating proposals; their initial offers; their participation in rulemaking negotiations; and, to the extent allowed by the incomplete and sketchy information available, their participation in bilateral market access negotiations. This section is factual. Section 4 then turns to an analysis of those negotiating positions and presents the necessary policy recommendations. The final section concludes the paper. Several basic themes emerge from that discussion: the essential role of services for economic development, the high costs imposed by trade protection, the benefits of liberalization, the need to make use of the WTO forum to enhance credibility and sustain domestic regulatory reform programs, the challenges of regulatory reform and the importance of appropriate sequencing, and the benefits of seeking further market access overseas in those areas in which developing countries have a comparative advantage.
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I. Services, Development, and the Cost of Protection Simply defined, services are a diverse group of economic activities distinct from manufacturing, mining, and agriculture. The term encompasses a broad range of industries that provide basic economic infrastructure (communications, transport, distribution, energy-related services, construction, water supply, sanitation and sewerage services, waste collection and disposal), financial infrastructure (banking, insurance, financial markets) support to business (advertising, marketing, computer services, professional services), or social infrastructure (education, health, and social services). The share of GDP and employment in services tends to rise with income, but even for the poorest countries it is now significant. In 2001, service sectors accounted for 45 percent of GDP in low-income economies, 57 percent in middleincome economies, and almost 71 percent in high-income economies. Services activities in low- and middle-income countries have been expanding faster than GDP for the last two decades, representing on average 5 to 10 percentage points more of GDP than in the early 1980s. An implication of this continuous shift toward services is that the overall growth of productivity in the economy is determined increasingly by what happens in the service sector (IMF, 1997).2 Services are essential for development and are broadly understood as improvements to human welfare. The availability of essential services, such as water supply, sanitation, power supply, transportation, education, or health, is associated with higher productivity and earnings. But services are often inaccessible, prohibitively expensive, or, even when accessible, of low quality and unsuited to the needs of consumers (World Bank, 2003a). Services sectors can be particularly important in terms of employment, because many services are labor-intensive. In principle, the development of the labor-intensive sector can help reduce poverty by generating labor-intensive growth (McCulloch, Winters, and Cirera, 2001). However, productivity gains – and therefore, growth and poverty reduction – are often hampered by an inefficient allocation of resources as a consequence of trade protection. Although Members usually approach multilateral trade negotiations with the objective of seeking “concessions” or market access opportunities in other markets, while minimizing the export opportunities that they grant in their own markets – a crude mercantilist approach to negotiations – it is worth emphasizing that trade protection results first and foremost in a cost to the country that imposes it. Liberalization of services sectors means the reduction or elimination not only of barriers that affect the services per se but also of those barriers that affect services firms, such as restrictions on entry, legally established monopolies or oligopolistic market structures, discriminatory taxation, and limits on foreign 2
See the discussion on “Causes and implications of deindustrialization” in Section III.
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investment.3 The arguments for liberalizing trade in services are similar to those for liberalizing trade in goods and are based on the improvement of resource allocation in line with social marginal costs and benefits (the traditional static gains from trade); improved access to better technologies, inputs, and intermediate services; greater domestic competition; transfer of know-how and technology through investment; and a shake-up of industry that may create a Schumpeterian environment especially conducive to growth (Dornbusch, 1992). Liberalization in the GATS context, which basically implies greater competition in the market and non-discrimination against foreign services and service suppliers, leads to a more economically rational market structure. Markets in protected economies are narrow, and lack of competition from the rest of the world, whether actual or potential, fosters oligopoly and inefficiency. Protectionism creates market power for domestic firms, whereas trade openness exposes those same firms to greater competition, thereby reducing monopoly rents, driving down margins, and reducing prices for consumers. In a competitive environment, firms are forced to innovate, to introduce new products, and to improve quality constantly; otherwise, they will be forced to exit the market. Protection in services (e.g., prohibitions of new entrants into the market or more restrictive operating conditions imposed solely on the new entrant, be it foreign or not) is, first of all, a tax on domestic consumers. Moreover, trade barriers are very often a regressive form of taxation, hurting particularly the poorest in society. The primary effect of protection is to reduce the supply of certain services and thereby force domestic demand toward more expensive, domestically produced services. Protection reduces supply and raises prices directly because of the higher costs of domestic producers. As such, protection becomes a tax on domestic consumers and leads to a redistribution of income from consumers to domestic producers. The effects of protection on prices to consumers can even be worse if the market is characterized by imperfect competition or a monopoly. Although experiences have varied considerably across countries and sectors, the introduction of competition has generally led to improvements in services performance, increases in infrastructure investment and service coverage, improvements in service quality, and prices that are aligned more closely to underlying costs. The size of such changes depends enormously on the extent to which the market is liberalized and the effectiveness of regulation. In telecommunications, competition has boosted coverage, lowered repair requests, raised call completion rates, and reduced the time needed to receive a telephone line. In railroads, market reforms have increased locomotive availability. In ports, market reforms have shortened waiting times for vessels, whereas in electricity, they have lowered energy losses, outages per customer, and rates of plant unavailability (World 3
This is so because of the broad definition of trade set forth in the General Agreement on Trade in Services (GATS), which encompasses both traditional forms of supplying services (e.g., cross-border) and the supply through commercial presence of juridical persons (mode 3) and natural persons (mode 4). See Article I GATS.
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Bank, 2004a). In banking, foreign bank entry has led to lower margins, and market reforms have strengthened prudent regulation, which has had a dynamic positive impact on the efficiency and competitiveness of local banking systems (World Bank, 2001b). Another reason why protection against foreign sources of service supply is bad for the economy is that it results in a tax on production in general. Many services – usually called “producer services” – are intermediate-demand (as opposed to final-demand) services that represent inputs into the production process of firms and other organizations across all sectors of the economy. These services include such activities as banking, finance, insurance, business services (e.g., various professional services, research, advertising, marketing, and computers), transportation, storage, and communication services.4 Increases in the price of inputs due to protection in many cases translate into a tax on the production of exportable and import-competing goods and services. Governments are often aware of the dangers of protection of tangible inputs into production processes, and that is why the so-called capital goods usually benefit from a preferential import regime, even in those countries most attached to import-substitution industrialization. But sometimes governments do not seem to realize – at least judging by their actions – to what extent protection of service inputs raises similar problems and to what extent it is costly (Hindley, 1988). Lack of storage capacity, poor stock management, unreliable transportation, expensive communications, poor product design, insufficient and costly financing, inadequate legal advice, or even outdated software products and processes are key determinants of firms’ competitiveness and can even destroy otherwise favorable prospects for meeting domestic or export demand. The price and quality of these services are therefore crucial in determining the cost of all other products in the economy and are a determining factor of a country’s chances of exploiting its comparative advantages, not only in service exporting but also in non-service exporting (e.g., mining, agriculture, textile, and other manufacturers). There may be substantial gains from liberalizing access for foreign firms to intermediate services in terms of the increase in the productivity of the final goods sector that uses these firms’ services as input (Markusen, Rutherford, and Tarr, 1999). A great part of the benefits of liberalizing access to producer services comes from the enlargement of the market motivated by the dynamics of trade 4
In general, the vast majority of researchers agree that producer services are intermediatedemand (as opposed to final-demand) services that represent inputs into the production process of firms and other organizations (as opposed to households and individuals) across all sectors of the economy. At an operational level, however, the expression “producer services” has been used with different meanings. For some authors, the concept is synonymous with “business services,” such as computer services, advertising, management consulting services, as well as various professional services, such as accounting services and legal services. For others, the concept includes business services plus finance, banking, insurance, and real estate services. For others still, the concept includes all those services plus transportation, storage, distribution, and communication services. I tend to use a broad concept of producer services.
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between upstream producer service firms and downstream user industries: better and cheaper inputs reduce cost in the downstream industry, the downstream industry expands, demand facing the upstream industry increases, the upstream firms increase output and reduce costs, and a larger market attracts new entrants in the upstream industry (Hodge and Nordas, 2000). In countries in which tariffs for manufactured goods are low and prices of services high, manufacturers may well end up facing low or even negative effective rates of protection (Hoekman and Djankov, 1997). It is extremely difficult to estimate the costs of barriers to trade in services. Nevertheless, there is substantial evidence from case studies that policies that reduce competition in services industries, particularly in those that are heavily used as intermediate products, are very costly (Box 4.1). Estimations of the level of restrictiveness in different service sectors, albeit limited by difficulties in identifying and quantifying barriers to trade in services, suggest that policies regarding important services sectors that are used as inputs in production and trade (e.g., business services, transportation, finance, telecommunications) are frequently very restrictive in developing countries (Hoekman, 2000; Warren and Findlay, 2000).5 Recent research using computable general equilibrium (CGE) techniques to assess the impact of service sector reform shows that there may be big gains in liberalizing services trade (see Hoekman, 2000, for a summary of the most important studies). Additionally, further econometric evidence, relatively strong for the financial sector and less strong but still statistically significant for the telecommunications sector, shows that openness in services influences long-run growth performance. Indeed, countries that liberalized both sectors grew at faster rates than other countries (Mattoo, Rathindran, and Subramanian, 2001). Eliminating or reducing protection for domestic services and services suppliers against foreign competition will, if implemented appropriately, advance the economic interests of the country. The predominant view now among economists is that an open trade regime is an important part of growth and development policy (Winters, 2001). Protection imposes not only direct – sectoral costs – but also wider costs in terms of lost opportunities and growth.6 The adequacy of services in general will be a determinant factor of one country’s success and another’s failure in diversifying production, expanding trade, coping with population growth, reducing poverty, and improving environmental conditions.
5
6
See Hoekman (2000) for a summary of the diverse attempts to quantify restrictions on trade in services; see also Warren and Findlay (2000) for an explanation of the difficulties encountered in trying to quantify restrictions on trade in services. See additionally, the work done by the Australian Productivity Commission on this issue (available at http://www.pc.gov.au). Pinning down the link between openness and growth is not an easy task due to innumerable measurement and statistical problems. Having said that, it is also true that, as explained by one of the most critical analysts of studies on the relationship between openness and growth, “no country has developed successfully by turning its back on international trade and long-term capital flows” (Rodrik, 2001).
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Box 4.1: How costly can protection of services be? Some examples In Bangladesh, services-contents are the largest per unit of output in industrial production. For instance, the contribution of services to ready-made garments industry production (the largest foreign-exchange earner for Bangladesh) ranges between 20 to 25 percent (Azad, 1999). In Chile, deregulation and liberalization of international maritime transport services led to a saving of some 22 to 25 percent of the freight bill on Chile’s exports to the United States (Bennathan, 1993). For a small economy confronting given world prices of traded goods, higher transport costs reduce export prices and increases prices of delivered imports. The poor export performance of subSaharan African countries has also been attributed to high transport costs, which are in turn adversely influenced by the anti-competitive cargo reservation policies adopted by most of these countries (Yeats et al., 1996). Poor infrastructure and logistics may lead to high inventories, which have adverse effects on companies’ costs and competitiveness. A recent study found that raw materials inventories in the manufacturing sector in the 1970s, 1980s, and 1990s were two to five times higher in developing countries than in the United States, despite the fact than in most developing countries real interest rates are at least twice as high. This study identified poor infrastructure, ineffective regulation, and deficiencies in market development as the main causes of higher inventories of raw materials. Cross-country estimations show that a 1 standard deviation worsening of infrastructure increases raw materials inventories by 27 percent to 47 percent (Guasch et al., 2001). Competition in telecommunications, through the provision of extended access to the Internet, may also affect international service provision. Recent estimates show, for example, that countries that have greater Internet penetration also have had higher growth in services trade in recent years. After controlling for GDP and exchange-rate movements, Freund and Weinhold (2002) found that a 10 percent increase in Internet penetration was associated with a 1.7 percent increase in the growth of U.S. imports and a 1.1 percent increase in the growth of U.S. exports from 1995 to 1999. An important sector in the context of trade reform is distribution. If there are barriers to entry into distribution, those who control this sector may be the primary beneficiaries of trade liberalization, thereby impeding the distributional effects in favor of consumers. In agriculture, para-statal marketing boards often strongly restrict competition for the products of poor farmers and restrain their incomes. For example, in Francophone African countries, because of the absence of any competition in the purchase of seed cotton from farmers, they have been paid prices for their seed cotton that tend to be far below competitive levels. In terms of lint equivalent, seed cotton prices in these countries have generally been within a range of 40 to 50 percent of the export price of cotton lint, compared to ratios averaging almost 90 percent in India and around 80 percent in Zimbabwe (Hoekman et al., 2001).
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In another example concerning distribution services, the Zambian government abolished the official purchasing monopsony. The activity then became dominated by two private firms that probably colluded to keep prices low and that abandoned purchasing altogether in remote areas. In Zimbabwe, on the other hand, three private buyers emerged after privatisation, including one owned by the farmers. Here the abolition of the government monopoly resulted in increased competition, and prices and farm incomes rose appreciably (Winters, 2000).
2. Developing Countries in Previous Multilateral Services Negotiations The Uruguay Round marked the first time in which developing countries were significantly involved in multilateral trade negotiations and also the first time in which they were called on to negotiate on services trade. However, the introduction of services into the work program of the GATT in the 1980s did not come without controversy and was originally marked by North-South confrontation, with developed nations, led by the United States, supporting the issue and developing nations – led by Brazil and India – toughly opposing it (Bhagwati, 1987). The North-South confrontation of those years is long past, for one basic reason that can be summed up in one word – flexibility – meaning the great freedom of governments to decide the level and scope of the commitments they make and therefore the speed at which liberalization of their own services markets progresses. Indeed, although WTO Members may, via their GATS commitments, allow the access of foreign services and service suppliers to their markets, they are not obliged to do so. Moreover, if they choose to make commitments, they can maintain discriminatory measures or quantitative restrictions. Although WTO Members certainly negotiate with each other on the level and form of protection, the final outcome is, at the end of the day, a unilateral choice by the Member concerned. As we see in this chapter, WTO Members, and most particularly the less developed among them, made ample use of the leeway provided by the agreement. Whether this use reflects good policymaking is an entirely different question, one to which we turn in the following sections. As might have been expected from the reluctant participation and extremely defensive position of developing countries in the services negotiations during the Uruguay Round, the initial sets of commitments arising from that process did not impose any liberalization obligation on these countries. Commitments made to allow market access were minimal, and when they were made, they did not go further than the binding of the status quo. The situation is not that different in the case of developed countries, although their sectoral coverage is much wider.7 7
The extent of the gap between existing policies and GATS commitments is unknown because of the lack of systematic information on the former. However, anecdotal evidence, supported by experts in the various fields of services supports the assertion that in general multilateral
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It must be acknowledged that, unlike previous rounds of negotiations, which essentially focused on trade liberalization within an established framework of rules, services negotiations demanded the creation of a completely new framework of disciplines. For most developing nations, this was indeed a completely new negotiating universe. A great deal of negotiating effort went therefore to the rule-making aspects of the agreement (which remained incomplete anyway),8 and attention was certainly diverted from the objective of actually liberalizing trade in services. It is no wonder then that schedules of specific commitments came to reflect that situation. Schedules of commitments do not necessarily involve liberalization, and in fact most of them appear to have been confined, in the best of cases, to binding the status quo. However, a note of caution is appropriate here. The schedules of commitments provide in general an incomplete picture of the real degree of liberalization in a market for two basic reasons: first, commitments on most sectors were made at the end of the Uruguay Round,9 and sectors may have well become more open since then; and, second, the absence of a commitment on a particular sector or mode of supply cannot be taken as indicating that access is forbidden or that foreign suppliers are discriminated against. Countries may have refrained from making commitments for different reasons, including apathy in the negotiations or tactical motivations linked to the preservation of negotiating coins for future multilateral or regional negotiations. Be that as it may, overviews of commitments are still useful because they provide an indication of countries’ past intentions and of prospects and challenges for the current round of negotiations. The commitments currently in force can be assessed by reference to four aspects: the Members involved, the sectors covered, the modes of supply bound, and the commitments’ restrictiveness. In terms of the number of sectors inscribed in schedules, the picture that emerges is clear: in general, developing countries have committed substantially less than developed countries and transition economies. Moreover, on average, the number of subsectors included by transition economies is fairly similar to the number included by developed nations. The only criterion used here is the inclusion of a subsector in a Member’s schedule.10 This approach, however, does not allow for an assessment of the quality of the
8
9
10
commitments did not go beyond the status quo. See Hoekman (1996) and Dobson and Jacquet (1998) for some examples. Disciplines are still to be developed in the following areas: domestic regulation, emergency safeguards, subsidies, and government procurement. In addition, there’s hardly any discipline on private anti-competitive practices. Formally concluded in April 1994, but schedules of services commitments were fairly well fixed by December 1993. The classification list generally used by WTO Members for scheduling commitments on market access and national treatment divides all services into 11 broadly defined service sectors, and these are further divided into some 160 subsectors. The 11 sectors are as follows: Business Services (including all professional services and computer-related services); Communication Services (divided into Postal, Courier, Telecommunication, and Audiovisual Services); Construction Services; Distribution Services (including both retail and wholesale); Education Services; Environmental Services; Financial Services (including banking,
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Table 4.1. Commitments by country group, January 2004
Countries Least-developed economies Developing & transition economies Developed countries Accessions since 1995 ∗
Average number of subsectors committed per country
Range (lowest/highest number of scheduled subsectors)
20 54 (106)∗ 108 106
1–110 1–154 (58–154)∗ 87–117 37–154
Transition economies only. Notes: Total number of subsectors: 160. Total number of Members: 146.
Source: WTO Secretariat.
relevant commitment in terms of the number of modes of supply covered or the existence and restrictiveness of limitations included (Table 4.1). An interesting feature is that acceding countries, mostly low- and middleincome countries, undertook more ambitious commitments than many participants in the Uruguay Round.11 The basic reason for that outcome may lie in the context of those negotiations, which is quite different from that of ordinary trade rounds. The terms of a country’s accession to the WTO are negotiated in quite specific detail between the country and all WTO Members,12 whereas the majority of current schedules have been negotiated in a more anonymous setting (WTO, 2001a). In other words, in spite of their interactions with other Members, participants in a trade round have a certain “independence” in making their commitments. Figures 4.1 and 4.2 reflect the sectoral pattern of commitments and, to a great extent, the scheduling preferences revealed by Members in past negotiations. We divided our analysis into three broad categories of Members: developing (including least-developed) countries, economies in transition, and developed countries.13 Figure 4.1 presents the number of commitments in the main sectors whereas Figure 4.2 shows the percentage of Members having made commitments
11
12
13
securities, and insurance); Health and Social Services; Recreational Services; Tourism and Travel-Related Services; and Transport Services. Acceding countries is the expression used in general to make reference to the WTO Members that joined the Organization after 1995. In practice, although all WTO Members give their blessing to the terms of a candidate’s accession, the general details are negotiated by the those who decide to be part of the Working Party dealing with the particular accession; while the terms of the acceding country’s schedule of commitments are negotiated with a smaller group of countries – those that expressed an interest in negotiating bilaterally with the acceding country. It is worth remembering that there is no legal definition of “developing countries.” Nevertheless, according to the taxonomy used for this analysis, of 146 WTO Members at the time of writing this paper, there are 17 transition economies, 24 developed economies (basically all OECD countries minus Mexico and the Republic of Korea), and 105 developing countries. The 25 EU Member States are counted individually. This taxonomy is, of course, without prejudice to the status of individual countries in the WTO.
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24 17 24 17
24 17
52 23 16
45
Developing & Least developed
36 22 13 24 23 17 24 2117
27 14 21 20 10
30
Transition economies
1416
27
14
30 201620
20 3 3
Developed countries
4
6 4
0
Figure 4.1. Number of WTO Members with commitments in each sector, March 2004. Source: Author’s elaboration based on the WTO database.
0
17
m
20
Tou ris
40
l Fina n c ia
63
Tele com
60
Com pute r
77
En v i r onm enta l
80
Dist ribu tion Pr o f e ssio nal ( ave p r o f essi rage fo ons) r all
100 97
e Mar itim
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Hea lth
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Tour
ism
34 23 20
29
59
Transition economies
83
26
82 67
19
94 83
29 17
82
1918 13
6
24
Developed countries
0
Figure 4.2. Number of WTO Members with commitments in each sector, March 2004 as a percentage of each category. Source: Author’s elaboration based on the WTO database.
0
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43
l
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anc Fin
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ental
100 100
on
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ationa Recre
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Heal
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within each country group (e.g., 80 percent of all developed countries, 60 percent of all transition economies, etc.). The latter percentage gives an additional indication of the scheduling preferences of Members within each group. Among the main broad service sectors that were subject to negotiation in the past, tourism has drawn by far the highest number of commitments, followed by financial and telecommunication services.14 In general, developed countries15 have made commitments in all major sectors, with the notable exceptions of courier, audiovisual, and, most important, postal services, for which no developed country has made a liberalization commitment. It is interesting to observe that a good number of developed countries (33 percent) have also found it difficult to commit to liberalization or to allow market access in the area of health and social services. There is more variation among developing countries in the sectors chosen. Almost all developing countries (92 percent of the total, including LDCs) have made commitments in tourism services, where they clearly seem to have a comparative advantage. Although a majority of developed countries have refrained from making significant commitments, the so-called transition economies have tended to follow the pattern of commitments of more developed nations, particularly in such sectors as finance, telecommunications, construction, computer, distribution, and professional services, where all of them have committed to allow access to their markets. A closer look at individual schedules from transition economies reveals that access conditions are in general quite open. Transition economies have been even more forthcoming than developed countries in such areas as health, education, courier, and postal services. What can explain this pattern of commitments from transition economies? In my view, the main reasons are to be found in the radical market reforms carried out by those countries in the early 1990s, after decades of state-trading regimes, and their perception of the benefits of commitments in terms of integration into the multilateral trading system and the attraction of increased investment. The high number of commitments in tourism services from developing countries is fairly easy to explain, given that most of these countries seem to enjoy a comparative advantage in this area, and access conditions to the main activities (e.g., hotel and restaurants) are fairly liberal worldwide.16 Other more
14
15
16
In this analysis, we depart from the traditional presentation of commitments in the broad 11 categories referred to, supra note 10, to avoid the misinterpretations arising from the highly aggregated nature of those categories. Our approach allows us to see the situation with respect to important “subsectors,” such as professional services, courier, postal, audiovisual, or computer-related services. Developed countries in this section include the 15 EU Member States (before the enlargement in 2004), the United States, Japan, Australia, New Zealand, Norway, Switzerland, Iceland, Liechtenstein, and Canada. Even promotion activities, such as investment incentives for the construction of hotels, would not be against “liberal” commitments on market access and national treatment in the GATS, provided those incentives are granted on a non-discriminatory basis.
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“sensitive” areas, such as travel agencies and guides, are more often reserved to nationals. The relatively high proportion of commitments on financial and telecommunication services by developing countries is, to a certain extent, surprising, but may also be telling in terms of the political economy of liberalization and the advantages/disadvantages of pursuing narrowly defined sectoral negotiations. Negotiators and observers often discussed in the past whether sector-specific negotiations would be able to deliver meaningful results in the absence of crosssectoral trade-offs that could benefit those countries not having a comparative advantage in the export of the sector subject to negotiation. As can be seen from the results of the negotiations on financial services and telecommunications, those assumptions proved to be wrong. It is fair to acknowledge that in terms of quality the negotiations on telecommunications appear to have been more meaningful, providing for genuinely open markets in many cases. Many factors can explain the success of these negotiations compared with contemporaneous negotiations on maritime transport and the movement of natural persons. In both telecommunications and financial services, the sectors were of key interest for developed countries, particularly the United States and the EU. In addition, in the case of telecommunications, the success of negotiations owed a great deal to the liberalization and deregulation trends in world telecommunication markets at the time. In that sense, even if the negotiations did not prompt further liberalization, they helped consolidate domestic reform programs that were already underway. In both the telecommunications and financial services negotiations the involvement of central decision makers was crucial, something that seems to be a key ingredient if international cooperation and multilateral commitments are to serve the purpose of accompanying and sustaining domestic reform processes.17 Clearly, in both sectors, final decisions were not taken just by trade negotiators, but by the sectoral policymakers, who were at the same time involved in the regulatory reform programs in their countries.18 In spite of the big achievement of both negotiations, the outcomes differ in significant respects. Telecommunication negotiations marked the first time in which WTO Members undertook additional commitments on regulatory disciplines on the basis of a common text. Indeed, by the end of the negotiations, 57 (out of 69) WTO Member governments having submitted commitments on this sector also committed to the Reference Paper in whole or with few modifications.19 Six other WTO Member governments undertook some kind of commitment on regulatory behavior. Moreover, apart from locking in reforms
17 18
19
See Hoekman and Messerlin (2000). The direct involvement of Lawrence H. Summers (US Treasury Secretary) and of John Mogg (EU Commission Director-General, Internal Market) is a clear testimony of that. As of today, 69 WTO Members have adopted the Reference Paper in whole or in part.
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already underway,20 many developing countries decided to give a sense of direction to domestic reforms by consolidating market openness at future dates, allowing for a gradual liberalization to be implemented, with a clear and fixed horizon for full liberalization.21 In contrast to that experience, commitments on financial services raised doubts as to whether good economic policy was being promoted. First, there was less emphasis on the introduction of competition through allowing new entry than on allowing (or maintaining) foreign equity participation and protecting the position of incumbents. Second, even where the immediate introduction of competition was not deemed feasible, not much advantage has been taken of the GATS to lend credibility to liberalization programs by pre-committing to future market access (Mattoo, 1999). Setting aside those two fundamental sectors, for which still many developing countries have not undertaken commitments (27 percent for financial services and 40 percent for telecommunications), it is clear that developing countries have refrained from making commitments on key infrastructure sectors (e.g., maritime transport, courier, and distribution services) and business services (e.g., computer and related services and various professional services). The extremely low number of commitments in professional services by developing countries may be an indication not only of the grip of vested interests on governments but also of the difficulties that these countries face in opening the supply of services through mode 4, which is a paradigmatic mode of supply for professionals.22 Sectors, such as basic telecommunications, banking, and insurance services, reveal a significant number of – economically highly restrictive – mode 3 limitations.23 Although it is difficult to find adequate indicators reflecting the state of liberalization across modes of supply, Figure 4.3 gives a rough idea for four country groupings: developed, developing, transition, and least-developed economies. It is evident from Figure 4.3 that, regardless of the level of development, the bindings undertaken for mode 2 are significantly more liberal than those for other modes, whereas bindings on mode 4 are the least liberal of all. At least 45 percent of the entries under market access for mode 2 are without limitations for each group of countries, whereas the share of unlimited commitments on mode 4 is close to nil. In the case of modes 1 and 2, the level of unrestricted commitments does not differ significantly between developed and developing 20
21
22
23
The use of commitments to lock in reforms was further confirmed by the unprecedented unilateral submission of commitments on telecommunication services outside the negotiations by many Members (e.g., Cyprus, Egypt, and others). Such countries include, inter alia, Argentina, Hong Kong, China, Indonesia, Korea, Singapore, and Thailand. The number of developing countries with commitments in professional services ranges from 10 (midwives and nurses) to 43 (engineers). To give a more balanced picture of the number of countries with commitments in all professional services, Chart 2 only includes the average number of developing countries in all professional services. See World Trade Organization (2001a).
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100% 80% 60% 40% 20% 0% DC
Tran Dev LDCs
DC
Mode 1
Tran Dev LDCs Mode 2
Full
DC Tran Dev LDCs Mode 3
Partial
DC
Tran Dev LDCs Mode 4
Unbound
Figure 4.3. Structure of market access commitments by mode, August 2004. Percentage of bindings calculated on the basis of a sample of thirty-seven sectors deemed representative for various service areas (update of information contained in WTO (1999b)). Note: DC (developed countries); Tran (transition economies); Dev (developing countries); LDCs (least developed countries). Source: Author’s elaboration based on the WTO database.
economies, whereas transition economies and least-developed countries have tended to undertake more open commitments. The situation is somewhat different for mode 3, in which developing countries have tended to make more restrictive commitments than the other three groups of countries. In addition, it is interesting to note that although the movement of natural persons has often been presented as a North-South issue, there is no evidence that developing countries have found it easier to make commitments under this mode than their developed partners. Cross-border supply (mode 1) and commercial presence (mode 3) are generally considered to be the economically most important modes, accounting for more than 80 percent of world trade in services (Karsenty, 2000). Figure 4.3 reveals not only more full commitments but also a far higher share of non-bindings for mode 1 than for mode 3 for each group of countries. Clearly, WTO Members have generally shown a preference for commitments on trade through commercial presence.24 As we see, the liberalization of cross-border trade may become one of the most important challenges for developing countries in this round of services negotiations. 24
However, it is fair to acknowledge that for some service activities, cross-border trade is technically unfeasible and therefore commitments would add little value (e.g., hotel, restaurant and hospital services).
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3. Developing Countries in the Current Round of Services Negotiations A major difficulty in discussing developing countries’ positions is that such countries as a group are quite heterogeneous. Developing countries differ widely in terms of their individual levels of development, their economic structures (and therefore the relative importance of different services sectors), and their economic policies (which reflect ideological, cultural, and political factors). All these factors have an impact on their negotiating positions. Accordingly, the participation of developing countries in this round of services negotiations can be analyzed by reference to the following elements: their general approach to the negotiations, their negotiating proposals, their initial offers, and their participation in other areas of the services work program (negotiations on safeguards, subsidies, government procurement, and domestic regulation). Although there is no denying their active participation, generally speaking developing countries have approached these negotiations cautiously and defensively. They have submitted negotiating proposals and bilateral requests, have coordinated positions with each other, and have participated in multilateral discussions, but that “activism” is not necessarily synonymous with a vigorous stance in favor of liberalization that would manifest not only in the quest for further market access abroad but also in the commitment to guarantee the liberalization of their own domestic markets. That attitude became apparent during the negotiations for the establishment of the negotiating modalities and procedures, when they supported – and managed to obtain- the reaffirmation of the following principles25 : (i) flexibility for developing countries to open fewer sectors and transactions, (ii) non-exclusion of any sector or mode of supply from the negotiating table (code name for the non-exclusion of negotiations on mode 4), (iii) emphasis on bilateral – request/offer – negotiations, (iv) no explicit inclusion of formula approaches, (v) no creation of sectoral negotiating groups, and (vi) a link between the market access negotiations and the rule-making work.26 The negotiations for the establishment of modalities for the treatment of autonomous liberalization followed the same pattern, amplified by the technical difficulties surrounding the issue. Again, developing countries – supported this time by developed countries – opposed the establishment of a formula approach or quantitative targets that might have helped in the definition of a multilateral credit. Apart from that, the most important area of divergence between the two groups of countries concerned the likelihood of binding the measures undertaken autonomously in the past. It goes without saying that developing countries firmly 25
26
The similarity between the negotiating proposal submitted by 23 of the most prominent developing countries and the final text of the negotiating guidelines and procedures is in that regard noteworthy. Rule-making work is understood to include the negotiating mandates on safeguards, subsidies, government procurement, and domestic regulation.
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opposed any obligation to bind the autonomous liberalization measures for which they were seeking recognition/credit. Unfruitful attempts were also made, this time by LDCs, to establish a mechanism for Special and Differential (S&D) treatment under the GATS with the idea of making it possible to allocate quotas (e.g., on the movement of people) or to grant specific commitments only to specific groups of countries (i.e., the LDCs).27 It is worth noting that this proposal was met with opposition not only from developed countries but also from more advanced developing countries, which feared the loss of access opportunities in advanced economies, particularly with respect to the temporary movement of natural persons. Influenced by this state of mind, the negotiations have been conducted on the basis of the so-called request/offer approach, which is purely bilateral. There are virtually no WTO documents that could be used to trace the requests exchanged between WTO Members to date. Nor is it possible to know which developing countries are involved. A look at the various reports of the Special Session of the Council for Trade in Services28 and other sources, such as government reports or consultation papers, reveals that around 20 developing countries have submitted requests.29 In any case, since large developed countries seemed to have circulated requests to almost all other Members, there may be only a few developing countries not involved in bilateral negotiations with at least one major trading partner.30 Anecdotal evidence suggests that only the largest developing countries have submitted initial bilateral requests to some trading partners.31 Paradoxically, in the absence of formal negotiating bodies for each sector, so-called groups of friends have proliferated. These groups, which follow a sectoral/modal pattern, are convened by interested delegations, and there is one for each major sector and one for mode 4. Their composition is diverse: some of 27
28
29
30
31
This description is a statement of fact and is without prejudice to my personal views on the issue, which are discussed in the following sections. The Special Session of the Council for Trade in Services is the negotiating body in charge of overseeing the negotiations on trade in services within the Doha Development Agenda. It reports directly to the Trade Negotiations Committee. For example, Australia received requests from the following WTO Members: Argentina, Brazil, Canada, China, Chinese Taipei, Egypt, EC, Hong Kong, China, India, Japan, Korea, Malaysia, Mauritius, Mexico, Norway, Pakistan, Panama, Peru, Singapore, Switzerland, Uruguay, and the United States. The EC received requests from Argentina, Australia, Brazil, Canada, China, Chinese Taipei, Egypt, Hong Kong, China, India, Japan, Kenya, Korea, Malaysia, Mali, Mauritius, Mexico, New Zealand, Pakistan, Panama, Paraguay, Peru, Singapore, Switzerland, Uruguay, and the United States. See Australian Government (2003) and European Commission (2003). The European Union, for example, submitted requests to 109 WTO Members. However, this is not necessarily tantamount to involving these countries in bilateral negotiations. See European Commission (2003). See various reports of the meetings of the Council for Trade in Services, document series S/CSS/M and TN/S/M). The number of requests submitted by developing countries, according to their own reports to the Council, range from 15 (Thailand) to 22 (Argentina) to 56 (Panama).
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them are open-ended, whereas others are not. The nature of the discussion within each group is unknown, and it is impossible to trace what type of proposals or formulas are being discussed, if any. In the absence of information on bilateral requests, it is hard to guess the sectors and modes of supply in which developing countries have shown a special interest. One indication can be found, nevertheless, in the negotiating proposals submitted during the last five years.32 Of some 150 multilateral proposals submitted in the course of these negotiations,33 about 42 percent have been submitted by individual developing countries, groups of developing countries, or groups of WTO members including at least one developing country. Table 4.2 shows the sector focus of those proposals. Almost 40 developing country Members have expressed interest in at least one sector or mode of supply under negotiation.34 Some proposals have been submitted jointly by developing and developed countries in an unprecedented expression of common negotiating interests in services. Developing countries’ interests seem to be concentrated on the movement of natural persons (mode 4), tourism, maritime transport services, computer-related services, and construction. It is worth noting that the interest on mode 4 was expressed not only through specific proposals for this mode of supply but also through sectoral proposals with an emphasis on the movement of natural persons as the essential mode of supply (e.g., proposals on computer services and on professional services).35 The movement of natural persons seems to have been the object of bilateral requests by developing countries, as evidenced by summaries of requests published by some developed countries (e.g., Australia and the EC).36 Apart from the negotiating proposals, more information can be obtained from the initial offers. In the four years that followed the launch of the Doha Round, the submission of sectoral negotiating offers proceeded at a slow pace. Indeed, as of the end of November 2005, 69 offers had been submitted, representing 92 Member governments (less than one-third of the WTO membership).37 Not 32
33
34
35
36 37
In the absence of a clear calendar for the negotiations on services that started autonomously in January 2000 (following the negotiating mandate contained in Article XIX GATS), WTO Members started to submit negotiating proposals on different sectors, issues, or modes of supply. These are position papers by which Members made their views and interests known to each other. Most of them advocate further liberalization for the sectors or modes addressed, but some of them also express other concerns (e.g., the impact of liberalization on Small and Medium Size Enterprises). Setting aside the negotiating proposals on so-called horizontal issues (transparency, the situation of SMEs supplying services, and classification issues), and purely informal room documents. The group of “developing countries” exceeds the so-called low- and middle-income countries and includes those countries that have self-proclaimed as developing. This emphasis on mode 4 has been recently reaffirmed when Members adopted the so-called July package, to which reference was made in the introduction to this chapter. See Australian Government (2003) and the European Commission (2003). See WTO (2005a). The European Communities’ offers are counted as only one, representing 25 WTO Member states. The WTO Members that submitted an offer as of September 2005 are
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Table 4.2. Sectoral/modal interests expressed by developing countries in their multilateral negotiating proposals, as of 1 December 2005
Subject Business services Professional Legal Computer services Communication Postal/Courier Telecom Audiovisual Construction Distribution Education Energy Environmental Financial Tourism Transport Maritime Air Logistics services Mode 4 Mode 1
Proposals submitted jointly with developed countries
Number of sponsoring developing countries
3
1 1
2 3 12
1 4 1 5 4 – 2 2 4 5
1 1 1 1 – – – – 1 –
6 7 3 10 7 – 2 2 8 16
3 3 1 8 2
3 1 2 – –
18 3 9 20 4
Proposals submitted only by developing countries (*) 2
(∗ ) Proposals on individual sectors included in negotiating proposals covering a broad range of sectors and issues are considered as if they were single sectoral proposals. Source: Author’s own elaboration.
including LDC Members, some 24 offers remain outstanding. The regional distribution of offers has remained uneven. Although relatively many countries from Latin America and Asia have made contributions, Africa is still on the sidelines. There is a sense of disappointment concerning the quality of the offers, both in terms of sectoral coverage and liberalizing content. This disappointment, and the consequent need to improve the offers, was reflected in the recommendations the following: Albania, Argentina, Australia, Bahrain, Barbados, Bolivia, Brazil, Brunei Darussalam, Bulgaria, Canada, Chile, China, Chinese, Taipei, Colombia, Costa Rica, Croatia, Cuba, Czech Rep, Dominica, Dominican Republic, El Salvador, Egypt, European Communities and its member states; Fiji, Former Yugoslav Republic of Macedonia (FYROM), Gabon, Grenada, Guatemala, Guyana, Honduras, Hong Kong, China, Iceland, India, Indonesia, Israel, Jamaica, Japan, Jordan, Kenya, Korea, Liechtenstein, Macao, China, Malaysia, Mauritius, Mexico, Morocco, New Zealand, Nicaragua, Norway, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Qatar, Saint Kitts and Nevis, Saint Lucia, Saint Vincent & the Grenadines, Senegal, Singapore, Slovak Republic, Slovenia, Sri Lanka, Suriname, Switzerland, Thailand, Trinidad and Tobago, Tunisia, Turkey, United Arab Emirates, United States, and Uruguay. For the information on the WTO Members submitting offers on services, see the WTO Web site, available at http://www.wto.org/english/tratop e/serv e/s negs e.htm.
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adopted by WTO Members as part of the so-called July package.38 A recent report to the WTO Trade Negotiations Committee recognized the need to improve the offers: The quality [of initial and revised offers] remains poor. For most sector categories, a majority of the offers do not propose any improvement. If the current offers were to enter into force, the average number of sub-sectors committed by Members would increase only from 51 to 57 [out of 156 possible]. . . . There is thus no significant change to the pre-existing patterns of sectoral bindings. . . . Few, if any, new commercial opportunities would ensue for service suppliers. Most Members feel that the negotiations are not progressing as they should.39
Figure 4.4 gives an indication of the general thrust of the offers made by developing countries as of December 2005. It shows the coverage of selected sectors in current commitments and in the initial offers of all the 52 developing countries with an offer on the table. Figure 4.4 takes account of both initial and revised offers. The sectors are deemed to be representative of basic infrastructure and business services.
4. Developing Countries in the Services Negotiations: Doing Enough? 4.1. To Commit or Not to Commit? That Is the Question Protection is first of all a domestic problem. As experience shows, the basic reason why many developing countries have embraced free trade policies and abandoned import-substitution policies in the early 1990s was a clear dissatisfaction with the results delivered by decades of protectionist policies at home (Dornbusch, 1992). The dissatisfaction with protectionism and the poor performance of service activities in the past have led industrial, developing, and transition economies to undertake – in some cases – ambitious domestic reform programs. These reforms have entailed a combination of competitive restructuring, privatization, and establishment of modern regulatory mechanisms and institutions. The previous considerations serve as a preamble to argue that the first order of priority for developing countries should be to pursue vigorous domestic reform programs, which in many cases are already under way, to boost services sectors’ efficiency. This is basically a suggestion for unilateral action. Domestic policy priorities go in fact beyond multilateral negotiations, and delaying the introduction 38
39
The expression “July package” refers to a series of decisions taken by WTO Members on 1 August 2004 with a view to giving a boost to the Doha Round of multilateral negotiations after the failure of Cancun (September 2003). See Doha Work Programme, supra note 1. See WTO (2005b).
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Lega l serv ices Acc o u nting Arc h i t e c Consu Engin tural ee lta Softw ncy on co ring a r e imple mputer me n t a ti Data proc on e s sin Data g base Ad v e r t ising Mana Market res g e e m e n o arch t c nsulti ng Posta l Cour services ier se rvi V o i c e tele ces phon y Elect ronic mail Cons tructi EDI on o f Civil buildings engin Co e m m ission ering Wh agent o l e s s ale di stribu Retai l dist tion ributi S Refus ewage se on rvices e disp os Sanit al services ation Direc services t in u s ra Reins nce u Depo rance sitt a k ing Lend ing Se c Secur urities tra ding ities u n Asse derwriting t Marit ime tr manageme an nt s p o r t (frei ght)
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of necessary reforms would entail costs for the rest of the economy. Additionally, those domestic priorities should not be held hostage to external bargaining imperatives. Having said that, these two questions arise: why should countries engage in multilateral trade negotiations, and how can multilateral trade negotiations help achieve that national reform agenda? The main factor affecting the impact of trade policy reform in developing countries is its lack of credibility (i.e., the difficulty faced by policymakers in convincing business, labor, and consumers that trade reforms will be lasting and that governments will stick to them and will oppose any adverse reactions, particularly in the short term, when adjustment costs may be felt). Reform processes are frequently met with skepticism on the part of the private sector, particularly in countries with a history of policy reversals. Because the magnitude of adjustment, particularly in the labor market, is unknown when reforms start, the commitment of the leadership to the reform will often remain suspect in the eyes of the public. Formally, there is an instance of asymmetric information: the leadership may know its commitment to reform, but may be unable to communicate it and convince the private sector (Rodrik, 1992). The immediate objective of trade liberalization is to shift relative prices in order to induce investment in, and an expansion of, the exportable sector where the comparative advantage lies. The quicker the expansion of the exportable sectors the better, because resources are reallocated with minimal adjustment cost. If reform is not credible, and private sector participants suspect that the government will re-impose restrictions to protect the import-substituting industries (which, by the way, may be lobbying to reverse reforms), investments in the exportable sectors will not materialize, and the country will not reap the full benefits of reform in time. There is an additional consideration in the case of services liberalization in developing countries. The effects of reforms may not necessarily result in an immediate increase in services exports, where in some cases developing countries may not have a clear comparative advantage. Rather, the likely effect of introducing reforms, such as the elimination of monopolies or the abolition of limitations on foreign investment, is the expansion of business opportunities in those liberalized sectors, provided returns to investment are sufficiently high. Again, the country will only reap the full benefits of reform (e.g., capacity expansion, lower prices, higher product quality) provided those potential investors believe that the reform will not be reversed and that investments are worthwhile to justify eventual sunk costs. Once sunk investments have been made, bargaining power shifts from suppliers to regulators. Regulators can then decide or threaten to impose special taxes, require special investments, control procurement and employment practices, restrict the composition and movement of capital, or put a cap (or even lower) the regulated prices that utilities can charge for services, particularly when social discontent arises due to higher prices. Recognizing these risks, private companies will likely invest less than is optimal – especially in activities with large sunk costs – or demand high-risk premiums
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unless governments can credibly commit to regulatory stability (World Bank, 2004a). Therefore, the “credibility” needed relates to two dimensions: first, credibility that the investments will not be confiscated,40 and, second, credibility that the regulatory framework will be consistent, fair, and predictable. What is the possible contribution of GATS commitments to solving this credibility problem? Commitments may help increase credibility by making the exit from them costly enough to outweigh the gains from simply abrogating commitments and reversing policy.41 Yet, to take advantage of GATS negotiations in this way, a greater dose of unilateralism is required when making commitments.42 A purely bilateral request/offer approach might not bring satisfactory results along these lines, because (i) it creates a holdback problem (i.e., I minimize what I give and try to maximize what I get)43 and (ii) it has a bias toward second-best results depending on the negotiating circumstances.44 The challenge is to make the right choices in terms of policies and multilateral commitments, particularly taking into account that the GATS does not impose any hierarchy between the protective instruments – market access or national treatment limitations – which are treated equally as long as they are scheduled. In other words, the Member concerned is not forced to choose the most efficient means of protection (e.g., tariffs instead of quotas, as in the GATT context45 ), but has the freedom to decide by itself on any of them.46 40
41
42 43
44
45
46
I use the expression “confiscation” in a broad sense to refer not only to outright expropriations of property but also to the imposition of a greater regulatory or fiscal burden once important investments have been committed. In other words, sudden changes in the rules of the game for businesses may amount to confiscation in this sense. Specific commitments to grant full market access and national treatment would make costly any attempt to (re)introduce monopolies, to limit the number of companies in the market, to introduce limitations to foreign investment in the sector, or to impose taxation or regulation that discriminates against foreign suppliers. There are other instances of “confiscation” that belong to the realm of domestic regulatory measures. See the examples in Box 2.5 of World Bank (2004a). Hoekman and Meserlin (2000). For a discussion of the difficulties in applying strict reciprocity in the services negotiations, see Marchetti and Mavroidis (2004). For example, the “demandeur” comes to the negotiating table with a first-best objective – to obtain full liberalization. However, if this turns out to be impossible, the “demandeur” will turn to plan “B,” a second-best result – to protect the acquired rights of the companies already in the market. This may well explain the dynamics that led to second-best compromises, such as the scheduling of grandfathering stipulations that protect the incumbents but fail to introduce competition in the market. See Mattoo (2003) for a discussion on efficient means of protection in the GATT and the GATS. As explained by Sykes (2000), The various market access limitations are unlikely to be equivalent in their welfare consequences. Presently, however, GATS treats all market access limitations equally as long as they are scheduled. Just as GATT seems to encourage efficient protection in goods markets, so too could GATS undertake to do more to channel market access restrictions into particular instruments based on an assessment of which tend to do the least damage . . . as in the case of the market access restrictions, measures that deny national treatment can have radically different welfare consequences. As with the market access restrictions discussed above, GATS could do more to channel the denial of national treatment for protective purposes into less destructive avenues.
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Table 4.3. Average annual growth of exports of different products, in percentages 1980–90 Agricultural products Mining products Manufactures Memo item: All merchandise Transport Travel Other Commercial services Memo item: All services
1995–2000
1990–2002
3.59
1985–90 9.42
1990–2000 3.17
1990–95 7.38
–1.04
3.10
–0.65 8.46 5.68
3.92 15.24 12.09
7.26 7.13 6.64
1.98 9.39 8.64
12.54 4.88 4.65
5.27 5.99 5.59
5.51 10.33 9.06
12.39 18.29 15.74
4.60 6.04 8.51
6.42 8.78 10.52
2.79 3.29 6.49
4.11 5.18 8.06
8.25
15.46
6.66
8.80
4.51
6.10
Source: Author’s own calculations, based on WTO International Statistics Database, on the basis of current billion dollars (data retrieved in August 2004).
It is worth recalling, however, that not all types of commitments promote good policy. A number of simple rules of thumb may be identified in that regard. First, emphasis should be given to producer and infrastructure services, whose efficiency will be important for all other economic activities. Obvious candidates are telecommunications, maritime transport, financial services, computer and related services, various professional services, distribution services, and logisticsrelated services. Second, emphasis should be given to the introduction of competition through unimpeded entry, instead of committing only to changes in ownership or to the protection of incumbents’ rights. In fact, in today’s regulatory perspective, competition can be introduced even in network utilities, which are seen as encompassing distinct activities that can be unbundled, with potentially competitive segments under separate ownership from natural monopoly components (World Bank, 2004a).47 But even where natural monopoly components remain, competition may be introduced indirectly by allowing competitive bidding for the right to provide such exclusive services. Third, explicit discrimination between domestic and foreign suppliers should be eliminated. A last word on the convenience of undertaking multilateral commitments. Even in an essentially mercantilist setting like multilateral trade negotiations, undertaking commitments can contribute to a country’s own bargaining position in the negotiations. If a country is not willing to open its own market and to guarantee certain conditions of operation, it deprives itself of the most obvious 47
For example, in electricity, transmission and distribution (less competitive) should be separated from generation (more atomistic market); in telecommunications, the local loop should be separated from long-distance, mobile, and value-added services; in natural gas, high-pressure transmission and local distribution (non-competitive) should be split from production, supply, and storage (more competitive activities); in railroads, tracks, signals, and other fixed facilities should be separated from train operations and maintenance. See World Bank (2004a). These considerations might even help negotiators figure out a more updated classification for certain service sectors under negotiation (e.g., energy services).
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Table 4.4. Share of major goods and services categories in total world exports, in percentages
Agricultural products Mining products Manufactures Transport Travel Other commercial services Memo: All services
1990
1996
2002
10.2 12.0 58.6 5.5 6.5 7.2 19.21
9.5 9.8 60.6 4.9 6.8 8.4 20.07
7.6 10.3 61.5 4.7 6.2 9.7 20.62
Source: Author’s own calculations, based on WTO International Statistics Database (data retrieved in August 2004).
means of inducing its trading partners to do the same. This would indirectly suit the protectionist interests of trading partners because it allows them to avoid liberalization in sensitive sectors.48
4.2. Seeking Enhanced Access in Foreign Markets: Where and How As explained, the principal beneficiary of trade reform is the reformer, particularly if it is a small country. Nevertheless, if other countries liberalize their markets in sectors of their own export interest, the unilateral liberalizer benefits twice because a country cannot on its own improve access for its exports to foreign markets (World Bank, 2001a). The pertinent question raised therefore is not whether to seek more access in foreign markets, but where (in what sectors or modes of supply) and how. Answering this question is the objective of this section. Services have been among the fastest-growing components of world trade over the last two decades, particularly in the 1980s. Indeed, during the period from 1980 to 1990, the average annual growth rate of services exports was over 8 percent, compared with 5.7 percent for merchandise exports.49 The performance of services trade was particularly impressive in the second half of the 1980s, with an average annual growth rate of 15.5 percent. However, thereafter the record is mixed. At the aggregate level, services and merchandise trade have evolved in a roughly similar way since 1990 (both growing at 6.6 percent per year), leaving the share of trade in services in international trade stagnant, at around one-fifth of all cross-border trade (Tables 4.3 and 4.4). Developments are more varied, however, at a disaggregated level (Table 4.3). Disaggregated data reveal that, since 1985, one services category (transport) and two merchandise product groups (agricultural and mining products) have expanded less rapidly than world trade. As a consequence, the relative importance 48
49
See the argument being used in a discussion of India’s stance in multilateral trade negotiations (Mattoo & Subramanian 2000). Measured on a balance-of-payments basis, which covers primarily trade in services under modes 1 (cross-border) and mode 2 (consumption abroad).
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Table 4.5. Share in world services exports, by income group
Low- and middle-income countries High-income countries Memo item: OECD high income
1990
1996
2002
16.0 84.0 75.3
20.0 80.0 70.2
23.5 76.5 73.6
Source: Author’s own calculations, based on WTO International Statistics Database (data retrieved in August 2004).
of transport services in world services exports declined from 5.5 percent in 1990 to 4.7 percent in 2002. In contrast, exports of travel services expanded vigorously in the 1980s, but then slowed down in the 1990s, leaving its share in international trade at around the same level. The driver behind services trade over the last two decades has undoubtedly been “other commercial services”; this sector has proven to be the most dynamic segment of world trade in the 1990s, particularly in the first half of the decade. As a result, the share of other commercial services has increased from 7.2 percent of all cross-border trade in 1990 to 9.7 percent 12 years later. Trade in other commercial services now represents 47 percent of world trade in services, up from 37 percent in 1990. Where do developing countries50 stand in world services trade? As a group, low- and middle-income countries have witnessed a more rapid increase in their service exports and a consequent increase in their share in world services trade from 16 percent in 1990 to 23.5 percent in 2002 (Table 4.5). The great dynamism shown by these economies in world services trade has translated into an increase in their participation in all segments of services exports. Their exports now account for 23 percent of world exports of transport services, 30 percent of world exports of travel services, and 20 percent of world exports of other commercial services (see Tables 4.6 to 4.9 for average annual rates of growth and relative shares in world exports). From a regional perspective, between 1990 and 2000, the exports from low- and middle-income countries in Asia, Central and Eastern Europe, and Latin America and the Caribbean grew at higher average annual rates than world services exports (Table 4.10). Although some developing countries are increasingly exporting through commercial presence abroad (Table 4.11; Nielson and Taglioni, 2004),51 the two 50
51
There is no institutional definition of developing countries in the WTO. Members identify themselves as such on the basis of a sort of self-selection. In the statistical analysis that follows, I would rather make use of geographical groups and income groups following the World Bank classification. Economies are divided according to their 2003 GDP per capita, and the groups are as follows: low income ($756 or less); middle income (between $766 and $9,385); and high income ($9,386 or more). Between 1995 and 2000, the sales of services by Latin American and Asia-Pacific countries through commercial presence in the United States grew at average annual rates of 27.9 and 6.5 percent, respectively (Table 4.10). In the case of Latin American and Western Hemisphere countries, this rate is much higher than the annual growth rate of their sales to the United States on a cross-border basis.
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Table 4.6. Transport services, average annual growth of exports, by income group
Low income Middle income High income
1990–1995
1995–2000
1990–2000
1990–2002
6.10 11.15 6.27
0.88 5.68 2.03
3.49 8.41 4.15
3.66 8.06 3.53
Source: Author’s own calculations, based on WTO International Statistics Database (data retrieved in August 2004).
Table 4.7. Travel services, average annual growth of exports, by income group
Low income Middle income High income
1990–1995
1995–2000
1990–2000
1990–2002
11.26 15.57 7.60
3.70 6.84 2.17
7.48 11.21 4.88
5.23 9.71 4.13
Source: Author’s own calculations, based on WTO International Statistics Database (data retrieved in August 2004).
Table 4.8. Other commercial services, average annual growth of exports, by income group
Low income Middle income High income
1990–1995
1995–2000
1990–2000
1990–2002
4.12 21.08 9.67
21.49 1.80 6.38
12.81 11.44 8.03
13.02 9.22 7.93
Source: Author’s own calculations, based on WTO International Statistics Database (data retrieved in August 2004).
Table 4.9. Share of different country groupings in transport, travel, and other commercial services, in percentage of total for each sector
Transport
Low- and middleincome countries High-income countries
Other commercial services
Travel
1990
1996
2002
1990
1996
2002
1990
1996
2002
17
18
23
18
25
30
13
17
20
83
82
77
82
75
70
87
83
80
Source: Author’s own calculations, based on WTO International Statistics Database (data retrieved in August 2004).
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Table 4.10. Average annual growth of services exports, by region, in percentages
Africa Asia Low- and middle-income Asia Central and Eastern Europe, the Baltic States, and the Commonwealth of Independent States Latin America and the Caribbean World
1990–1995
1995–2000
1990–2000
1990–2002
6.89 14.79 20.30 17.58
3.39 3.41 5.23 2.61
5.14 9.10 12.76 10.09
4.59 8.16 12.30 10.03
8.30 8.80
6.48 4.51
7.39 6.66
5.61 6.10
Source: Author’s own calculations, based on WTO International Statistics Database (data retrieved in August 2004).
key modes in which many of them may have a comparative advantage are the presence of natural persons (mode 4) and cross-border supply (mode 1).
4.3. The Mode 4 Agenda The temporary movement of natural persons (mode 4) remains a crucial means of delivery for developing countries, which have always been perceived as having a comparative advantage in labor-intensive services. Greater freedom for the temporary movement of service providers, still highly restricted in GATS commitments, would enable developing countries to supply the labor component of various service activities, such as construction, distribution, transport, and others. In spite of the benefits for the host and home countries, which have been thoroughly discussed elsewhere and are not elaborated here,52 the liberalization of the movement of service providers has so far been extremely limited. Both developed and developed countries have been reluctant to make significant commitments in this area. Commitments made so far privilege highly skilled personnel and especially providers associated with the establishment of foreign companies. These intra-corporate transferees (ICTs) are the group targeted by about 43 percent of all current horizontal commitments. Another 26.6 percent of commitments relate to executives, managers, and specialists (not specifically related to intra-corporate transferees); 13 percent to business visitors in charge of setting up a commercial presence; and 10 percent to other business visitors. Independent professionals account for only 1 percent of all commitments on mode 4 (Figure 4.5). In spite of their alleged interest, it took developing countries some time to articulate a collective position on this issue. Only in 2003 did important 52
See OECD (2001), Mattoo and Carzaniga (2004), and World Bank (2004b). The most-quoted estimate comes from Alan Winters, who suggests that a relaxation of the quotas on inflows of workers into developed countries, by 3 percent of their labor forces, would generate global gains of over $150 billion a year. See Winters’ paper in Mattoo and Carzaniga (2004).
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Table 4.11. Average annual growth rates of exports to the United States, between 1995 and 2000, in percentages
Latin America and Western Hemisphere Developing Asia
Private services imports (i.e., cross-border imports)
Sales by MOUSAs to U.S. persons
10.05
27.90
10.71
6.54
Source: Author’s own calculations, based on “U.S. International Services: Cross-Border Trade in 2002 and Sales through Affiliates in 2001,” October 2003, Bureau of Economic Analysis.
developing countries manage to make a joint proposal on this issue.53 The approach advocated by developing countries includes the following:54
r Use of common categories of persons, both linked and de-linked from commercial presence in the horizontal section of Members’ schedules. Such categories are (a) Intra-corporate Transferees; (b) Business Visitors; (c) Contractual Services Suppliers; and (d) Independent Professionals. r Further sector-specific commitments to allow for deeper liberalization, particularly at (lower) skill levels not covered in broad horizontal commitments. r Establishment of a separate visa or separate subset of procedures for temporary movement. r Additional commitments under Article XVIII GATS regarding transparency and procedural aspects affecting temporary entry and stay. These additional commitments could cover procedures for verifying a foreign service provider’s competence to provide the service. The idea would be to introduce a hierarchy of measures with the burden of proof being placed on the 53
A much elaborated proposal had been previously submitted by India in November 2000. That proposal called for the following: (a) de-linking commitments with mode 3 by including a category of “Individual Professionals” among the categories covered by horizontal commitments; (b) uniform definitions and coverage of personnel categories included in the horizontal commitments; (c) further expansion in the scope of categories covered by horizontal entries by expanding the coverage of “other persons” and “specialists” to include middle- and lower-level professionals; (d) additional sectoral commitments for professional and business services where movement of professionals is important; (e) use of disaggregated categories of services providers at a sectoral level, by superimposing ILO’s International Standard Classification of Occupations (ISCO-88) on the WTO Services Sectoral Classification; the ISCO has established an internationally adopted classification of nine major occupational groups; (f ) establishment of multilateral agreed criteria on the use of Economic Needs Tests (“Reference Paper on the Use of ENTs”) and reduction of the number of occupational categories subject to such tests; (g) strengthening GATS disciplines on recognition of qualifications (GATS Article VII); (h) introduction of a special GATS visa for categories of personnel covered by horizontal and sector-specific commitments in order to separate temporary services providers (mode 4) from permanent labor flows (immigration); (i) exemption of developing country professionals from social security contributions and conclusion of bilateral totalization agreements between countries. 54 See WTO (2005c) and WTO (2003).
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43.0%
40.0% 35.0% 26.6%
30.0% 25.0% 20.0%
13.0%
15.0%
10.0%
10.0%
5.3%
5.0%
1.0%
1.0%
0.0% Intra-corporate transferees (as E,M,S)
E,M,S not specified as ICTs
Business visitor (to set up commercial presence)
Business visitor (to negotiate the sale of a service)
Independent Not specified professionals (includes employees of juridical enterprise not having CP)
Other
Figure 4.5. Structure of Horizontal Commitments on Mode 4 (2003). Source: WTO Secretariat.
domestic regulator to move from a less burdensome measure to a more burdensome one. For example, administering a test of competence and/or educational attainment to verify the foreign service provider’s competence may be considered the least burdensome measure. Only where it was necessary would a foreign service provider be required to make up objectively verifiable deficiencies in his or her education, training, and experience. r Elimination of economic needs tests applicable to the common categories identified above. r Addressing other regulatory measures, such as administrative procedures for obtaining and renewing visas or entry permits, that could constitute obstacles to the movement of natural persons. r Strengthening the framework for Recognition Agreements under Article VII of GATS through (i) compliance with notification and consultation requirements and (ii) development of possible multilateral guidelines and principles guiding the establishment of such Recognition Agreements, with a view to including them as Additional Commitments under Article XVIII GATS. Bilateral requests also seem to focus on mode 4. For example, both the European Union and Australia55 have indicated that most of the requests received 55
See Australian Government (2003) and European Commission (2002). Australia received requests from the following WTO Members: Argentina, Brazil, Canada, China, Chinese Taipei,
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address mode 4 at a horizontal level and tend not to be sector specific. The level of ambition of the requests seems to vary widely, from requests to allow completely free movement of persons providing services to rather more limited requests to improve transparency. The requests most frequently made to the EU (each made by five or more countries) are as follows:
r Apply sectoral coverage of Contractual Service Suppliers (CSS) equally to all
r
r r r r r r r
EC member states; in other words, if one Member State has made a commitment on, say, management consulting, it should be made by all Member States Extend sectoral coverage of CSS to cover sectors not currently committed (some countries have specified sectors of interest, whereas others seek a commitment for all service sectors covered by the Service Sectoral Classification List) Extend the permitted length of stay for CSS to between one and three years. Specify the length of stay for intra-corporate transferees (between three years and indefinite stay) Specify the length of stay for Business Visitors (90 days) Create a new category of ICT for training purposes Remove Labour Market Testing requirements Accept the principle that the third-country qualifications recognised by one EC Member State should be recognised throughout the EC Improve transparency of rules and procedures linked to mode 4 (e.g., in relation to work and residence permits) and faster processing times
In addition, the following requests to the EU have been made by two or more countries:
r Removal of all restrictions, allowing free movement of persons who provide r r r r r
services (two countries have requested this for all categories of service suppliers, one country for ICTs only. and one country for certain job types only) Commitments on lower skill levels Commitments on foreign employees of domestic companies (persons recruited directly from overseas) Commitments on independent professionals (self-employed persons established overseas and entering the EC to provide services on the basis of a contract) Allowing persons to provide after-sales/after-lease services without requiring a work permit Permitting multiple entries for persons covered by commitments Egypt, European Communities, Hong Kong China, India, Japan, Korea, Malaysia, Mauritius, Mexico, Norway, Pakistan, Panama, Peru, Singapore, Switzerland, United States, and Uruguay. The European Communities received initial requests from the following: Argentina, Australia, Brazil, Canada, China, Chinese Taipei, Egypt, Hong Kong China, India, Japan, Kenya, Korea, Malaysia, Mali, Mauritius, Mexico, New Zealand, Pakistan, Panama, Paraguay, Peru, Singapore, Switzerland, United States, and Uruguay.
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In spite of the emphasis placed on the liberalization of mode 4 in the last few years, which has been reflected in several papers, symposia, and other initiatives undertaken by international organizations, business groups, and academics, no significant progress had been witnessed in the negotiations as of the end of 2005. Less than half of the offers envisage improvements to horizontal commitments on mode 4. Although those offers contain improvements in certain areas (e.g., inclusion of new categories of natural persons, more appropriate definitions for each category, extension of the duration of stay, clarification of the application of economic needs test requirements, expansion of activities permitted to service suppliers, or even the inclusion of horizontal commitments by Members that did not have them in their existing schedule of commitments), the gap between these offers and the proposals and requests made by developing countries is still significant. A recent WTO report noted the following: Many participants welcomed the improvements made in some offers, which included coverage of new categories not linked to commercial presence, such as contractual service suppliers and independent professionals, the expansion in the coverage of intra corporate transferees and business visitors, the elimination of some restrictions, such as economic need tests and nationality requirements, and the extension of the periods of stay. Nevertheless, many delegations felt that the quantity and quality of Mode 4 offers fell short of expectations, in terms of the categories of natural persons subject to a commitment and issues of interest to developing countries, such as key market access and regulatory concerns.56
Expectations on this issue are high among a number of developing countries. However, whether current conditions allow a significant improvement in this area of trade remains to be seen, and expectations might eventually have to be reassessed in that context. There is a growing sense within the international community of the need to ensure a more equitable and fair outcome for these negotiations, and this area of trade is seen as essential in that regard. In addition, both developing and developed countries – as well as their respective services industries – are more aware of the benefits arising from increased temporary mobility of natural persons. Despite those factors encouraging change, the issue continues to be highly politically sensitive. First, governments find it difficult to distinguish in practice between temporary labour movements and permanent migration, and the fear that entrants through temporary arrangements may refuse to play the game informs immigration and labour policies. This problem may be behind the lack of significant support for developing a “GATS visa” or “Service Provider Visa.” Second, negotiations will have to contend with considerations related to heightened security concerns worldwide. Third, taking into account cyclical movements of labour markets, governments may be reluctant – if only for political reasons – to undertake ambitious commitments in this area. 56
See WTO (2005b).
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4.4. Reaping the Benefits of Outsourcing In addition to the undeniable interest in supply through mode 4, a number of developing countries seem to have developed a genuine interest in the expansion of commitments on cross-border trade (mode 1). Technological advances increasingly allow the spatial fragmentation of goods and services production, and offshoring to operational units abroad and even outsourcing to a foreign third-party service supplier have become common practices among multinational corporations. Developing countries are indeed becoming exporters of socalled Business Process Outsourcing (BPO) services. Low labour costs, the availability of a well-educated pool of workers, and the improvement in the quality and price of international telecommunications have allowed several developing countries to take the lead in providing BPO services. The most notable case is India, but other countries are also venturing into this area (e.g., China, Malaysia, and Philippines).57 Typical BPO services include the following functional areas:
r Administration: tax processing, claims processing, asset management, document management, transcription, and translation
r Finance: billing services, accounting transactions, tax consulting and compliance, risk management, financial reporting, financial analysis
r Human resources: benefits administration, education and training, recruiting and staffing, hiring administration
r Payroll services: records management; payment services; credit/debit card services, cheque processing, transaction processing
r Logistics and Distribution: materials management, distribution/warehouse management, logistics management, procurement
r Customer care: database marketing, customer analysis, telesales/telemarketing, inbound call centre
r Content development: engineering, design, animation, network consultancy and management, research and development For the moment, the vast majority of services outsourced to overseas developing country suppliers are the paper-based back-office ones that can be digitalized and communicated over telecommunications networks anywhere around the world. However, the more advanced developing countries are even moving away from this type of services (data entry, etc.) to more integrated and higher-end service bundles in fields like customer care, human resource management, and product development. It is to be expected that technological evolution, together with business practices, will make it possible for developing countries to profit from increased cross-border exports of even more sophisticated 57
The offshoring and outsourcing businesses remain predominantly English-speaking, but some Latin American and French-speaking African countries are also entering the business (Nielson and Taglioni, 2004).
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services (R&D, engineering services, etc.). The development potential of crossborder trade in services is not limited to more advanced developing countries. Other (relatively smaller) developing countries will also enter BPO activities in parallel with increasing wages and a move of the current service suppliers up the value chain. Unfortunately, there are already signs of incipient protectionism emerging in developed countries, which has so far translated only in initiatives to introduce barriers (e.g., an outsourcing ban in the United States with respect to government contracts). In spite of the export potential that these services offer for developing countries, only a few of them58 have focused on this issue, highlighting the limitations of the request/offer approach in this area and hinting at the possibility of developing another approach, most probably a formula. The elements of that formula have not been entirely developed, but would include a possible list of commercially meaningful sectors to allow for targeted commitments (e.g., professional services, business services, other business services, computer and related services, research and development services, tourism, part of education services); the undertaking of mode 1 commitments in sectors, such as telecommunications, transport, postal and courier, distribution, and financial services; and the binding of existing levels of liberalization, in particular by removing commercial presence requirements and discriminatory measures.59 The use of a formula in this area seems to be justified because it would be impossible to anticipate the full range of services that could be supplied on a crossborder basis both because of constant technological changes and the emergence of new products and services. Technical issues have recently been analysed, and several options have been proposed elsewhere,60 from an ambitious and sweeping liberalization of the cross-border supply for all sectors to a more modest model schedule or cluster approach grouping the sectors that are currently the object of outsourcing and increased cross-border trade (see the sectors in Figure 4.6). Sweeping liberalization of modes 1 and 2 might not be feasible at this stage. However, the development of model schedules is worth considering. The situation of commitments for some of the key sectors that might be targeted by such a formula is shown in Figure 4.6.
4.5. Domestic Regulation: Taking Care of Special Circumstances Services negotiations are also under way to complete the GATS framework of disciplines in the crucial area of domestic regulation.61 The object of this section is to analyze developing countries’ interests and positions in this issue. 58 59 60 61
Chile, India, and Mexico. See the list of submissions by WTO Members in WTO (2005a). See WTO (2005a). See Mattoo and Wunsch (2004). Other Uruguay Round “left overs” include emergency safeguards, subsidies, and government procurement, which are not addressed in this chapter. For a discussion on the rationale for a safeguard mechanism in services, see Marchetti and Mavroidis (2004).
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117 Accounting, auditing and Taxation services Professional Services
Consultancy services related Software implementation Data processing services Data base services Other
Computer and related services
Management consulting Services related to management Placement and supply services Printing, publishing
Market research Other business services
Provision and transfer of On-line information and On-line information
Telecommunication Financial Recreation
0 521 86276 0
Advertising services
Figure 4.6. Structure of market access commitments on mode 1 for selected sectors, number of Members. Three categories of commitments have been distinguished “full” commitments (i.e., absence of market access barriers); unbound (i.e., no commitment at all); and “partial” commitment (i.e., commitments subject to market access limitations). Source: Author’s elaboration based on the WTO database.
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20
40
60
Partial Full
Unbound
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100
120
140
160
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Certain forms of protection are embedded in domestic regulatory conduct and are certainly difficult to identify, discipline, and apprehend. These hidden barriers may take the form of, inter alia, unduly high minimum capital requirements or licensing fees, cumbersome procedures for the recognition of qualifications, cumbersome and opaque licensing requirements, and lengthy and opaque licensing procedures. To attain effective access to services markets, Article VI.4 GATS calls for the development of disciplines to ensure that “measures relating to qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade in services.” According to the same mandate, “such disciplines shall aim to ensure that such requirements are, inter alia, (a) based on objective and transparent criteria, such as the competence and the ability to supply the services; (b) not more burdensome than necessary to ensure the quality of the service; and (c) in the case of licensing procedures, not in themselves a restriction on the supply of the service.” To reap the full benefits of the liberalization process, developing countries need to accompany openness with policies to foster competition and avoid anticompetitive conduct (e.g., telecommunications), to solve informational asymmetries arising in many markets (e.g., professional services), to avoid systemic risk (e.g., banking), or to take care of social concerns (e.g., universal service). Thus, as part of the move toward competition, new regulatory frameworks, procedures, and bodies will be needed. Particularly for developing countries, these should be lean and efficient, for otherwise they become drains for the public sector and may hamper the full realization of welfare gains. In this process, developing countries could benefit from multilateral cooperation. Part of this efficiency could indeed come from being prepared to adopt regional or international standards or emulate those of other more experienced trading partners, rather than seeking to fine-tune standards to perceived local idiosyncrasies or to avoid improvements to the regulatory framework because of a lack of resources. On the other hand, hidden trade barriers, such as the ones targeted by future Article VI.4 disciplines, also affect the access of developing country providers to foreign markets. This is indeed the case for licensing and qualification requirements and procedures, which may be particularly burdensome for natural persons seeking to provide services on a temporary basis overseas. As previously shown, developing countries have already realized the importance of this work and are actively engaged in these discussions. Having said that, particularly where domestic regulation is concerned, it is fair to acknowledge that developing countries are different from developed ones. They often regulate in a less efficient manner, need to set up standards and regulatory arrangements from scratch, lack sufficient monetary resources, and have a deficit in competent human resources. Recent research on business regulation shows that there is a relationship between the level of development and regulatory burden. Rich countries have less burdensome entry regulations than developing
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countries (World Bank, 2004b).62 Overcoming these constraints takes time, and countries in this situation need special consideration. However, this should not be seen as an excuse to delay the introduction of competition in their markets or the adoption of multilateral commitments. Here again, developing countries should use the multilateral system to inform and support their own reforms (especially against entrenched interests, whether domestic or foreign-owned). A gradual approach may be necessary. Rather than pressing to water down the substantive content of disciplines that would only favour domestic vested interests and work against developing countries’ exports of services, developing countries should consider the adoption of strong disciplines on domestic regulation and, if necessary, seek transition periods and technical assistance to adapt domestic regulatory structures to the challenges ahead. This is particularly true for sectors in which market access limitations (e.g., limitations on the number of suppliers or foreign equity caps) or discriminatory regulation cannot be justified on economic grounds (e.g., business services, telecommunications, maritime transport services, logistics services, distribution services). A promise of full market access and national treatment would definitely be a good starting point in informing and supporting domestic regulatory reform, and transition periods could help individual countries update their regulatory frameworks to comply with an additional layer of multilateral disciplines of the type being developed under Article VI.4 GATS.
5. Concluding Remarks The aim of this paper was to analyse developing countries’ participation so far in the current round of services negotiations under the Doha Development Agenda. In contrast with their participation in the Uruguay Round, which led to a very shallow level of liberalization commitments, developing countries have been particularly active in this round. They have submitted negotiating proposals and bilateral requests, have coordinated positions with each other, and have participated in multilateral discussions, thereby making their views and interests known. However, they have generally adopted a cautious and defensive approach toward liberalization of trade in services per se. This approach has been manifested in a small number of offers from developing countries (less than 30) with no major improvements in their sector coverage. The paper has tried to show how costly protectionism in services can be and why developing countries should be putting priority on domestic reform. 62
For example, high-income countries appear to have the smallest number of entry procedures with a median of 7, followed by upper middle-income countries with a median of 10 procedures and lower-middle income countries with a median of 12 procedures. The time to register a company is again the shortest in the richest countries (less than one month), takes around 50 days in middle-income countries, and is the highest in the poorest countries, where the median number of days is 63. See World Bank (2004b).
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Because of the various sectoral linkages, an economy-wide perspective should be adopted for such reforms, recognizing in particular the importance of liberalizing entry into business and infrastructure services that are used as essential inputs into the production processes of other goods and services. The availability of first-best intermediate services, regardless of their origin, may be crucial in expanding export opportunities in sectors where countries may have a comparative advantage (e.g., manufacturing, agriculture, or even services). In addition to the “unilateralism” implied in that suggestion, I have tried to show how multilateral commitments may contribute to overcome the credibility deficit that developing countries often have because of a history of unpredictability and policy reversal. The challenge is not only to undertake liberalization commitments in key service sectors but also to shape those commitments in such a way as to promote good economic policy and a sustainable sequencing of reforms, making full use of the flexibility provided by the agreement in that regard. A more proactive stance in liberalizing their own markets would also contribute to the developing countries’ bargaining position, because it would highlight the seriousness of their engagement in these negotiations and how many opportunities may lie ahead in those markets if that opening is reciprocated by liberalizing commitments in areas of export interest of developing countries. The temporary movement of natural persons is a crucial area of export interest for many developing countries. However, in spite of the emphasis placed on the liberalization of mode 4 in the last few years, no significant progress has been witnessed so far in the negotiations on this issue. Even though expectations on this issue are high among a number of developing countries, the fulfillment of those expectations will depend on the interplay of positive and negative factors underlying this area of trade. From a negotiating perspective, although the most interested developing countries have rightly identified the main barriers and obstacles on mode 4 and have suggested various ways to overcome them, the action does not seem to have been fruitful enough. The liberalization of mode 4 is not the only area on which developing countries should be focusing their attention. In the last few years, a number of developing countries have developed or are in the process of developing a comparative advantage in the supply of various business services, benefiting from the worldwide trend toward business process outsourcing. Even though the business environment for this type of activities is fairly open, there are already signs of incipient protectionism emerging in developed countries. The challenge for developing countries would be to get all WTO Members to lock in that open trade regime through commitments in these negotiations. Only a few developing countries have recently focused on this issue. The challenge is important, and both technical and political/negotiating work in this area is needed. The paper has also addressed the development of disciplines on domestic regulation, not from a technical point of view but from a political economy
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perspective, acknowledging that deeper disciplines in this area are needed. When it comes to domestic regulation, developing countries face important challenges. They often regulate in a less efficient manner, need to set up standards and regulatory arrangements from scratch, lack enough monetary resources, and have a deficit in competent human resources. Overcoming these constraints takes time, and countries in this situation need special consideration. A gradual approach may be necessary. However, rather than pressing to water down the substantive content of disciplines that would only favour domestic vested interests, developing countries should consider the adoption of strong disciplines on domestic regulation that would inform their own domestic reform processes. If necessary, they should seek transition periods and technical assistance to adapt domestic regulatory structures to the challenges ahead. As may have become clear to readers, the paper has focused mostly on developing countries’ own policies and negotiating strategies, in recognition of the fact that it is those policies that are the key for them to reap the benefits of integration into the world trading system. Accordingly, it is also true that trade talks can play an important role in facilitating liberalization, in promoting further liberalization, and in consolidating prior gains. Linking domestic liberalization with multilateral liberalization can strengthen the prospects of dismantling domestic trade barriers. For one thing, although every country benefits by opening its own market and implementing sound regulatory policies, the same country will benefit even more if others open their markets as well. Trade liberalization processes usually face political opposition from affected – and very well organized – import-competing interests. If that pressure can be offset by pro-trade lobbying, not just of users of services (therefore all economic activities) but also of services exporters eager for improved access to overseas markets, then the chances of overcoming opposition are greatly enhanced. And here is where developed countries have the important responsibility of contributing to the developing countries’ liberalization policies by providing enhanced access for services in which developing countries have or may develop a comparative advantage.
references Australian Government (2003), “Discussion Paper on the General Agreement on Trade in Services,” by the Office of Trade Negotiations, Ministry of Foreign Affairs and Trade, available at http://www.dfat.gov.au/trade/negotiations/services/downloads/discussion paper gats jan2003.pdf Azad, A. K. 1999, “Inter-Industry Linkages of Services in the Bangladesh Economy (with a case study of the ready-made garments industry) and Potential Services Trade.” Mimeo. Washington, DC: The World Bank. Bhagwati, Jagdish (1987), “Trade in Services and the Multilateral Trade Negotiations,” The World Bank Economic Review, Vol. 1, September 1987, No. 4. Bennathan, Esra 1989, “Deregulation of Shipping – What is to be learned from Chile?” World Bank Discussion Paper No. 67. Washington, DC: The World Bank.
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Chanda, Rupa (1999), “Movement of Natural Persons and Trade in Services: Liberalising Temporary Movement of Labour under the GATS.” Mimeo. New Delhi: Indian Council for Research on International Economic Relations. Deardorff, Alan (1999), “International Provision of Trade Services, Trade and Fragmentation,” Mimeo, Ann Arbor: University of Michigan. Dobson, W. and P. Jacquet (1998), “Financial Services Liberalization in the WTO.” Washington, DC: Institute for International Economics. Dornbusch, Rudiger (1992), “The Case for Trade Liberalization in Developing Countries,” Journal of Economic Perspectives, Vol. 6, No. 1, Winter 1992. European Commission (2002), “WTO Members’ Requests to the EC and its Member States for Improved Market Access for Services – Consultation Document,” Version 2, available at http://europa.eu.int/comm/trade/issues/sectoral/services/wto nego/ index en.htm Findlay, Christopher and Tony Warren (eds.) (2000), Impediments to trade in services: measurement and policy implications. London: Routledge. Freund, Caroline & Diana Weinhold, 2002. “The Internet and International Trade in Services,” American Economic Review, American Economic Association, Vol. 92(2), Pages 236–240, May. Guasch, J. L. and J. Kogan (2001). “Inventories in Latin America: Current Trends and Historical Evidence from Other Developing Countries,” World Bank Working Paper, 2001. Hindley, Brian (1988), “Service Sector Protection: Considerations for Developing Countries,” The World Bank Economic Review, Vol. 2, No. 2, May 1988. Hodge, J. and H. Nordas (1999), “Liberalization of Trade in Producer Services – the Impact on Developing Countries,” Studies on Foreign Policy Issues, Report 1999:7. Oslo, Ministry of Foreign Affairs. Hoekman, B. “Assessing the General Agreement on Trade in Services,” in Will Martin and L. Alan Winters (eds.), The Uruguay Round and Developing Economies. Cambridge: Cambridge University Press, 1996. Hoekman, Bernard (2000), “The Next Round of Services Negotiations: Identifying Priorities and Options,” Federal Reserve Bank of St. Louis Economic Review, July/August 2000. Hoekman, Bernard Kym Anderson, Anna Strutt, Agriculture and the WTO: Next Steps, Review of International Economics, Vol. 9, 2001. Hoekman, Bernard and C. Primo Braga (1997), “Protection and Trade in Services,” World Bank Policy Research Working Paper 1747, April 1997. Hoekman, Bernard and Simeon Djankov (1997), “Effective Protection and Investment Incentives in Egypt and Jordan during the Transition to Free Trade with Europe,” World Development, Vol. 25, No. 2, 1997. Hoekman, Bernard and Patrick Messerlin (2000), “Liberalizing Trade in Services: Reciprocal Negotiations and Regulatory Reform,” in Sauv´e, Pierre and Robert M. Stern, eds., GATS2000: New Directions in Services Trade Liberalization. Washington, DC: Brookings Institution Press and Center for Business and Government, Harvard University, pp. 487– 508. International Monetary Fund (1997), World Economic Outlook. Washington, DC: International Monetary Fund, May 1997. Karsenty, Guy (2000), “Assessing Trade in Services by Mode of Supply,” in Sauv´e, P. and R. M. Stern, eds., GATS 2000: New Directions in Services Trade Liberalization. Washington, DC: Brookings Institution Press, pp. 33–56.
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Marchetti, Juan, and Petros Mavroidis (2004), “What Are the Main Challenges for the GATS Framework? Don’t Talk about Revolution,” in European Business Organization Law Review, Vol. 5, No. 3, pp. 511–62. Markusen, James R., Thomas Rutherford and David Tarr (1999), “Foreign Direct Investment in Services and the Domestic Market for Expertise.” Mimeo: Washington, DC: The World Bank. Mattoo, Aaditya (1999), “Financial Services and the WTO: Liberalization Commitments of the Developing and Transition Economies,” in The World Economy. Mattoo, Aaditya (2000), “Developing Countries in the New Round of GATS Negotiations: Towards a Pro-Active Role,” The World Economy, Vol. 23, Issue 4, April 2000. Mattoo, A. (2000), “Financial Services and the WTO: Liberalization Commitments of the Developing and Transition Economies,” World Economy 23(3): 351–386. Mattoo, A. (2003), “Shaping Future Rules for Trade in Services: Lessons from the GATS,” in Ito, T. and Anne Krueger, eds., Trade in Services in the Asia-Pacific Region – NBER-EASE Volume 11. Chicago: The University of Chicago Press. Mattoo, A., and A. Carzaniga, eds. (2004), Moving People to Deliver Services. Washington, DC: The World Bank and Oxford University Press. Mattoo, A., R. Rathindran, and A. Subramanian (2001), “Measuring Services Trade Liberalization and its Impact on Economic Growth: An Illustration,” World Bank Research Working Paper, No. 2655. Washington, DC: The World Bank. Mattoo, A., and P. Sauv´e, eds. (2004a), Domestic Regulation and Service Trade Liberalization. Washington, DC: The World Bank and Oxford University Press. Mattoo, A., and A. Subramanian (2000a), “India and the Multilateral Trading System After Seattle – Toward a Proactive Role,” World Bank Research Working Paper, No. 2379. Washington, DC: The World Bank. Mattoo, A., and S. Wunsch (2004), “Pre–empting Protectionism in Services: The WTO and Outsourcing,” World Bank Policy Research Working Paper 3237, March 2004. McCulloch, Neil, L. Alan Winters and Xavier Cirera (2001), Trade Liberalization and Poverty: A Handbook. Washington, DC: Center for Economic Policy Research. Nielson, J. and D. Taglioni (2004), “Service Trade Liberalization: Identifying Opportunities and Gains,” OECD Trade Policy Working Paper No. 1, TD/TC/WP (2003)23/FINAL, 6 February 2004. OECD (2001), “Service Providers on the Move: A Close Look at Labour Mobility and the GATS”, TD/TC/WP (2002) 26. Paris: Organization for Economic Co-operation and Development. Prud’homme, R´emy (2004), “Infrastructure and Development,” Paper prepared for the World Bank ABCDE (Annual Bank Conference on Development Economics), Washington, May 3–5, 2004. Rodrik, Dani (1992), “The Limits of Trade Policy Reform in Developing Countries,” Journal of Economic Perspectives, Vol. 6, Number 1, Winter 1992. Sauv´e, Pierre (2000), “Developing Countries and the GATS 2000 Round,” Journal of World Trade, Vol. 34, No. 2, (April), pp. 85–92. Sauv´e, Pierre and Robert M. Stern, eds. (2000), GATS 2000: New Directions in Services Trade Liberalisation, Washington, DC: Brookings Institution Press and Center for Business and Government, Harvard University. Sykes, Alan (2000), “Efficient Protection Through WTO Rule Making.” Paper presented at the Conference on “Efficiency, Equity and Legitimacy: The Multilateral Trading System at the Millennium,” held at the John F. Kennedy School of Government, Harvard University, Cambridge, Massachusetts, 1–2 June 2000.
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Warren, Tony, and Christopher Findlay (eds.). (2000). Impediments to Trade and Services: Measurements and Policy Implications. London: Routledge. Winters, L. Alan (2000), ‘Trade and Poverty: Is There a Connection?’ in Trade, Income Disparity And Poverty, Special Studies, Geneva, WTO. Winters, L. Alan (2001). Trade Liberalisation and Poverty: A Handbook (with Neil McCulloch and Xavier Cirera). London: Centre for Economic Policy Research. World Bank (2001a), Global Economic Prospects and the Developing Countries 2002 – Making Trade Work for the World’s Poor. Washington, DC: The World Bank. World Bank (2001b), Finance for Growth: Policy Choices in a Volatile World. Washington, DC: The World Bank and Oxford University Press. World Bank (2003a), World Development Report: Making Services Work for Poor People. Washington, DC: The World Bank and Oxford University Press. World Bank (2003b), Global Economic Prospects 2004 – Realizing the Development Promise of the Doha Agenda. Washington, DC: The World Bank. World Bank (2004a), Reforming Infrastructure: Privatization, Regulation and Competition. Washington, DC: The World Bank and Oxford University Press. World Bank (2004b), Doing Business in 2004 – Understanding Regulation. Washington, DC: The World Bank and Oxford University Press. World Trade Organization (1999a), “The Developmental Impact of Trade Liberalization under GATS,” Informal Note by the Secretariat, 7 June 1999. Available at http://www. wto.org/english/tratop e/serv e/gsliber e.doc. World Trade Organization (1999b), “Structure of Commitments for Modes 1, 2 and 3,” Background Note by the Secretariat, S/C/W/99, 3 March 1999. World Trade Organization (2001a), Market access: unfinished business – post-Uruguay Round Inventory and Issues, Special Study No.6, Geneva: World Trade Organization. World Trade Organization (2001b), Communication from Australia – Negotiating Proposal for Education Services, S/CSS/W/110, 1 October 2001, Geneva: World Trade Organization. World Trade Organization (2003c), Communication from Argentina, Bolivia, Chile, China, Colombia, Dominican Republic, Egypt, Guatemala, India, Mexico, Pakistan, Peru, Philippines and Thailand, Proposed Liberalization of Mode 4 under GATS Negotiations, TN/S/W/14, 3 July 2003. World Trade Organization (2005a), Special Session of the Council for Trade in Services – Report by the Chairman to the Trade Negotiations Committee, TN/S/23, 28 November 2005. World Trade Organization (2005b), Special Session of the Council for Trade in Services – Report by the Chairman to the Trade Negotiations Committee, TN/S/20, 11 July 2005. World Trade Organization (2005c), Communication from Argentina, Bolivia, Brazil, Chile, Colombia, India, Mexico, Pakistan, Peru, Philippines, Thailand, and Uruguay, Categories of Natural Persons for Commitments under Mode 4 of the GATS, TN/S/W/31, 18 February 2005. Yeats, Alexander J., Azita Amjadi, Ulrich Reincke, (1996), Did external barriers cause the marginalization of Sub-Saharan Africa in world trade? World Bank Discussion Paper 348.
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KAL RAUSTIALA
Comment on Juan Marchetti’s “Developing Countries in the WTO Services Negotiation: Doing Enough?”
Juan Marchetti is a consummate WTO insider – a counselor in the Trade in Services Division of the WTO Secretariat – and his very interesting paper reflects the tremendous empirical knowledge he possesses about services trade. His knowledge of the area far surpasses mine. Consequently, in this comment, I move away from the details of the current negotiations over services and point to four interesting questions or puzzles that the paper raises about trade in services more generally. First, what is perhaps most striking about this issue is how little we discipline protectionism in service provision. Marchetti tells us that, for upper-income Members, services comprise nearly three-quarters of GDP, and even for lowincome Members the figure is nearly half. (As a fraction of world trade, the services percentages are quite a bit lower, but that is partly endogenous: relatively undisciplined regulatory barriers help keep trade in services low). Services are thus plainly at the core of most contemporary economies. Yet, the WTO is not primarily about trade in services. In fact, as Marchetti tells us, the very idea of regulating domestic barriers to trade in services was bitterly fought in years past. And these barriers are not trivial. As he shows us quite compellingly, protectionism in services is very costly. So the big puzzle here is why barriers to trade in goods are easy to dismantle but those for services are hard. I say “easy” only in relative terms, of course. Why can we look at more than 50 years of marked success in reducing barriers to trade in goods through multilateral negotiations, but so little success in the area of services – especially when services comprise the bulk of economic activity in the most powerful and important WTO Members? The answer may be partly structural. Many services are hard to export – haircuts, for example. But increasingly technology is making services trade
I thank my colleague Richard Steinbertg and participants at the Columbia Law School Seminar on WTO Law for helpful comments on this paper.
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possible where it previously was not or was prohibitively costly. The current obsession in the United States is the flight of call centers to places like India, where English-speaking Indians working through the night field inquiries from the United States and elsewhere in real time. Cheap phone calls, facilitated by overinvestment in telecommunications infrastructure, make this outsourcing possible, and it is easy to imagine further extensions of this sort of cross-border service provision. Without buying into hyperbolic claims that “the world is flat,” it seems clear that services trade – including legal services, medical services, tax preparation, accounting, and many others – is bound to grow tremendously over the next decade.1 The structural barriers that keep some services purely local still exist, but increasingly we can transcend these barriers through technology – and are rapidly doing so. And in any event, even purely local services are part of the current GATS negotiations. Hence, on basic economic grounds services trade ought to loom ever larger in the WTO, perhaps quite a bit larger in rounds to come. But that said, if Marchetti is right, issues in services trade ought to have loomed larger in recent years and they plainly have not. Another reason why services trade may be more difficult to liberalize than trade in goods is that the baseline for services today is different than the baseline for goods in 1947. When the GATT began, high tariffs were the norm and the Members moved them down dramatically over time. For services, conversely, the big players like the United States had and still have relatively open service markets, making it harder to use simple reciprocity as an opening tool. And the barriers in services tend to be not tariffs but more complex non-tariff barriers, and as recent negotiations illustrate, these are more difficult to regulate and to regulate effectively than simple quantitative price instruments. Yet another (and related) possible reason for the difference between positions of services and goods trade in the WTO relates to timing. Services are a relative latecomer to the WTO, and negotiations on any topic are generally harder today because the WTO membership is so much heterogeneous than that of the GATT 50 years ago. Of course, the same ought to be true for trade-related intellectual property rights. And yet this issue had no trouble becoming a central part of the “single undertaking” of the Uruguay Round. So the question remains: why are services so politically difficult? Why the disjuncture between GATT and GATS? Is it that services are more local, more reflective of national values, more likely in their regulatory regimes to be inscribed with certain particularistic assumptions? I remain unsure, but the question is intriguing. My second point relates to the role of WTO negotiations in reducing regulatory barriers. Some scholars have argued – controversially – that the WTO really 1
Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-First Century (2005).
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does not matter much for world trade.2 In other words, trade levels would be high and cooperation would ensue whether we had the WTO or not. To my knowledge this decidedly minority argument has largely been made with regard to goods. Marchetti, however, provides some interesting statistics that raise this issue in the services context. He tells us in Table 4.3 of his paper that in the decade before the Uruguay Round was completed (i.e., 1985–1995) trade in services grew at roughly 11 percent a year. In the decade since the Uruguay Round, the rate has been closer to 5 percent. One might simplistically infer that GATS is actually a major drain on trade in services, because after GATS came into force the growth rate of trade halved. I find this thesis unlikely. Nonetheless one wonders why this dramatic change occurred. And more important, what is the evidence that GATS is actually promoting rather than inhibiting trade in services? Was there an exogenous process that promoted trade in services in the 1980s and 1990s that has now stopped or waned? Marchetti notes the telecoms and financial revolutions in passing, so maybe they are the answer. If so, these exogenous technology and organizational changes were clearly much more powerful than the GATS negotiations – which in itself is an interesting fact, one worth remembering when evaluating the effectiveness of international agreements. In any event, it may be that the developing countries were right to resist GATS after all. Perhaps WTO negotiations render the political stakes of liberalization more clear, and therefore make bargaining more difficult. I doubt it, and I am sure there are easy answers to this pattern, but I’m curious to hear an explanation. The third question raised by the paper relates to cooperation theory. What is the role of GATS vis-`a-vis state credibility? Marchetti argues that, for developing countries, the primary limiting factor in reforming their services sector is credibility and that international commitments alleviate this credibility problem by raising the costs of policy reversal. In making this claim he echoes a familiar theme from the literature on international cooperation. Political scientists have long argued that international agreements like GATS are lock-in devices, which, by tying the hands of future decision makers, make current liberalization initiatives more credible.3 The paper makes
2
3
See, especially the work of Andrew Rose of UC-Berkeley, available at http://faculty.haas .berkeley.edu/arose/RecRes.htm#GATTWTO. Similar claims are made in Jack Goldsmith & Eric Posner, The Limits of International Law (Oxford, 2005). Rose’s work is critiqued in Judith Goldstein, Doug Rivers, and Michael Tomz, Institutions in International Relations: Understanding the Effects of GATT and the WTO on World Trade, in International organization (forthcoming). E.g., Andrew Moravcsik, The Origins of International Human Rights Regimes: Democratic Delegation in Postwar Europe, in International Organization 54 (2000); Steve Ratner, Precommitment Theory and International Law: Starting a Conversation, 81 TEX. L. REV. 2055 (2003).
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an additional, more interesting point, however, that services differ from goods in that a “greater dose of unilateralism” is required. The question is why. What promotes or demands more unilateralism here than in other areas of WTO negotiation, such as trade in goods (GATT), sanitary and phytosanitary standards (SPS Agreement), or intellectual property rules (TRIPS Agreement)? Certainly, the holdback problem identified in the paper exists in all trade negotiations. Is there something additional about trade in services that changes the bargaining dynamics? Grandfathering, likewise, is hardly unique to services – even the TRIPS Agreement has it.4 My fourth and last question relates to immigration. Marchetti notes that there has been little progress on the issue of movement of persons, the socalled mode 4. No one attuned to the politics of the major powers would expect anything different: immigration is a highly volatile issue in many industrialized democracies. Immigration levels vary tremendously across the major economies: compare Canada to Japan. But it is a politically thorny issue nearly everywhere. The populist right often fears large-scale (or even small-scale) immigration, and the left is frequently unhappy with proposals that might permit more immigration in exchange for more limited access by those immigrants to social welfare programs and to political activity in the host states. In the end, it is hard to see how serious liberalization via the WTO of the movement of persons is politically possible, despite its enormous economic benefits to both migrants and their host countries. At the same time, however, it seems that the technological breakthroughs of the past decade vitiate some of the need for movement of persons. When work can be digitized and sent to the worker, rather than bringing the worker here, there can be substantial gains from trade, as Marchetti notes. I would like to hear more about how evolving technologies may substitute the movement of 1s and 0s for the movement of natural persons. Most importantly, what is the significance of these technological shifts for the future of WTO services talks? Is there a tension between the outsourcing boom he notes and the effort to move Mode 4 forward? Let me close by noting how interesting services trade is and how complex it is in comparison to trade in goods. Perhaps the world economy is something like an iceberg, with the currently visible portion – trade in goods – representing only a small fraction of actual economic activity. The much larger portion, related to services rather than goods, remains obscured. And yet, as this paper makes clear, the economic and social costs of this obscurity are very high. 4
For example, the provisions on geographic indications for wine and spirits expressly grandfather in those users of terms such as “champagne” that had been using the term on their labels for at least 10 years prior to the entry into force of the TRIPS Agreement.
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5 Developing Countries and the Protection of Intellectual Property Rights Current Issues in the WTO
Introduction The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) provides minimum standards for the protection of intellectual property rights (IPRs) and does not envisage harmonization of these rights among all WTO Members. It makes it clear that Members are not obliged to implement more extensive protection, but does not prevent them from doing so. Although some important multilateral conventions pre-date the TRIPS Agreement, by the mid1980s they no longer represented a functioning international consensus about the extent to which countries should protect the intellectual property of the nationals and companies of other countries, especially in the area of industrial property. The demandeurs for the inclusion of an intellectual property agreement in the Uruguay Round of negotiations were developed countries, notably the United States, EU, Japan, and Switzerland. Although one of the reasons for inclusion of this subject in trade negotiations may well have been the attractiveness of the trade enforcement mechanism, the trade forum was more importantly seen as one in which the chances of making progress from their perspective was higher because of the possibilities of making trade-offs with other areas. Even if not all developing countries participated in these negotiations in equal measure, it would be fair to say that the developing countries’ perspective was represented. As is widely acknowledged, the TRIPS Agreement, in an effort to strike a proper balance among the differing interests of the participating
In preparing this chapter, I have relied in part on material available in the Intellectual Property Division of the WTO as of the date of writing and in part on material available in Jayashree Watal, Intellectual Property Rights in the WTO and Developing Countries (Kluwer Law International, 2001). The views expressed in this chapter, however, do not engage the responsibility of the WTO Secretariat nor of WTO Members, individually or collectively, and do not present authoritative interpretations of WTO provisions, which can only be done by WTO Members acting jointly.
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countries, provides for significant flexibility in the protection to be given (see examples in Annex). This flexibility, which went considerably further than some of the demandeurs in the negotiations would have liked and were achieving in bilateral agreements at the time, resulted from a compromise achieved through negotiation by developing countries acting collectively and making issue-based alliances in a multilateral context. The TRIPS Agreement continues to be the generally accepted point of reference for the protection that countries should give to the intellectual property of others.1 This does not mean that it is not criticized. However, this criticism comes from both sides. On the one hand, the TRIPS Agreement is not accepted, at least by some developed countries, as necessarily providing for adequate and effective protection of their intellectual property, and there has been a continuing effort to get trading partners to provide enhanced protection in important respects. On the other hand, developing countries have proposed, and in one important case – that of TRIPS and public health – achieved amendments to the TRIPS Agreement in order to improve the balance from their perspective.
Why Did Developing Countries Accept the TRIPS Agreement in the Uruguay Round? A legitimate question that can be asked is why, after many years of resisting proposals for higher levels of intellectual property protection, did developing countries accept the TRIPS Agreement in the Uruguay Round? One major reason lies outside the area of intellectual property; namely, in their stake in a successful conclusion of the Uruguay Round as a whole. They had an interest in the survival of a credible multilateral trading system and its reinforcement. This survival depended on a successful conclusion to the Uruguay Round, for which participants accepted that a major outcome on intellectual property was necessary. They also expected benefits from results in specific areas of the negotiations, such as textiles and agriculture. There can be differences of opinion on the question of whether developing countries got a balanced bargain in the Uruguay Round under textiles and agriculture in return for agreeing to changes in their intellectual property laws. However, it should not be overlooked that, despite the apprehensions at that time about the back-loaded textiles agreement, the multilateral fibre agreement (MFA) was eliminated on schedule, and recent disputes on cotton and sugar have shown the value of commitments in agriculture. What was clear to these countries at the time was that the alternative to negotiating multilateral intellectual property standards would, almost certainly, have 1
Criticism that is often heard of the so-called TRIPS-plus provisions in the context of bilateral/plurilateral free trade agreements implies that TRIPS is the acceptable standard beyond which countries should not go.
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been to negotiate bilateral trade and intellectual property agreements without commonly accepted multilateral points of reference and without functioning restraints on the threats of trade counter-measures. Indeed, when comparing the post-TRIPS with the pre-TRIPS situation, it is fair to say that there has been significant movement away from unilateral threats of the withdrawal of GATT market access benefits. In an effort to secure protection of intellectual property, there has been a demand to conclude TRIPS-plus bilateral agreements and these are being concluded. Those countries that have agreed to such higher standards have presumably done so after weighing the market access and other benefits being offered to them.
Pre-TRIPS National IP Laws in Developing Countries It is often overlooked that, with some exceptions, there were well-developed IPRs systems in the developing world even before the launch of the Uruguay Round of multilateral trade negotiations. It would be fair to say that, in some sectors, many developing countries had intellectual property standards and enforcement procedures that were already quite close to what was later obligatory under the TRIPS Agreement. However, there were evidently notable differences, particularly in some important developing countries, and consequently the demands made in the negotiations for better intellectual property protection were focused on certain sectors. Not surprisingly, it was in precisely those sectors that IPRs are considered important, indeed crucial, in appropriating the returns to R&D (e.g., software, pharmaceuticals, and chemicals). In this respect, a study of individual countries would present a mixed picture for historical and other reasons. For example, although there may have been high standards of patent protection, including for pharmaceutical products, there may have been little or no copyright protection for software or vice versa. A presumption of many is that enforcement procedures mandated by the TRIPS Agreement were already available in all developed countries in pre-TRIPS national IP laws. However, early TRIPS complaints by the United States against some developed countries show that this was not the case. On the other hand, developing countries that followed the common law systems, being ex-colonies of the United Kingdom, did not have difficulties accepting TRIPS standards of enforcement.2 Many developing countries are also becoming significant generators of intellectual property, and the TRIPS Agreement serves to facilitate its protection worldwide. The important film, music, publishing, and computer software and other copyright interests of developing countries are well known. International protection of trademarks is also of growing importance as developing countries generate higher value-added items marketed under their own brand names. In the area of 2
See, Jayashree Watal, Intellectual Property Rights in the WTO and Developing Countries (Kluwer Law International, 2001).
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patents, there are signs of a rapid growth in applications from several developing countries, although, in many cases, this growth is from a very low base.
Forum for Lodging an Intellectual Property Agreement Some have argued that, irrespective of the merits of strengthening intellectual property worldwide, an intellectual property agreement has no place in a trade organization and is indeed a dangerous precedent as it opens the door to the entry of other non-trade-related areas, such as environment and labor standards, whose enforcement worldwide is perceived to require the clout provided by the threat of trade sanctions. However, TRIPS negotiations were mandated to continue in the Uruguay Round without prejudice to the issue of lodgement of the agreement. Toward the end of the Uruguay Round, once the substance of the TRIPS Agreement had been accepted, the question of whether such an agreement should be lodged in the WTO or in another specialized body, such as the World Intellectual Property Organization (WIPO), which has a clear mandate to promote the protection of intellectual property worldwide, was considered to be of relatively minor importance for developing country negotiators. There were undoubtedly misgivings about the application of the retaliation clause under the WTO Dispute Settlement Understanding (DSU) to violations of intellectual property rules at the time of the TRIPS negotiations. In the end, the text that was agreed to allows retaliation in one sector or under one agreement in response to a failure to comply with obligations in another sector or under another agreement (i.e., retaliation in the intellectual property area for violation of rules on trade in goods and services or vice versa). To date, there has been no case of a Member seeking authority to retaliate in response to the failure of another Member to comply with its TRIPS obligations. Indeed there has been only one instance so far under the WTO dispute settlement system of authorized “cross”-retaliation. This case involved TRIPS, and it enabled a small developing country to use withdrawal of certain TRIPS obligations as a means of putting pressure on a large developed country Member to comply with its GATT and GATS obligations. This was the authority given to Ecuador in 2000 not to apply certain obligations on related rights, Geographical Indications, and industrial designs, as well as on trade in goods and in a particular service sector, in response to a failure of the European Communities to bring its banana regime into compliance with its GATT and GATS obligations (WT/DS27/ARB/ECU). The Arbitrator based his decision in part on the terms of trade in goods and services between the two Members concerned. This authorization may have contributed toward negotiation of an understanding on a solution to the dispute. There is one more case – that of Brazil – seeking cross-retaliation in the area of intellectual property to enforce the Dispute Settlement Body (DSB) recommendations on cotton subsidies in the United States
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(WT/DS267/26, 7 October 2005). At the time of writing, that arbitration had been suspended. As to experience under dispute settlement in general in the TRIPS area, to date, 25 complaints relating to 20 separate matters have been lodged under the WTO dispute settlement system, which represents 7.5 percent of the 325 complaints in the WTO as a whole. Most complaints have been between developed countries, with only 7 of the 25 directed at developing country respondents, of which 2 involved the establishment of panels. Although this concentration on complaints involving developed countries was not unexpected prior to the 2000 deadline for implementation by developing countries, there has not been, so far, any large-scale recourse to dispute settlement against developing countries after this date. In fact, since that time, only two complaints have been filed concerning developing country implementation, both in 2000 and both settled bilaterally. As for negotiating to move TRIPS out of the WTO, the shoe is on the other foot now, with developing countries demanding that issues of interest to them, such as patent disclosure requirements and traditional knowledge, be negotiated in the WTO and with the other side preferring such discussions in WIPO, arguing that it is the specialized body dealing with IPRs (see below).
Developing Country Concerns in the TRIPS Council In the intellectual property area, developing countries have focused on three sets of issues since the WTO came into existence. First, they have wanted clarifications on the use of existing flexibilities and their improvement in order to protect public health and promote access to medicines for all. Second, they have brought in their own demands on intellectual property-related issues, such as the relationship with the Convention on Biological Diversity (CBD) and the protection of traditional knowledge and folklore. Third, they have wanted to secure or strengthen existing commitments on the part of developed countries to transfer technology. Some developing countries are also demanding the extension of the higher level of protection of geographical indications accorded to wines and spirits to other products of interest to them, but this is not strictly a North-South issue and is not dealt with in this chapter.
Clarifications and Further Flexibility Provided by the Doha Declaration on the TRIPS Agreement and Public Health On the issue of access to medicines, a request was first made by the African Group in April 2001 for special discussion on this subject in the next TRIPS Council meeting. Informal consultations were held in Geneva from July to October 2001 on a special declaration on the subject and on the text sent to the Ministers in Doha, in which there were areas of outstanding disagreement which were finally resolved there.
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The purpose of the Declaration was to respond to the concerns that had been expressed about the possible implications of the TRIPS Agreement for access to patented medicines. The TRIPS Agreement enshrines in public international law the right of countries to take various kinds of measures that can qualify or limit intellectual property rights, including for public health purposes (see above). However, some doubts had arisen as to whether the flexibility in the TRIPS Agreement was sufficient to ensure that it is supportive of public health, especially in promoting affordable access to existing medicines while also promoting research and development into new ones:
r First, different views were being expressed about the nature and scope of the flexibility in the TRIPS Agreement; for example, in regard to compulsory licensing and parallel imports. r Second, questions were being raised as to whether this flexibility would be interpreted by the WTO and its Members in a broad, pro-public health way. r Third, there was concern about the extent to which governments would feel free to use to the full this flexibility without the fear of coming under pressure from trading partners or industry. The special Declaration responded to these concerns in several ways. First, it emphasized that the TRIPS Agreement does not and should not prevent Members from taking measures to protect public health and reaffirms the right of Members to use, to the full, the provisions of the TRIPS Agreement that provide flexibility for this purpose. These important declarations signaled an acceptance by all WTO Members that they would not seek to prevent other Members from using these provisions. Second, the Declaration made it clear that the TRIPS Agreement should be interpreted and implemented in a manner supportive of WTO Members’ right to protect public health and, in particular, to promote access to medicines for all. Further, it highlighted the importance of the objectives and principles of the TRIPS Agreement for the interpretation of its provisions. Although the Declaration did not refer specifically to Articles 7 and 8 of the TRIPS Agreement, it referred to “objectives” and “principles,” words that are the titles of these two Articles, respectively. These statements thus provide important guidance to both individual Members and, in the event of disputes, to WTO dispute settlement bodies. Third, the Declaration contained several important clarifications of some of the flexibilities contained in the TRIPS Agreement while maintaining Members’ commitments in it. It made it clear that each Member is free to determine the grounds on which compulsory licenses are granted. This, for example, is a useful corrective to the views often expressed in some quarters implying that some form of emergency is a pre-condition for compulsory licensing. The TRIPS Agreement does refer to national emergencies or other circumstances of extreme urgency
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in connection with compulsory licensing, but this is done only to indicate that, in these circumstances, the usual condition that first an effort must be made to seek a voluntary license does not apply. The Declaration made it clear that each Member has the right to determine what constitutes a national emergency or other circumstances of extreme urgency, and those public health crises, including those relating to HIV/AIDS, tuberculosis, malaria, and other epidemics, can represent such circumstances. In regard to the exhaustion of intellectual property rights and therefore a Member’s right to permit parallel imports, the TRIPS Agreement states that a Member’s practices in this area cannot be challenged under the WTO dispute settlement system. There had been much debate about what exactly this provision means in regard to a Member’s freedom to choose its own regime for exhaustion and parallel imports. The Declaration made it clear that the effect of the provisions in the TRIPS Agreement on exhaustion is to leave each Member free to establish its own regime without challenge – subject to the general TRIPS provisions prohibiting discrimination on the basis of the nationality of persons. In regard to the least-developed country (LDCs) Members of the WTO, the Declaration accorded them an extension of their transition period until the beginning of 2016 in regard to the protection and enforcement of patents and rights in undisclosed information with respect to pharmaceutical products. Therefore, in the meantime, these countries are exempt from these TRIPS obligations and need not occupy themselves with any of the concerns mentioned above. A Decision of the TRIPS Council accordingly extended the transition period for LDCs until January 1, 2016 (IP/C/25 – June 2002), and another Decision of the General Council waived Article 70.9 (WT/L/478 – July 2002) for the same period.3 An issue that arose in the work on the Declaration was that of the ability of countries with limited manufacturing capacities to make effective use of compulsory licensing. It is not in dispute that Members can issue compulsory licenses for importation as well as for domestic production. However, the concern that had been expressed was about whether sources of supply from generic producers in other countries would be available to meet such demand, particularly in light of the provision of Article 31(f ) of the TRIPS Agreement, which states that any compulsory licenses granted to generic producers in those other countries shall be “predominantly for the supply of the domestic market of the Member” granting the compulsory license. In this regard, the Declaration recognized the problem and instructed the Council for TRIPS to find an expeditious solution to it and to report on this before the end of 2002. It should also be noted that, although it emphasized the scope in the TRIPS Agreement to take measures to promote access to medicines, the Declaration 3
In 2005, the TRIPS Council extended the time given to LDCs for implementing the TRIPS Agreement to July 2013 (IP/C/40).
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also recognized the importance of intellectual property protection for the development of new medicines and reaffirmed the commitments of WTO Members in the TRIPS Agreement. Although WTO Members have clarified the flexibility in the TRIPS Agreement and the Members’ right to use it to the full, it should not be forgotten that it is not the TRIPS Agreement but each country’s domestic law that has direct legal force in regard to acts relating to intellectual property on its territory. The Declaration does not obviate the need for each country to take the necessary steps at the national level to avail itself of this flexibility where necessary to secure the availability of medicines at affordable prices.
Implementation of Paragraph 6 of the Declaration As noted above, the Declaration recognized the problem of countries with little or no manufacturing capacities in the pharmaceutical sector in its paragraph 6 and instructed the Council for TRIPS to find an expeditious solution to it and to report on this before the end of 2002. Because Members can issue compulsory licenses for importation as well as for domestic production, the problem to be resolved was whether sources of supply from generic producers in other countries to meet such demand would be available, particularly in the light of the provision of Article 31(f ) of the TRIPS Agreement (“predominantly for the supply of the domestic market of the Member”). The concern about sources of supply was greater as some countries with important generic industries were coming under an obligation to provide patent protection for pharmaceutical products from 2005 onward. Intensive work in the Council for TRIPS in the second half of 2002 led to the presentation by the Chairman of the Council on December 16, 2002, of a draft Decision on the subject representing his best assessment of how to achieve a balanced result taking all positions and concerns into account. Not all Members were ready to adopt the Decision at that time, and a full consensus could not be found, notably on account of the U.S. objection to the scope of diseases covered.4 After further work, the Chairman’s proposal was finally adopted by the General Council on August 30, 2003 (Decision of the General Council – WT/L/540), in the light of the Chairman’s statement setting out several key shared understandings of Members about how the Decision would be interpreted and implemented (WT/GC/M/82 – para 29). The Decision covers any patented products or products manufactured through a patented process of the pharmaceutical sector needed to address the public health problems as recognized in paragraph 1 of the Doha Declaration on the TRIPS Agreement and Public Health, including active ingredients necessary for their manufacture and diagnostic kits needed for their use. The Decision 4
See IP/C/M/38, paragraph 34.
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grants three distinct waivers from the obligations set out in subparagraphs (f) and (h) of Article 31 of the TRIPS Agreement with respect to pharmaceutical products, subject to certain conditions. The three waivers are as follows: 1. A waiver of the obligation of an exporting Member under Article 31(f) of the TRIPS Agreement to the extent necessary for the purposes of production and export of the needed pharmaceutical products to those countries that do not have sufficient capacity to manufacture them. This waiver is subject to certain conditions to ensure transparency in the operation of the system, to ensure that only countries with insufficient domestic capacity import under it, and to provide for safeguards against the diversion of products to markets for which they are not intended. 2. A waiver of the obligation under Article 31(h) of the TRIPS Agreement on the importing country to provide adequate remuneration to the right holder in situations in which remuneration in accordance with Article 31(h) is being paid in the exporting Member for the same products. The purpose of this waiver is to avoid double remuneration of the patent owner for the same product consignment. 3. A waiver of the obligation under Article 31(f) of the TRIPS Agreement on any developing country or LDC that is party to a regional trade arrangement, at least half of the current membership of which is made up of countries presently on the United Nations list of LDCs. The purpose of this waiver is to enable such countries to better harness economies of scale for the purposes of enhancing purchasing power for, and facilitating the local production of, pharmaceutical products. The Chairman’s statement that was put on record at the time of the adoption of the Decision was designed to meet the concerns of those who feared that the Decision was too open-ended and might be abused in a way that would undermine the benefits of the patent system. For example, the statement recognizes that the system should be used in good faith to protect public health and not be an instrument to pursue industrial or commercial policy objectives. It addresses some concerns relating to the risk of trade diversion, and it also sets out ways in which any differences arising from the implementation of the system can be settled expeditiously and adequately. The Decision also records that the 23 most advanced countries have agreed to opt out of using the system as importers, to be joined, after their accession to the European Communities, by the 10 acceding countries. In addition, 11 other Members have agreed that they would only use the system as importers in situations of national emergency or other circumstances of extreme urgency.5 5
Hong Kong, China; Israel; Korea; Kuwait; Macao, China; Mexico; Qatar; Singapore; Chinese Taipei; Turkey; and the United Arab Emirates.
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The waivers provided for in the Decision will remain in force until an amendment to the TRIPS Agreement to replace its provisions, based, where appropriate, on the Decision, would take effect. Work on the amendment revealed differences in regard to its content, legal form, and timing. Agreement was reached on December 6, 2005, just prior to the Hong Kong Ministerial meeting. The General Council Decision of December 6, 2005, adopted a Protocol amending the TRIPS Agreement and submitted it to WTO Members for acceptance by December 1, 2007. In substance, this decision closely tracks the August 2003 text, including a re-reading by the General Council Chairman of the statement made at that time. The Protocol will enter into force on acceptance by two-thirds of the Members. In the meantime, the waiver provisions of the August 2003 Decision remain applicable until the date on which the amendment takes effect for a Member. As mentioned earlier, reaching agreement on the Decision was far from easy, with some Members having concerns that it might be too open-ended and susceptible to abuse and others feeling that it might be too burdensome. Views in some industry and civil society circles were even more polarized. Notwithstanding these concerns, there is reason for confidence that the system strikes a balance that is both workable and provides the necessary safeguards. Certain notification and other requirements have to be complied with, but these are not unreasonable and exporting countries should have no significant problems in meeting them. The system has been designed so as to keep to a minimum burdens on importing countries, especially LDCs, because they will generally be among those with more limited domestic administrative capacity. Where LDCs have any difficulties, it will behoove the international community, whether intergovernmental organizations, non-governmental organizations, or partner governments, to give them the necessary assistance. There is good reason to believe that this aid will be forthcoming. The Decision came into effect on August 30, 2003, and can be used. However, there have been no notifications of its use so far (see the dedicated Web page at www.wto.org). One factor explaining this lack of use is the time required for implementation of the system under the Decision. Implementation has required modification of laws/regulations in exporting and perhaps also importing Members. More important, there was no need to use the system as long as exports of generic drugs were possible without resort to compulsory licenses from countries not yet providing full patent protection for pharmaceuticals. Further, there is evidence that the existence of the system has encouraged voluntary licenses and price reductions by patent owners without having to resort to the actual use of this mechanism. It should not be forgotten that the system established by the Decision is only one small component of a much larger network of efforts required, both at the national and international levels, to address the grave public health problems afflicting many developing countries and LDCs and to facilitate their access to medicines. It is encouraging that the international community is increasingly
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involved in seeking solutions to these problems, but further concerted action is required in the relevant forums, including increasing funding, developing social and health infrastructure, and increasing R&D efforts for neglected diseases that mainly afflict the developing world.
Biodiversity and Traditional Knowledge Work began in the WTO in 1995 on biodiversity and traditional knowledge. The subjects of traditional knowledge or relationship between the TRIPS Agreement and the Convention on Biological Diversity (CBD) were not raised in the negotiations of the TRIPS Agreement, which ended effectively at the end of 1991 (WT/CTE/W/8). Discussions on the relationship between the TRIPS Agreement and the CBD first began in the WTO in the Committee on Trade and Environment in 1995 and were brought into the TRIPS Council through the built-in review of Article 27.3(b) in 1999. In the Doha Ministerial Declaration under paragraph 19 the Ministers instructed the Council for TRIPS “[t]o examine, inter alia, the relationship between the TRIPS Agreement and the Convention on Biological Diversity, the protection of traditional knowledge and folklore.” This was without prejudice to the inclusion of these subjects under paragraph 12 of that Declaration as a part of the outstanding implementation issues, a set of complaints by developing countries about implementation of the Uruguay Round agreements. Three separate items have been placed on the agenda since 2002 of the regular meetings of the TRIPS Council: the review of Article 27.3(b), the relationship between the TRIPS Agreement and the CBD, and the protection of traditional knowledge and folklore. The Hong Kong Ministerial Declaration of December 2005 (WT/MIN(05)/DEC) provides for the TRIPS Council to continue this work and for the General Council to report on it to the next Ministerial meeting. The Doha Ministerial Declaration addressed the question of outstanding implementation issues in its paragraph 12. The list of such issues includes several TRIPS issues, including the relationship between the TRIPS Agreement and the CBD. Consultations on these issues have been handled by the Director-General of the WTO since the end of 2002. The Decision on the Doha Work Program, adopted by the General Council on August 1, 2004 (the so-called July Package), requested the Director-General to continue his consultative process, if need be by appointing Chairpersons of concerned WTO bodies as his Friends with a duty to report to the Trade Negotiations Committee (TNC) and the General Council. In this context, the TRIPS Council Chair and one of the Deputy DirectorGenerals of the WTO held consultations in 2005 with Members on the relationship between the TRIPS Agreement and the CBD as an outstanding implementation issue. These discussions focused on the relation of this issue to the Doha Round of negotiations. Some countries sought a clear agreement that a solution would be negotiated as part of the outcome to the Doha Round. Some other WTO Members considered that there was no negotiating mandate on this matter and that it would
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not be appropriate to create one. No agreement has been reached on whether or not there should be negotiations on this issue. The Hong Kong Ministerial Declaration provides for the consultative process to be further intensified and for the Director-General to report to each regular meeting of the TNC and the General Council. This issue is now explicitly referred to in the text of the Declaration on outstanding implementation issues, alongside that of the extension of the protection of geographical indications. On October 10, 2006, the General Council reviewed the progress and endorsed taking appropriate actions. In the TRIPS Council discussions relating to the relationship between the TRIPS Agreement and the CBD (summarized in the Secretariat paper IP/C/W/368/Rev. 1), the positions of delegations broadly fall into four broad categories. First, a proposal has been made by a group of developing countries, led by India, Brazil, and Peru and with wide developing country support, to amend the TRIPS Agreement to make disclosure obligatory in patent applications of the following: first, the origin of genetic resources and/or traditional knowledge used in the claimed invention; second, evidence of prior informed consent under the relevant national laws/regulations/procedures; and third, evidence of fair and equitable sharing of benefits with those holding such resources or knowledge. Some other delegations, such as the United States, Japan, and Korea, are opposed to a disclosure requirement. However, they are willing to engage substantively on the issues, in particular on how the shared objectives in these areas, such as the avoidance of erroneously granted patents, facilitation of access to genetic resources, and fair and equitable benefit sharing, can be realized most effectively. They hold the position that a national-based approach using tailored national solutions, including contracts, is sufficient to ensure that the objectives of the CBD in relation to access and benefit sharing are met and that it would neither be helpful nor desirable to involve the patent system. In the view of the United States, such disclosure would not help in benefit sharing, and contractual agreements, including those backed by appropriate legislation, are a more effective way to achieve these goals. Such disclosure requirements would also be unnecessarily burdensome and create many practical difficulties in implementation. Some others – namely, the European developed countries – seem willing to have some measure of disclosure of source or origin within the patent system. Norway agrees that the TRIPS Agreement should be amended to include a mandatory disclosure requirement, but has not given further details of its proposal. The European Union and Switzerland refer to the proposals they have made in the WIPO on disclosure and expressed their readiness to engage in a discussion of disclosure as they had done in the past TRIPS Council meetings. The European Union has supported a mandatory requirement to disclose the origin or source of genetic resources and associated traditional knowledge that would cover all national, regional, and international patent applications. In their view, it is certainly premature to ask for evidence of benefit sharing at the stage of patent application. They also believe that effective remedies for the lack of or inadequate
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or incorrect disclosure can be instituted in criminal and civil laws and that the patent should not be invalidated or revoked. Switzerland has proposed making explicit in the Patent Cooperation Treaty (PCT) regulations that parties to the PCT may require patent applicants to disclose the source of genetic materials and traditional knowledge on which inventions are directly based. Failure to disclose fully or correctly could lead to non-processing of the application or invalidation of the patent. In the Swiss view, it would be premature and difficult to include information on prior informed consent or evidence of benefit sharing at the stage of patent application. Still other delegations have indicated that their mind is not closed, and they have expressed their desire to have a fact-based discussion based on national experiences in order to examine the issues involved. They hold the view that it would be premature to move forward on this issue because they were still studying it and the various proposals that have been made. This last group includes Australia, Canada, and New Zealand. Several new communications were submitted to the TRIPS Council in 2005.6 Constructive discussions have continued the process of clarification of the views held by the proponents, but divergent views persist in relation to the main issue as to whether or not a disclosure requirement would address the concerns raised. Even among those who agree with the disclosure approach, there are differences on several aspects, such as what type of disclosure requirement should be put in place (mandatory or voluntary; origin or source or both), under what instrument (the TRIPS Agreement or the PCT of WIPO) it should be implemented, and the legal effects of wrongful disclosure or non-disclosure (invalidation of the patent and in what circumstances; outside the patent system under civil/criminal law). On traditional knowledge there are no specific provisions in the TRIPS Agreement, which means that Members can protect traditional knowledge under the covered IPRs, where appropriate, or can introduce a sui generis law to protect it, provided there is no conflict with the TRIPS Agreement. They can similarly implement Art. 8(j) of CBD in order to respect, preserve, and maintain knowledge, innovations, and practices of indigenous and local communities and to encourage the equitable sharing of benefits. Quite detailed work is going on in the WIPO Intergovernmental Committee on intellectual property, genetic resources, and traditional knowledge and folklore, and the question of the appropriate forum for fleshing out the details of the subject comes up repeatedly in the TRIPS Council discussions. It has been said that, after WIPO develops an appropriate framework, it can be examined as to what extent such protection can be included in TRIPS. As seen above, the focus in the TRIPS Council is presently on the so-called disclosure proposal, which also includes traditional knowledge associated with genetic resources. 6
See the WTO Web page dedicated to these issues, available at http://www.wto.org/ english/tratop e/trips e/art27 3b e.htm.
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Transfer of Technology Facilitating the transfer of technology to developing countries and LDCs has been an important demand in the TRIPS Council, especially for African countries. Article 7 of the TRIPS Agreement reflects the expectation that this technology transfer should be promoted by the protection of intellectual property. Developing countries have been calling for the “operationalization” of this provision. The relationship between intellectual property protection and the transfer of technology is complex and one on which quite divergent views are held; for example, the issues may substantially differ according to whether the technology is easily copied or reverse-engineered or whether its effective exploitation depends on entering into a relationship with the company that has developed it. Transfer of technology also depends on many other factors outside the area of intellectual property. The TRIPS Agreement calls for more proactive measures to promote technology transfer and dissemination in the case of LDCs. Article 66.2 places obligations on developed countries to provide incentives for the transfer of technology to LDCs. The effective monitoring of this obligation through regular reporting and TRIPS Council reviews was the subject of a political agreement at Doha, which was turned into a TRIPS Council Decision of February 2003 (IP/C/28). The reports under this new mechanism were submitted at the end of 2003, 2004, and 2005, and these are being studied by the LDC Members. A separate WTO working group on technology transfer in the Development Division of the WTO also discusses the subject.
Concluding Remarks The TRIPS negotiations, although initiated at the insistence of certain developed countries, did take account of developing country perspectives, and the final text does provide considerable leeway in implementing this agreement. Such flexibilities have been clarified and further extended in the Doha Declaration on the TRIPS Agreement and Public Health in November 2001 and in the Decisions of August 2003 and December 2005. Whatever the initial misgivings of developing countries about the wisdom of agreeing to lodging the substance of the agreement in WTO rather than WIPO, they are now using the WTO TRIPS Council to get their own agenda, such as the TRIPS-CBD issue, incorporated into the work of the Council. In addition, at least two developing countries have sought to use crossretaliation in the field of intellectual property to enforce their WTO rights.
ANNEX: EXISTING FLEXIBILITIES IN THE TRIPS AGREEMENT: SOME EXAMPLES Article 1.1 (Nature and Scope of Obligations) “Members shall be free to determine the appropriate method of implementing the provisions of this Agreement within their own legal system and practice.”
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Article 6 (Exhaustion) “For the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3 and 4 nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights.” Article 7 (Objectives) “The protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations.” Article 8.1 (Principles) “Members may, in formulating or amending their laws and regulations, adopt measures necessary to protect public health and nutrition, and to promote the public interest in sectors of vital importance to their socio-economic and technological development, provided that such measures are consistent with the provisions of this Agreement.” Article 8.2 (Principles) “Appropriate measures, provided that they are consistent with the provisions of this Agreement, may be needed to prevent the abuse of intellectual property rights by right holders or the resort to practices which unreasonably restrain trade or adversely affect the international transfer of technology.” Article 27.2 (Patents: Patentable subject matter) “Members may exclude from patentability inventions, the prevention within their territory of the commercial exploitation of which is necessary to protect ordre public or morality, including to protect human, animal or plant life or health or to avoid serious prejudice to the environment, provided that such exclusion is not made merely because the exploitation is prohibited by their law.” Article 27.3 (Patents: Patentable subject matter) “Members may also exclude from patentability: (a) diagnostic, therapeutic and surgical methods for the treatment of humans or animals; (b) plants and animals other than micro-organisms, and essentially biological processes for the production of plants or animals other than non-biological and microbiological processes. However, Members shall provide for the protection of plant varieties either by patents or by an effective sui generis system or by any combination thereof. The provisions of this subparagraph shall be reviewed four years after the date of entry into force of the WTO Agreement.” Article 30 (Patents: Exceptions to rights conferred) “Members may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties.”
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Article 31 (Patents: Other use without the authorization of the right holder) “Where the law of a Member allows for other use of the subject matter of a patent without the authorization of the right holder, including use by the government or third parties authorized by the government, the following provisions shall be respected. . . . ” Article 40.2 (Control of anti-competitive practices in contractual licences) “Nothing in this Agreement shall prevent Members from specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market. As provided above, a Member may adopt, consistently with the other provisions of this Agreement, appropriate measures to prevent or control such practices, which may include for example exclusive grantback conditions, conditions preventing challenges to validity and coercive package licensing, in the light of the relevant laws and regulations of that Member.” Article 41.5 (Enforcement) “It is understood that this Part does not create any obligation to put in place a judicial system for the enforcement of intellectual property rights distinct from that for the enforcement of law in general, nor does it affect the capacity of Members to enforce their law in general. Nothing in this Part creates any obligation with respect to the distribution of resources as between enforcement of intellectual property rights and the enforcement of law in general.” Article 64.2 (Dispute Settlement) “Subparagraphs 1(b) and 1(c) of Article XXIII of GATT 1994 shall not apply to the settlement of disputes under this Agreement for a period of five years from the date of entry into force of the WTO Agreement.” Article 64.3 (Dispute Settlement) “During the time period referred to in paragraph 2, the Council for TRIPS shall examine the scope and modalities for complaints of the type provided for under subparagraphs 1(b) and 1(c) of Article XXIII of GATT 1994 made pursuant to this Agreement, and submit its recommendations to the Ministerial Conference for approval. Any decision of the Ministerial Conference to approve such recommendations or to extend the period in paragraph 2 shall be made only by consensus, and approved recommendations shall be effective for all Members without further formal acceptance process.” (Time extended in the July 2004 package to Sixth Ministerial Conference) Article 65.2 (Transitional Arrangements) “A developing country Member is entitled to delay for a further period of four years from the date of application, as defined in paragraph 1, of the provisions of this Agreement other than Articles 3, 4 and 5.” Article 65.4 (Transitional Arrangements) “To the extent that a developing country Member is obliged by this Agreement to extend product patent protection to areas of technology not so protectable in its territory on the general date of application
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of this Agreement for that Member, as defined in paragraph 2, it may delay the application of the provisions on product patents of Section 5 of Part X to such areas of technology for an additional period of five years.” Article 66.1 (Transitional Arrangements: Least-Developed Country Members) “In view of the special needs and requirements of least-developed country Members, their economic, financial and administrative constraints, and their need for flexibility to create a viable technological base, such Members shall not be required to apply the provisions of this Agreement, other than Articles 3, 4 and 5, for a period of 10 years from the date of application as defined under paragraph 1 of Article 65. The Council for TRIPS shall, upon duly motivated request by a least-developed country Member, accord extensions of this period.”
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¨ HÅKAN NORDSTR OM
6 Participation of Developing Countries in the WTO – New Evidence Based on the 2003 Official Records
abstract: The WTO takes pride in being a “Member-driven” organization, with decisions taken by consensus among all Member states. But how active are the various Member states in reality? In particular, to what extent do developing countries participate in the proceedings – and if not, why not? This chapter offers new evidence on this subject based of WTO official records for 2003. Data show that the activity level is highly uneven and is correlated closely with size and income levels. The relative silence of smaller and poorer member states is especially telling at the technical level (Committees and Working Groups) where the substantive work is carried out.
1. Introduction The WTO is run by its member governments. All major decisions are made by the membership as a whole, either by ministers (who meet at least once every two years) or by their ambassadors or delegates (who meet regularly in Geneva). Decisions are normally taken by consensus. In this respect, the WTO is different from some other international organizations such as the World Bank and International Monetary Fund. In the WTO, power is not delegated to a board of directors or the organization’s head. WTO (2003), Understanding the WTO, p. 101
As suggested by the opening paragraph quoted from a glossy brochure of the World Trade Organization, the WTO takes considerable pride in being a Member-driven organization with decisions taken by consensus among all Member states. From a normative point of view, this is how the organization is supposed to operate. The Marrakesh Agreement Establishing the World Trade Organization states that
The views expressed in this chapter are those of the author and should not be attributed to the National Board of Trade or the Swedish government. I am grateful to Hanna Ylitalo for putting the database together. I am also grateful for the comments received by the participants at the Columbia Law School Seminar on WTO Law in October 2005.
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“[t]he WTO shall continue the practice of decision-making by consensus followed under GATT 1947.”1 Moreover, in contrast with the World Bank and the IMF, the constitution of the WTO delegates no decision-making authority to board of directors or other limited-membership bodies. The official policy is thus one of open doors and equal opportunity for all Member states regardless of their weight in international trade. But how active are the various Member states in reality? In particular, to what extent do developing countries participate in the proceedings – and if not, why not? This paper offers new evidence on this subject based on the official records of written submissions in 2003. It draws on the seminal work by Michalopoulos (1999), who was the first to study the participation of developing countries in the rule-making process. The value-added aspect of our work is that it uses data that are related more directly to the notion of participation. Section 2 of this study provides some background information on the WTO, its internal organization, and decision-making mechanisms. Section 3 presents the new database. The data are analyzed in the next three sections. Section 4 focuses on the overall activity level, Section 5 on the Doha Development Agenda (DDA) negotiations, and Section 6 on the activity across areas and issues.
2. The World Trade Organization The WTO is the legal and institutional framework of the multilateral trading system as redefined and extended by the Uruguay Round of trade negotiations (1986– 94). The WTO is quite unique in the family of international organizations, not just because of the unusually wide scope of contractual (i.e., treaty) obligations but also because they are binding and enforceable through the integrated dispute settlement system. Trade sanctions can and are used to a hold a government to its word. The WTO is thus not the usual “best-endeavours” organization in which pledges are more of an ambition than anything else. In the WTO, there is no backing down without risk of retribution, which is one reason why participation in the rule-making process is so important. So what is covered by the current agreement or rather agreements, as it were? The first pillar of the WTO is the revamped version of the General Agreement on Tariffs and Trade (GATT): the treaty that has governed international trade in goods since 1947 and has been so successful in cutting tariffs on industrial goods.2
1
2
See Article IX (1), first sentence, of the Marrakesh Agreement Establishing the World Trade Organization. The average tariff rate on industrial goods in industrialized countries has fallen from approximately 40 to 4 percent. However, there are still some pockets of protectionism in certain products groups, including textiles, apparel, and shoes. As it happens, these are product groups that are of particular interest to developing countries.
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The new version of GATT (that is, its institutional component) features the following elements:
r The return of the “prodigal sons” of agriculture and textiles and clothing,
r
r r r
which slipped through the cracks of the GATT disciplines in the mid-1950s and 1960s, respectively. The return of these sectors is potentially of enormous importance to developing countries, although so far it has been an uphill legal battle with developed countries that have not yet come to terms with the new realities;3 The integration of “Tokyo Round codes” that previously were optional and in practise binding only on developed countries. All Members are now required to be covered by the updated codes (now referred to as agreements) on antidumping, subsidies and countervailing measures, technical barriers to trade, import licensing procedures, and customs valuation; The elaboration of some GATT articles into agreements of their own, notably, the addition of the Agreement on Safeguards to the rules set out in Art. XIX GATT. The Agreement on Trade-Related Investment Measures (TRIMs), which marks a first step toward global investment rules Many other smaller and larger changes. The new version of GATT (Annex 1A) is 305 pages long, about five times the length of the earlier version.
The second pillar of the WTO is the entirely new Agreement on Trade in Services (GATS). GATS has the potential of becoming equally important to the GATT over time – if not more so. About two-thirds of world GDP is services of different kinds. And even if we deduct “public services” (assuming that they fall under the exception of “services supplied in the exercise of governmental authority”), we are left with a commercial service content of about 50% of world GDP, compared to 20% of world trade. Moreover, although many pundits argued in the past that developed countries are best positioned to take advantage of the GATS, outsourcing of labour-intensive services to developing countries (e.g., call centres, accounting and other administrative functions, and programming) suggests that the stakes may be split more evenly between rich and poor countries. Of course, ultimately the split in the stakes depends on the commitments made at the negotiation table, which again stresses the need for developing countries to take active part in the ongoing negotiations. The third pillar of the WTO is the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The purpose of the TRIPS, in a broad sense, is to stimulate research and development by granting owners of intellectual property 3
See, e.g., EC – Bananas III (WT/DS27), EC – Export Subsidies on Sugar (WT/DS265/266/283), US – Upland Cotton (WT/DS267), US – Cotton Yarn (WT/DS192), US – Wool Shirts and Blouses (WT/DS33), EC – Bed Linen (WT/DS/141), US – Textiles Rules of Origin (WT/DS/243), US – Underwear (WT/DS/24).
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exclusive rights for a limited period of time. For example, the TRIPS Agreement imposes a generalized minimum patent protection of 20 years. Similar standards are defined for other types of intellectual property, including copyrights, trademarks, geographical indications, industrial designs, layout-designs of integrated circuits, and trade secrets. Looking ahead, in the round of trade negotiations launched at Doha (the capital of Qatar) in November 2001, WTO Members have made a strong commitment to put the interests of developing countries first. For example, in the area of market access for non-agricultural products, the Ministerial Declaration pledges to “reduce or as appropriate eliminate tariffs, including the reduction or elimination of tariff peaks, high tariffs, and tariff escalation, as well as non-tariff barriers, in particular on products of export interest to developing countries.”4 Similar pledges are made in other areas of the Doha Development Agenda (DDA) – which is the official name of the round – including a general pledge “to take fully into account the principle of special and differential treatment for developing and least-developed countries.”5 However, we shouldn’t hold our breath that this pledge will happen by itself. As the Nobel Prize–winning economist Milton Friedman once said, “There is no free lunch.” Being there and being active are keys to a successful outcome for developing countries. As far as new issues are concerned, the most controversial ones are the “Singapore issues,” which concern trade and investment, trade and competition policy, transparency in public procurement, and trade facilitation. Three of these have now been dropped because of the massive opposition of a new “militant” group of developing countries headed by India, China, Brazil, and South Africa (also known at the time as the G20). The only Singapore issue that managed to ´ Ministerial Conference was trade facilitation (i.e., simsurvive at the 2003 Cancun plifications of customs procedures).6 The DDA also includes a mandate to sort out the tenuous relationship between trade provisions in Multilateral Environmental Agreements (MEAs) and WTO rules. In a nutshell, the issue boils down to which set of rules take precedence when the rules conflict. A key role of the WTO is serving as a forum for trade negotiations. However, this is not its only function. An equally important, but less glorious task is to oversee the operation of the agreements already on the books. This work is carried out in some 40 Councils, Committees, and Working Groups open to all Members. Another task is to administer the dispute settlement system. The system handles 4
5 6
WTO Secretariat, Ministerial Declaration, adopted 14 November 2001, paragraph 16, WT/ MIN (01)/DEC/1 (November 20, 2001). Id., para. 50. An agreement on trade facilitation could be one of the most valuable results of the Doha Round. The average number of days to claim imports from customs is 18.5 days in Tanzania, 17.7 days in Pakistan and 13.8 days in Brazil, according to the investment climate database of the World Bank, available at http://www.ifc.org/ifcext/economics.nsf/Content/IC Investment Climate Assessments.
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Ministerial Conference General Council meeting as
Dispute Settlement Body
General Council meeting as
General Council
Trade Policy Review Body
Appellate Body Dispute Settlement panels
Committees on Trade and Environment Trade and Development Subcommittee on LeastDeveloped Countries Regional Trade Agreements Balance of Payments Restrictions Budget, Finance and Administration
Council for Trade in Goods
Council for Trade in Services
Committees on Market Access Agriculture Sanitary and Phytosanitary Measures Technical Barriers to Trade Subsidies and Countervailing Measures Anti-Dumping Practices Customs Valuation Rules of Origin Import Licensing Trade-Related Investment Measures Safeguards
Working parties on Accession
Working groups on Trade, debt and finance Trade and technology transfer (Inactive: (Relationship between Trade and Investment (Interaction between Trade and Competition Policy (Transparency in Government Procurement)
Council for Trade-Related Aspects of Intellectual Property Rights
Committees on Trade in Financial Services Specific Commitments
Working parties on Domestic Regulation GATS Rules
Plurilaterals Trade in Civil Aircraft Committee Government Procurement Committee
Doha Development Agenda: TNC and its bodies
Working party on State-Trading Enterprises
Trade Negotiations Committee Special Sessions of Services Council / TRIPS Council / Dispute Settlement Body / Agriculture Committee / Trade and Development Committee / Trade and Environment Committee
Plurilateral Information Technology Agreement Committee
Negotiating groups on Market Access / Rules / Trade Facilitation
Key Reporting to General Council (or a subsidiary) Reporting to Dispute Settlement Body Plurilateral committees inform the General Council or Goods Council of their activities, although these agreements are not signed by all WTO members Trade Negotiations Committee reports to General Council The General Council also meets as the Trade Policy Review Body and Dispute Settlement Body
Figure 6.1. Organization of the WTO. Source: WTO, available at http://www.wto.org/ english/thewto e/whatis e/tif e/org2 e.htm.
some 20 to 40 disputes per year, including some high-profile disputes, such as the EU import ban on genetically modified crops.7 Yet another task is to review the trade policies of the Members with regular intervals. The Marrakesh Agreement also instructs the WTO to cooperate, as appropriate, with the IMF and the World Bank and its affiliate agencies with a view to achieving greater coherence in global economic policymaking.
2.1. Organization The supreme authority of the WTO is the Ministerial Conference, which convenes usually every two years (see Figure 6.1). Since the establishment of the WTO, six ministerial conferences have been held: in Singapore (1996), Geneva (1998), 7
See, EC – Measures Affecting the Approval and Marketing of Biotech Products (WT/ DS291/ 292/ 293).
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´ (2003), and Hong Kong (2005). It is here, at the Seattle (1999), Doha (2001), Cancun highest political level, that the key decisions are taken. For example, the ongoing round of trade negotiations was launched by the Doha Ministerial Conference. The day-to-day operations are managed by the General Council, where the Members are represented at the ambassador level. The General Council acts on behalf of the Ministerial Conference on all WTO affairs. The General Council is convened under another name and with other chairmen on issues dealing with specific trade disputes and the operation of the dispute settlement system in the form of the Dispute Settlement Body (DSB), whereas the trade policy review mechanism is managed by the Trade Policy Review Body (TPRB). The next level in the institutional hierarchy is the three Councils for Trade in Goods, Council for Trade in Services, and Council for Trade-related Aspects of International Property Rights, respectively, and their associated subcommittees and working groups on specific issues. For example, agricultural issues are handled by the Committee on Agriculture and anti-dumping issues by the Committee on Anti-Dumping. In addition there are a dozen horizontal committees and working groups that report directly to the General Council, the Committee on Trade and Environment and the Committee on Trade and Development being two cases in point. Finally, the Doha Development Agenda has its own institutional structure under the leadership of the Trade Negotiations Committee (TNC), chaired by the Director-General (ex officio). The actual negotiations take place in “special sessions” of the regular committees or, in two cases, in designated negotiation groups.
2.2. Decision Making Article IX (1), first sentence, of the Marrakesh Agreement Establishing the World Trade Organization provides that “[t]he WTO shall continue the practice of decision-making by consensus followed under GATT 1947.” This is also how the WTO operates in practice, notwithstanding the fallback option of settling disagreements by way of majority decisions in secret ballots.8 What exactly is meant by “consensus” in this context is defined in a footnote to Article IX (1), first sentence: The body concerned shall be deemed to have decided by consensus on a matter submitted for its consideration, if no Member present at the meeting when the decision is taken, formally objects to the proposed decision.
Two points should be noted here. First, the consensus is not taken among all Members, only those present at the meeting when the decision is taken. Having a permanent representation in Geneva or capacity to fly in envoys on short notice 8
See, Article IX, Marrakesh Agreement Establishing the World Trade Organization, for details on the voting rules.
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is thus a must to block or augment adverse decisions. Not all Members have these resources, as is elaborated later. Second, there is a built-in procedural bias in favour of a proposed decision in that opponents have to object formally to the proposed decision by taking the floor at the decisive meeting. There is no way, thus, for dissenters to hide their identity (as with secret ballots); a fact that may dissuade weaker Members from stating their true preferences, especially if they go against the interest of their economic benefactors (donors of foreign aid or trade preferences). Having said this, one should not make too much of the formal aspects of the decision-making process. The success of a member-driven organization like the WTO should be judged on the basis of the inclusiveness and transparency of the policymaking process leading up to a decision. When everything is said and done, the formal decision should be a formality if the decision has been prepared in a transparent and inclusive way. Indeed, the Ministerial Declaration at Doha makes a strong pledge to include all Members in the negotiation process: “The negotiations shall be conducted in a transparent manner among participants, in order to facilitate the effective participation of all.”9 The next section turns to the evidence on this issue. Does everyone in fact participate in the proceedings?
3. Participation The original ambition of this project was to capture four dimensions of participation. The first dimension is human resources committed by each Member to the Geneva process, which we have captured on the basis of the information provided in the WTO directory. Second, participation in meetings, based on the lists of attendance circulated by the WTO Secretariat, could not be determined because attendance lists are confidential in the view of the Secretariat and only collected for internal use. The third dimension is oral interventions reported in the official minutes; capturing this information turned out to be a tall order because of gaps in the data. Some committees keep detailed records of what is being said and by whom; others provide only a summary of the proceedings without any identification of the speakers. In the end, we decided to drop also this variable because of the data gaps. The fourth dimension of written submissions by each Member could be assembled with some effort, although we are far from certain that we have found everything out there.10 In any event, on the basis of the data we have found, we developed three simple indices of participation: (1) the number of individual papers contributed by each Member, (2) the number of joint (cosponsored) papers, and (3) the total number of contributions. No effort has been 9 10
Ministerial Declaration, supra note 4, para. 49, first sentence. The methodological problems are discussed in more detail in Section 3.3.
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made to weigh the contributions against each other, although it is certainly clear that some submissions have had a more lasting impact than others. Moreover, because of resource constraints, we are only able to follow the “paper trail” for a single year in this study, 2003.
3.1. The Action in 2003 Before we delve into the data, let us say a few words about the action in 2003. The key event, of course, was the fifth Ministerial Conference held in Canc´ un, Mexico, from 10 to 14 September. The first part of 2003 was almost entirely devoted to the preparation for this important event, which was supposed to mark the halfway point of the DDA. One of the toughest area was the “modalities in agriculture” – that is, getting everyone to agree on what is required and by whom to meet the objectives set out in the Doha Ministerial Declaration: inter alia, “substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic support.”11 Deadlines came and went during spring and early summer without any consensus in sight. In mid-August, barely a month before the Ministerial Conference, the United States and the EU cornered the debate by tabling a joint proposal on the modalities.12 The U.S.-EU paper triggered a common response by a new alliance of developing countries led by India, Brazil, China, and South Africa.13 The G20+ ´ despite the internal was born, a group that was to become a key player at Cancun tensions between those with offensive interests in agriculture (Brazil) and those with defensive interests (India). They could all agree, however, that the onus of opening markets and cutting farms subsidies was on developed countries. Another area of intense debate concerned the fate of the Singapore issues. If we recall, the Singapore issues had been put only provisionally on the DDA. The plan was to take stock at the midway point and decide whether or not to initiate formal negotiations. At one end of this debate we had the EU, which pushed for inclusion of all four Singapore issues. At the other end we had the so-called G90 group (LDCs/ACP/African Group) that preferred to drop all the issues, but had some flexibility on trade facilitation if it was linked to financial and technical support. Yet another race against time was the efforts to get as many as possible of the some 100 items on the “implementation agenda” out of the way before Cancun, the most pressing one being the issue of TRIPS and Public Health; specifically, whether developing countries lacking their own manufacturing capacity in the 11 12 13
Ministerial Declaration, supra note 4, para. 13. WTO Secretariat, US-EU Joint Proposal, JOB (03)/157 (restricted) (August 13, 2003). WTO Secretariat, Response to US-EU Joint Proposal, JOB (03)/162 (restricted) (August 20, 2003).
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pharmaceutical sector could issue compulsory licences to low-price manufacturers of generic medicines in third countries to fight HIV/AIDS, tuberculosis, malaria and other public health concerns.14 This work was only partly successful. About 40 of the 100 items were settled at or before the Doha Ministerial Conference. Mention should also be made of the Cotton Initiative that emerged from nothing to the forefront of the policy discussions in less than six months. The cotton issue was originally raised in early spring both in the General Council and in the agriculture negotiations by Benin, Burkina Faso, Chad, and Mali. In a couple of submissions they described the damage that had been inflicted on them by the cotton subsidies of rich countries. These four Members demanded a termination of the subsidies and compensation for the losses already incurred.15 When the bell tolled in Geneva, many issues were still unresolved and passed ´ The rest is history, as the saying on half-digested to the ministers in Cancun. goes. The differences were too large to bridge in a few days, and the Ministerial Conference ended prematurely in disarray. The WTO was branded a “medieval organization” by a frustrated chief negotiator of the EC, Pascal Lamy, which didn’t stop him from becoming the new head of the WTO two years later. An equally frustrated U.S. chief negotiator, Robert Zoellick, also made some memorable remarks directed foremost at the G20+: “Some countries will now need to decide whether they want to make a point or whether they want to make progress.” In a written comment to the collapse of the negotiations he added: “As WTO members ponder the future, the U.S. will not wait: we will move towards free trade with can-do countries.”16 A period of reflection was called by the Director-General in order to calm things down and subdue the tense atmosphere. The rest of the year was very quiet in Geneva, at least on the surface. There was little point in reconvening the negotiation groups until all Members had had ´ The ordinary work outside the reign of a chance to digest the collapse at Cancun. DDA continued, however, more or less as usual throughout the year.
3.2. Representation in Geneva According to Blackhurst (1998), it takes a minimum of three delegates in Geneva to cover the most essential meetings of the WTO. Blackhurst based his estimate on a frequency of 40 to 45 meetings per week, which represented the situation in 1995– 96 before the gear up to the new round of trade negotiations. The workload has since tripled, according to the most recent statistics published by the Secretariat. 14
15
16
The implementation agenda grew out of the frustration of many developing countries with certain aspects of the Uruguay Round Agreement, including S&D treatment provisions that in practice are at best hortatory. See, Cotton Iniative, available at http://www.wto.org/english/tratop e/agric e/negs bkgrnd20 cotton e.htm. See, Confrontation DoomedWTO Cancun Meeting, Zoellick Says, available at http://www. useu.be/Categories/WTO/Sept2203ZoellickCancun.html.
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4,500 4,000 3,500 3,000 meetings
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2,500 2,000 1,500 1,000 500 0 1995
1996
1997
1998
1999
2000
2001
2002
2003
Figure 6.2. Meetings serviced by the Secretariat (January–August).
During the first eight months of 2003 the Secretariat serviced a total of 4,207 meetings (formal/informal/private).17 This makes an average of 120 meetings per week or 24 per working day (see Figure 6.2). This is certainly more than what a mission of three can manage. Today, you probably need five delegates in Geneva to stay on top of the action, plus a very active capital that feeds in material to the local delegates. Do the member states have these resources in Geneva? Well, some do, others don’t. Figure 6.3 shows the distribution of resources in Geneva along two dimensions: the type of representation and number of delegates per mission, sorted in ascending order.18 The database includes all countries that were Members as of 1 January 2003, a total of 144 countries. However, the European Community and its 15 member states are treated as one member in this study as it is a customs union.19 Thus, effectively we have 129 observations. The resources of the EC are those of the European Commission. At the bottom end of the distribution (the empty spots to the left in the bar chart) we have 22 non-resident members of the WTO, half of which are LDCs and half of which are Small Island Economies. These economies lack permanent representation in Geneva, but may still participate from time to time by flying
17
18 19
WTO Secretariat, Committee on Budget, Finance and Administration, 2004 2005 BUDGET ESTIMATES, Proposals by the Director General, WT/BFA/SPEC/100, at 16 (November 3, 2003). Data are collected from the March 2004 issue of the WTO Directory. Recall that the EU had 15 members in 2003. The enlargement to 25 members became effective as of May 1, 2004.
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21
delegates per mission
18 15 12 9 6 3 0 1
11
21 31 41
51 61
WTO mission
71 81
91 101 111 121
General mission
Figure 6.3. Representation at WTO (kind of representation and number of delegates).
in delegates from their embassies in Europe or capital.20 At the other end of the spectrum, we have the United States, China, Korea, Japan, and EC with more than 15 delegates per mission.21 Dark bars indicate a dedicated WTO mission, whereas light bars indicate a joint mission to the UN Office and other international organizations in Geneva.22 In the latter case, there is no telling how many of the listed delegates actually cover WTO matters on a regular basis. The light bars should therefore be discounted both quantitatively and qualitatively. If we cut data along development lines, it becomes clear that the resource situation is worst for least-developed countries (LDCs; see Figure 6.4). One-third of the LDCs have no representation at all in Geneva, and those that have tend to be severely understaffed. The resource situation is just the opposite for developed countries (denoted D in the graph), the exception being Lichtenstein with only one delegate posted in Geneva. (Two more delegates are listed in Berne and Vaduz, which are both only a few hours away by train/car). The middle ground is covered by developing countries (DC), some of which have few resources and some of which have plenty. 20
21
22
Belize, Chad, Fiji, Gambia, Grenada, Guinea Bissau, Guyana, Malawi, Niger, Papua New Guinea, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Sierra Leone, Solomon Islands, Suriname, Swaziland, and Togo are represented from Brussels; Dominica and Antigua and Barbuda from London; and Maldives and Central African Republic from their respective Capital. The size of the EC delegation does not include the delegates of the individual member states. Had they been included, the EC would top the list with more than 100 hundred delegates in total. Joint missions with a designated “WTO department” or other similar labels are classified as Permanent Missions for the purpose of this exercise.
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21
delegates per mission
18 15 12 9 6 3 0 1
11 21
31
41
51 61
71
81
LDCs
DC
D
91 101 111 121
Figure 6.4. Representation at WTO (distribution across development categories).
The general picture should now be clear. The distribution of resources in Geneva is highly uneven and therefore, the possibility to make an imprint on the negotiations is highly uneven. Table 6.1 summarizes the situation.
3.3. Written Submissions The number of staff posted in Geneva is at best an indirect measure of participation in the active sense of the word. Indeed, anyone who has been to a meeting at the WTO can testify to the widely different levels of engagement. Some Members have something to say on all subjects; others sit quietly most of the time. It is a different matter to measure the activity level in an objective way. Verbal interventions should in principle be recorded in the official minutes, but as noted before, this is not always the case. It is far easier to measure the activity level in terms of written submissions. Table 6.1. Representation in Geneva Category∗
WTO mission (%)
Joint mission (%)
Non-resident (%)
Av. number of delegates∗∗
Developed Developing Least developed
80.0 28.1 6.7
20.0 58.4 60.0
0.0 13.5 33.3
10.6 5.5 3.7
∗
The WTO recognizes as least-developed countries (LDCs) those countries that have been designated as such by the United Nations. The designation of “developed” or “developing” is based on self-selection. We defined the following countries as “developed”: Australia, Canada, EC, Iceland, Japan, Lichtenstein, New Zealand, Norway, Switzerland, and the United States. ∗∗ The average is calculated over Members that have a delegation in Geneva.
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Let us begin with a few words on the methodology employed in putting the database together. Data on written submissions are sampled from the Members’ password-protected version of Document Online (DO), which includes restricted documents that are not available in the open version on the WTO Web site. Some documents may still be missing in the DO, such as informal “non-papers” distributed as room documents. A special problem is caused by the fact that the WTO operates in three official languages – English, French, and Spanish – and the associated risk of counting the same document twice or even three times. To avoid this risk, we limited our database search to English documents. In principle, this should not cause any problems. Everything should be translated; that is the official policy. However, in times of extreme workload, translators may occasionally fall behind. In our case, we sampled DO in the summer of 2004, a half-year after the books were closed for 2003. One would hope that all 2003 documents would have been translated by then, but we are not certain. Thus, we cannot rule out that some contributions by the French- and Spanish-speaking community of the WTO are missing in the database. We try to account for this possibility by introducing language-group dummies in the statistical analysis. As mentioned in the introduction, we develop three simple indices of participation on the basis of the material found in the DO: (1) the number of individual papers contributed by each Member state during the course of 2003, (2) the number of joint (co-sponsored) submissions, and (3) the sum of the two, counting individual and joint submissions equally. Thus, a joint paper signed by 30 Members (the LDC group of the WTO) is treated in the same ways as 30 individual submissions with identical content.23 Our database includes a total of 958 written submissions, of which 838 are individual and 120 joint.24 Joint submissions are signed by 11.6 members on average, which gives a total of 1,387 joint activity points to distribute. In total the database includes 2,225 activity points,25 broken down over some 40 WTO bodies. Written submissions to the Dispute Settlement Body are not included in the database (apart from documents related to the review of the dispute settlement understanding) because doing so would introduce a bias toward Members that are actively involved in a trade dispute. We also exclude documents before the Trade Policy Review Body because only a subset of the Members are being reviewed a given year. In addition, corrigendum, addendums, and notifications are not included in the database. However, we do include revisions of papers because they presumably include new material that alternatively could have been presented as a new submission. The distribution of submissions over areas and issues is shown in Table 6.2.
23
24 25
We follow the convention developed by Horn, Mavroidis and Nordstr¨om (1999) of counting joint trade disputes as X bilateral disputes, where X is the number of co-complainants. Corrigendum, addendums, and notifications are not included in the database. 1387 joint activity points plus 838 individual.
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Table 6.2. Distribution of submissions over areas and issues (2003) Series
WTO body
DDA
Total
Share
X
958 80 32 43 5
100 8.35 3.34 4.49 0.52
128 18 33 77
13.36 1.88 3.44 8.04
166 25
17.33 2.61
41 8 4 9 10 4
4.28 0.84 0.42 0.94 1.04 0.42
61 3
6.37 0.31
Ruling Bodies WT/MIN (03)/ WT/GC/ TN/C/
Ministerial Conference, Doha General Council Trade Negotiations Committee
G/AG/ TN/AG/ G/SPS/
Agriculture Committee on Agriculture Committee on Agriculture – Special Session Committee on Sanitary and Phytosanitary Measures
G/C/ TN/MA/ G/MA/ G/RO/ G/VAL/ G/LIC/ G/IT/ G/TBT/ G/TRIMS/ G/STR/
Non-Agriculture Market Access (NAMA) Council for Trade in Goods (except trade facilitation) Negotiating Group on Market Access Committee on Market Access Committee on Rules of Origin Committee on Customs Valuation Committee on Import Licensing Committee of Participation on the Expansion of Trade in IT prod. Committee on Technical Barriers to Trade Committee on Trade-Related Investment Measures Working Party on State Trading Enterprises
G/SG/ WT/REG/
Rules Negotiating Group on Rules Committee on Anti-Dumping Practices Committee on Anti-Dumping Practices – WG on Implementation Committee on Subsidies and Countervailing Measures Committee on Safeguards Committee on Regional Trade Agreements
S/C/ TN/S/ S/CSC/ S/FIN/ S/WPDR/ S/WPGR/
GATS Council for Trade in Services Council for Trade in Services – Special Session Committee on Specific Commitments Committee on Trade in Financial Services Working Party on Domestic Regulation Working Party on GATS Rules
IP/ TN/IP/
TRIPS Council for TRIPS Council for TRIPS – Special Session
TN/RL/ G/ADP/ G/ADP/AHG/ G/SCM/
WT/WGTI/ WT/WGTGP/
Singapore Issues WG on Relationship between Trade and Investment WG on Transparency in Government Procurement
X
X
X
1
0.10
292 104 10 9
30.48 10.86 1.04 0.94
137
14.30
11 21
1.15 2.19
97 15 51 5 12 10 4
10.13 1.57 5.32 0.52 1.25 1.04 0.42
X
73 69 4
7.62 7.20 0.42
X
36 9
3.76 0.94
X
4
0.42
X
X
(continued)
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Table 6.2 (continued) Series
WTO body
DDA
Total
Share
WT/WGTCP/
WG on Interaction between Trade and Competition Policy Trade facilitation (dedicated meetings of the General Council)
X
18
1.88
X
5
0.52
X
9 2 2
0.94 0.21 0.21
1
0.10
3
0.31
G/C/
WT/COMTD/ TN/CTD/ WT/BOP/ WT/WGTTT/ WT/TDF/
Development Committee on Trade and Development Committee on Trade and Development – Special Session Committee on Balance-of-Payments Restrictions Working Group on Trade and Transfer of Technology Working Group on Trade, Debt and Finance
WT/CTE/ TN/TE/
Trade and environment Committee on Trade and Environment Committee on Trade and Environment – Special Sessions
TN/DS/
DSU Review
X
1
0.10
40 18 22
4.18 1.88 2.30
37
3.86
The first column in Table 6.2 provides information on the document series (the WTO body) from which the data were collected. For example, all documents related to the General Council start with WT/GC/. The name of the associated WTO body is provided in column two, grouped into the following 10 areas: Ruling Bodies, Agriculture, Non-Agriculture Market Access, Rules, GATS, TRIPS, Singapore Issues, Development, Trade and Environment, and DSU Review. The third column identifies bodies that have been set up for the DDA negotiations (i.e., the Trade Negotiations Committee [TNC] and its subsidiary bodies). We also include the Working Groups on the Singapore Issues in this category. The fourth and fifth columns list the number of submissions made in each area in absolute and relative terms. For example, 80 submissions or 8.35% of the total were addressed to the ruling bodies of the WTO. The areas that attracted most submissions were Rules followed by NAMA and Agriculture. The top 50 participants are listed in Table 6.3. Hardly surprising, the list is topped by the EC and the United States, with 120 and 116 submissions, respectively, almost twice as many as the third country, China. The order between the two front-runners is reversed if we look only at the individual submissions. The situation at the top is thus best described as a tie. Between the two of them, the EC and United States produce roughly a quarter of all individual submissions. Four other developed countries make it to the top 10: Japan (4), Australia (5), Switzerland (7), and Canada (10). As far as developing countries are concerned, the most active members in terms of written submissions are China (3) followed by India (6), Chile (8),
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Table 6.3. Top 50 participants (written submissions, 2003) Rank
Member
Category
Overall
Individual
Joint
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
EC USA China Japan Australia India Switzerland Chile Thailand Canada Egypt Chinese Taipei Korea, Republic of Mexico Peru Brazil Kenya Colombia Argentina Venezuela Costa Rica Cuba Pakistan Tanzania Uganda Hong Kong Norway Zimbabwe Malaysia New Zealand Indonesia Nigeria Mauritius Benin Philippines Bolivia Zambia Dominican Republic Ecuador Paraguay Burkina Faso Mali Guatemala Chad Turkey Jamaica Sri Lanka Botswana Senegal South Africa
D D DC D D DC D DC DC D DC DC DC DC DC DC DC DC DC DC DC DC DC LDC LDC DC D DC DC D DC DC DC LDC DC DC LDC DC DC DC LDC LDC DC LDC DC DC DC DC LDC DC
120 116 65 61 50 48 46 45 44 43 41 39 39 39 35 35 33 32 31 30 30 28 26 26 25 25 25 24 24 23 23 21 20 20 19 19 18 18 18 18 17 17 17 16 16 16 16 16 15 15
105 109 48 44 44 16 23 16 16 36 17 28 23 21 17 13 5 11 18 9 6 2 6 1 0 10 7 0 7 16 3 1 7 2 5 2 0 6 6 4 0 0 3 0 6 4 4 2 2 2
15 7 17 17 6 32 23 29 28 7 24 11 16 18 18 22 28 21 13 21 24 26 20 25 25 15 18 24 17 7 20 20 13 18 14 17 18 12 12 14 17 17 14 16 10 12 12 14 13 13
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120
submissions
100 80 60 40 20 0 1
11
21
31
41
51
61
71
Individual
81
91 101 111 121
Joint
Figure 6.5. Distribution of written submissions, individual and joint.
Thailand (9), Egypt (11), Chinese Taipei (12), Korea (13), Mexico (14), Peru (15), Brazil (16), Kenya (17), Colombia (18), Argentina (19), and Venezuela (20). The first LDC on the list is Tanzania (24) with 26 submissions overall, 25 of which were joint submissions. If we go down the list, two inter-related patterns emerge. Smaller and poorer countries down the list do not just make fewer submissions overall, but also fewer individual submissions as a share of their total (the pattern is illustrated graphically in Figure 6.5). Accordingly, what little they manage to do, they do together with others.
4. Analysis To put our preliminary observations on a firmer footing, we now turn to formal regression analysis. In the back of our mind we have a theoretical model where governments chose participation with an eye to maximizing the net benefit of their membership. This is a complex optimization problem with both probabilistic and strategic elements: Can we as an individual Member state influence the outcome of the negotiations? If yes, how many resources should we put into the WTO process, and what would we gain at the margin? Should we coordinate our positions with others to boost our common leverage, considering the compromises we must make with our own preferences? What would we lose if we instead elect a passive role with no representation in Geneva? Are we likely to be discriminated against, or does the MFN principle assure us equal treatment, irrespective of our own engagement? Do we have any unique trade interests that compel us
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to be present in Geneva, or are other parties already representing our views? In brief, can we justify the costs of having our own voice in Geneva? The questions posed above have not yet been addressed from a theoretical point of view. In fact, the only theoretical analysis we are aware of in this area concerns the use and disuse of the dispute settlement system.26 Participation in the rule-making process has not attracted any theoretical analysis as far as we can tell. This is unfortunate because we lack guidance on how to formulate the empirical model, including what variables matter for participation. Thus, what we can offer at this stage is only some explorative empirical analysis that should be revisited once we have a better theoretical grip of the issues.
4.1. The Regression Model Now, because the recorded activity is a count of written submissions by each Member, we look into statistical models designed for discrete outcomes.27 The default is the Poisson model. As do other statistical models, it recognises that human behaviour is predictable only to a point. The uncertainty is captured by a Poisson process that regulates the average interval between two submissions. Formally, the probability of observing yi = [0, 1, 2 . . . ] submissions by Member state i with characteristics xi = [xi1 , xi2 . . . xi K ] in a given time period (2003) is determined by a Poisson distribution with parameter λi . Pr (yi |xi ) =
e−λi λiyi , yi !
(1)
where λi = exp (β0 + β1 xi1 + β2 xi2 + · · · + β K xi K ) .
(2)
Thus, the model does not make a prediction, but a probability-weighted range of predictions that depends on the characteristics of each Member, where the marginal impact of each variable on the expected number of submissions is given by the estimated beta coefficient. The Poisson distribution is plotted in Figure 6.6 for three values of λi = [1, 10, 20]. Note that the Poisson distribution is asymmetric to the right because of the lower bound of the distribution (zero). The asymmetry is especially pronounced for low values of λi , which is no coincidence because the mean of the distribution equals λi . Another feature of the Poisson distribution is the equality between the variance and the mean. Thus, the shape of the distribution, the mean value, and the variance around the mean are all regulated by a single parameter: E (yi |xi ) = V (yi |xi ) = λi . 26 27
See, e.g., Bown (2005). For an introduction to count models, see, e.g., Green (2003), chapter 21.
(3)
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0,4 1
10
20
Pr(y | x ) i i
0,3
0,2
0,1
0,0 0
5
10
15
20
25
30
35
yi Figure 6.6. The Poisson distribution (for different means).
The Poisson model has been applied successfully in many different contexts and is the default specification in count data models. Notwithstanding, the statistical properties must be verified in each application, in particular the assumption of equal mean and variance. It turns out that the Poisson assumption does not stand up to scrutiny when tested against a more flexible two-parameter distribution in the same statistical family, the Negative Binomial (NB) distribution. In fact, a log-likelihood test rejects the Poisson assumption in all our applications; there is always more variation in the count of submissions than would be expected were the random process truly Poisson. The extra variation (overdispersion) is accounted for by an ancillary parameter in the negative binomial specification, which makes it a better choice in this case. In other dimensions, the NB process is just like the Poisson, and the two processes converge when the overdispersion approaches zero. The NB model comes in different versions depending on the assumed relationship between the variance and the mean. We use the default specification in STATA, known as the mean dispersion model.28 It corresponds to the NB2 model derived by Cameron and Trivedi (1998, pp. 70–77) and imposes the following restriction on the NB process, V (yi |xi ) = [1 + αλi ]λi ,
(4)
where the ancillary parameter α is estimated alongside the structural parameters of the model. The Poisson assumption corresponds to the special case α = 0. 28
STATA is a statistical software package (www.stata.com).
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4.2. Size and Income Matter Against this methodological background, we now begin our exploration of the participation in the rule-making process. Perhaps the most obvious reason why some Members are more active than others is that they are larger and richer and hence find it easier to cover the expenses of a Geneva mission and back-office experts in the capital. The WTO process is quite taxing for those aspiring to have an effective voice, and it is no coincidence that the two largest economies in the world – the EC and the United States – top the activity list by a wide margin. Nor is it a coincidence that small island economies and LDCs rank low on the list, especially as far as individual contributions are concerned. What remains to be done is to put numbers on these observations. The first set of regressions in Table 6.4 confirms the positive link between GDPi and the total number of submissions. The estimated impact is 0.264 with a standard error of 0.021. Hence, size matters, but not in a proportional way (the coefficient is less than unity). What the data tell us is that larger Members are more active in absolute terms, whereas smaller Members are more active in relative terms. If we decompose GDPi into population (POPi ) and per capita income (CAPi ) we find that the former is the more important factor for the overall activity level.29 The estimated coefficients are 0.324 and 0.161, respectively, and the difference is statistically significant.30 The second and third sets of regressions contrast individual and joint submissions. Note that the estimated coefficient for GDPi is five times larger for individual submissions than for joint submissions and that the divisive factor between the two modes of participation is the per capita income (the level of development). That is, high-income countries are more prone to make individual submissions and low-income countries to make joint submissions. This finding is corroborated by the last set of regressions, which looks directly at the shares.31 Whether this is because smaller players lack individual capacity or because it is necessary for them to present a common front to be heard at the WTO is unclear, but probably it is a little bit of both. What about the language-group dummies reported in Table 6.4? As discussed earlier, the WTO operates in three official languages: English, French, and Spanish. When the database was put together, we sampled only documents in English in order to avoid the risk of double- or triple-counting the same submission. The downside is the risk of undercounting French and Spanish originals if the translation service is lagging behind. Any bias in this direction would show up as an unexplained deficit of submissions from the French- and Spanish-language groups. Fortunately, the data do not support this concern. The Spanish-language 29 30 31
Note that GDP by definition equals population times GDP per person (the per capita income). H0 : βLn (CAPi ) = βLn (POPi ) , χ 2 (1) = 21.41, Prob > χ 2 (1) = 0.0000. Note that we employ a standard OLS model in this case because the share of submission is a fraction and not a count of data.
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0.511∗∗ (0.116) 0.524∗∗ (0.146) 0.542∗∗ (0.143) Nbreg 128 −430 0.124 0.202 0.000
0.498∗∗ (0.108) 0.380∗∗ (0.138) 0.503∗∗ (0.133) Nbreg 128 −419 0.145 0.164 0.000 0.082 (0.186) −0.441 (0.279) 0.522∗ (0.213) Nbreg 128 −264 0.236 0.340 0.000
** Significant at the 1% level. * Significant at the 5% level. † OLS Adj. R2 (not directly comparable with McFadden’s R2 ).
Method Observations Log Likelihood McFadden’s R2 α H0 : α = 0
Spanish
French
Languages English
0.324∗∗ (0.023) 0.161∗∗ (0.029)
(0.037)
(0.021)
0.074 (0.184) −0.403 (0.284) 0.559∗∗ (0.210) Nbreg 128 −263 0.240 0.326 0.000
0.547∗∗ (0.041) 0.652∗∗ (0.055) 0.503∗∗ (0.136) 0.614∗∗ (0.168) 0.629∗∗ (0.167) Nbreg 128 −404 0.039 0.273 0.000
(0.026)
0.122∗∗
0.432∗∗ (0.119) 0.380∗∗ (0.147) 0.572∗∗ (0.142) Nbreg 128 −386 0.082 0.173 0.000
0.198∗∗ (0.026) −0.041 (0.033)
Joint submissions
−0.134∗∗ (0.041) −0.135∗ (0.054) −0.087 (0.053) OLS 128 0.523†
0.426†
0.044∗∗ (0.009) 0.113∗∗ (0.012) −0.145∗∗ (0.045) −0.220∗∗ (0.056) −0.120∗ (0.058) OLS 128
0.066∗∗ (0.009)
Share of individual
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Ln(CAPi)
Ln(POPi)
Ln(GDPi)
0.582∗∗
Individual submissions
0.264∗∗
Total submissions
Table 6.4. Size and income matter
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dummy is larger than the English-language dummy in all regressions, which contradicts the hypothesis. The concern remains for the French-language group but the estimated deficit (compared with the English-language dummy) is in no case statistically significant. Interestingly, in the process of checking for a sample selection bias, we stumbled on a rather unexpected result. The official languages of the WTO do matter. Members that are able to make submissions in their own language (whether English, French, or Spanish) are more productive than other language groups, other things being equal. Especially the Spanish-language group stands out from the crowd. Whether this increased productivity is due to the language advantage or some cultural aspect is difficult to say. We leave this issue open for now.
4.3. Trade Stakes That size and income matter is no surprise. Nor is it surprising that smaller and poorer Members make proportionally more joint submissions. It makes good sense to work together with others if you are small and have scarce human and financial resources. But resources are presumably not everything that matters. The business of the WTO is to open up markets for international trade through multilateral negotiations. Most governments enter these negotiations with a mercantilist view: exports are good and imports are bad, and the goal is to negotiate as favourable conditions as possible for the export industry while giving away as little as possible on the import side. The activity level should therefore be correlated with the commercial interests of each Member state. One simple proxy for commercial interests is current exports. Countries that export more than others have presumably larger interests to defend at the WTO and consequently more reasons to be active. This hypothesis is analyzed in Table 6.5. The first two columns reproduce earlier results for ease of comparison. The third column introduces a competing specification with export as the only explanatory variable. As expected, we find a significant positive relationship between export and the activity level. The question is what we should make of this result? If we compare columns (1) and (3), we find that the results are virtually identical whether we use export or GDP as the explanatory variable. A quick glance in the correlation table explains why this is the case. The correlation between export and GDP is as high as 0.95 out of one. This means that either variable can be used as an almost perfect proxy for the other variable, which raises the following question: is it resources, trade stakes, or a combination of both that decide the activity level of individual Member states? The last columns address this issue by combining both sides of the argument. Note that the coefficient for exports changes signs from positive to negative when combined with the other variables. Taken literally, the combined specification suggests that trade stakes are at best immaterial for the activity level and possibly even negative. The activity level
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Table 6.5. Resources, trade stakes, or both? (1) Total submissions Ln(GDPi )
(2)
0.264** (0.021)
Ln(POPi )
−430 0.124
−419 0.145
−264 0.236
−263 0.240
−404 0.039
−386 0.082
−0.193* (0.073) −401 0.047
Ln(Xi ) 0.426†
0.277** (0.068) 0.051 (0.080) −0.083 (0.066) −385 0.084
0.060* (0.028) 0.044** (0.009) 0.113** (0.012)
Ln(CAPi )
Log Likelihood OLS Adj. R2
0.088** (0.025) −409 0.029
0.066** (0.009)
Ln(POPi )
0.646** (0.122) 0.764** (0.142) −0.106 (0.123) −262 0.242
0.315** (0.078)
Ln(Xi )
Share individual Ln(GDPi )
−0.048 (0.121) −264 0.236
0.198** (0.026) −0.041 (0.033)
Ln(CAPi )
Log Likelihood McFadden’s R2
0.554** (0.040) −276 0.203
0.122** (0.026)
Ln(POPi )
0.470** (0.062) 0.331** (0.072) −0.157* (0.062) −416 0.151
0.629** (0.)
Ln(Xi )
Joint submissions Ln(GDPi )
−0.219** (0.063) −424 0.136
0.547** (0.041) 0.652** (0.055)
Ln(CAPi )
Log Likelihood McFadden’s R2
0.224** (0.022) −446 0.089
0.582** (0.037)
Ln(POPi )
(5)
0.480** (0.065)
Ln(Xi )
Individual submissions Ln(GDPi )
(4)
0.324** (0.023) 0.161** (0.029)
Ln(CAPi )
Log Likelihood McFadden’s R2
(3)
0.523†
0.060** (0.008)
0.006 (0.026)
0.069** (0.025) 0.141** (0.030) −0.026 (0.025)
0.404†
0.422†
0.524†
Note: Languages dummies included in the regression but not reported for space reasons. ** Significant at the 1% level. * Significant at the 5% level.
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is positively correlated with export only when GDP is absent from the regressions. This finding favours the resource argument. Countries that can afford to be active are the most active ones. Yet, we find it difficult to accept that trade stakes either do not matter or even weigh in on the negative side of the decision. Something is clearly missing in the analysis. Perhaps we are not measuring what we thought we were measuring. What we tried to capture with the export variable was the commercial reason to engage in WTO activity. Countries that benefit from the current trade regime (as suggested by a high export share of GDP) may well be the ones that are most active when it comes to implementation and enforcement activities. It is not self-evident that they also are the ones that have the strongest incentives to push the envelope of the DDA. It could be that they already face low trade barriers, either because of successful negotiations in the past or because of regional and preferential trade agreements at the side. The Members that have the strongest incentive to engage may rather be the ones that are underperforming today because of unaddressed trade barriers. For example, the WTO has only begun the long journey toward free trade in agricultural products. Obviously, we need to refine the analysis in order to find out what is going on.
4.4. Regional and Preferential Trade Agreements As a first step, we break out exports to regional and preferential trade partners because these flows are not covered by the WTO, at least not directly.32 Our maintained hypothesis is that activity level is negatively related to the amount of trade that is conducted under regional and preferential conditions. Indeed, as noted by Michalopolus (1999, p. 9), “many of the smaller ACP countries consider their main international trade policy issues involve relations with the EC rather than the WTO and thus locate their representatives in Brussels, from where they also are supposed to follow WTO issues.” According to the latest count by the WTO, there were some 300 regional and preferential trade agreements in force by the end of 2005.33 How much trade that is actually benefiting is difficult to say because all these agreements, with the exception of the internal market of the EC, include various exceptions and conditions. For example, agriculture is often left outside the deal. What is more, products that are included on paper may be excluded in practice because the conditions attached to the duty exemption are too costly to satisfy for the export industry. For example, assembly industries may have to undertake costly changes in their sourcing patterns to reach the domestic content target imposed by the
32
33
The WTO has some indirect power over these agreements through Article XXIV GATT and Article V GATS, including a supervising role. See Regional Trade Agreements, available at http://www.wto.org/english/tratop e/region e/region e.htm.
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Table 6.6. Trade between WTO members in 2003 (%) FTA
PTA
MFN
Total
28.1
12.6
59.3
Developed Developing Least-developed
36.6 18.9 0.0
0.0 26.0 67.7
63.4 55.1 32.3
Note: Intra-EC15 trade is not included in the calculations.
rules of origin. Also the level of preferences may vary from product to product. A case in point is the EC, which grant GSP beneficiaries 25, 50, 75, or 100% rebates on its MFN rates depending on the “sensitivity” of the products concerned.34 The only practical solution given the large number of side agreements is to ignore the fine print and assume head-on that all trade between the signatories is covered. This assumption allow us to calculate an upper estimate of how much trade is conducted under Free Trade Agreements (FTAs) and Preferential Trade Agreements (PTAs) and a lower estimate of how much trade is conducted under MFN conditions. Based on the FTAs and PTAs notified to the WTO by 2003, we estimate that about 40% of the trade within the WTO area is governed by some kind of side agreement (the estimate approaches 50% when the intra-EC trade is accounted for). As expected, the LDCs are the most dependent on preferential trade, whereas FTAs are most common among developed countries. The respective shares vary, of course, from country to country. If we accept these lower and upper band “estimates” as indicative of the actual situation on the ground, we can now ask a rather critical question for the multilateral trading system. Do regional and preferential trade agreements divert attention from the multilateral trade agenda? The result is inconclusive. The answer would seem to be “yes” if we look at the total of submissions. The point estimates of regional (XFTAi ) and preferential trade (XPTAi ) are both negative and statistically significant; that is, a low dependence on MFN trade would seem to reduce the activity level at the WTO. However, when data are grouped into individual and joint submissions the significance disappears, although the point estimates are still negative. The evidence of a regional and preferential drag on the multilateral negotiations is thus mixed (see Table 6.7). Although this “non-result” may seem puzzling at first, one could make a case that the outcome should be indeterminate because of two offsetting forces. From an offensive point of view, the WTO may certainly lose some of its relevance when governments conclude more far-reaching trade agreements. After all, there is no point pushing for something in the WTO when you already have achieved it by other means. Some downsizing of the representation in Geneva may therefore 34
GSP stands for Generalized System of Preferences.
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171 Nbreg 128 −416 0.151 0.151 0.000
Nbreg 128 −262 0.242 0.326 0.000
0.646** (0.122) 0.764** (0.142) −0.106 (0.123)
0.601** (0.131) 0.658** (0.179) −0.053 (0.132) −0.009 (0.011) −0.029 (0.020) Nbreg 128 −261 0.245 0.292 0.000
Individual submissions
Nbreg 128 −385 0.084 0.169 0.000
0.272** (0.071) 0.057 (0.096) −0.067 (0.071) −0.015 (0.008) −0.013 (0.013) Nbreg 128 −383 0.089 0.160 0.000
Joint submissions 0.277** (0.068) 0.051 (0.080) −0.083 (0.066)
Note: Languages dummies included in the regression but not reported for space reasons. ** Significant at the 1% level. * Significant at the 5% level. † OLS Adj. R2 (not directly comparable with McFadden’s R2 ).
Method Observations Log Likelihood McFadden’s R2 α H0 : α = 0
Ln(XPTAi )
Ln(XFTAi )
Ln(Xi )
0.405** (0.062) 0.219** (0.084) −0.078 (0.063) −0.017** (0.007) −0.043** (0.011) Nbreg 128 −407 0.170 0.119 0.000
Total submissions 0.470** (0.062) 0.331** (0.072) −0.157* (0.062)
0.546†
0.524†
OLS 128
0.065* (0.027) 0.141** (0.034) −0.017 (0.026) −0.007** (0.003) −0.007 (0.005) OLS 128
Share individual 0.069** (0.025) 0.141** (0.030) −0.026 (0.025)
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Ln(POPi )
Table 6.7. The impact of regional and preferential trade agreements
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be called for. On the other hand, once you have achieved a privileged position in a certain market you do not necessarily want to share these benefits with everyone else. Indeed, although we would like to think of the WTO as an offensive instrument for governments to open up foreign markets, it can also be used for defensive or strategic ends. A case in point is the ACP countries that are working hard in the WTO to protect their privileged position in the EC market for bananas, fearing that a dismantling of the current quota system (in their favour) would shift the market towards more competitive “dollar bananas.” Another example of a defensive use is the preference-erosion argument advanced against general tariff reductions in the DDA. Indeed, countries that benefit from these schemes miss no opportunity to hammer in the message that broad-based liberalization would harm the economic development of poor countries by eroding their preferential position in important markets like the EC and the United States. Even donor countries resort to this line of argument when they need some respectability for a protectionist policy. For example, the EC likes to defend the banana regime by referring to the development needs of its former colonies, rather than the needs of domestic banana producers in Create, Madeira, Canaries Islands, and the French overseas territories (Guadalupe, Martinique, Reunion, etc.). This raises the following intriguing issue: perhaps it is the nature of the engagement (from offensive to defensive use of the WTO) rather than the degree that changes when countries go regional and preferential. Unfortunately, we are not in a position to test this hypothesis because the content of the submissions is not recorded in the database, only the body to which they were addressed. We hope to come back to this issue in future research.
4.5. Market Access Conditions Preferential and regional trade agreements aside, two countries with equal dependence on MFN trade may face substantially different trade barriers because they specialize in different goods, which in turn may influence their activity levels at the WTO. As a general rule, agricultural products are subject to higher duties than industrial products and processed goods to higher duties than unprocessed goods. The offensive interests of low trade barriers in export markets must at the same time be balanced against the defensive interests of maintaining the protection for the domestic import-competing industry. A Member that asks a lot of others must stand ready to offer something comparable in return. The reciprocity principle may pour cold water on protectionist-inclined governments that otherwise would jump at the opportunity to improve the prospects for the export industry. Combining both sides of the argument, we expect liberal countries facing high trade barriers abroad to be the keenest members of the WTO. To test this linked hypothesis, we need a summary measure of the trade barriers faced and imposed by each Member. Such indices are not easy to come by for such a large group of countries. The most comprehensive indices currently
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available are those calculated by Kee, Nicita, and Olarrega (2005) at the World Bank, which account both for tariffs and non-tariff measures of various kinds. However, their study covers only 76 of the 128 countries in our database, which is an unacceptable loss of observations. The best we can do for all countries is average tariff rates. The question is: what tariff rates? The first choice that springs to mind is the bound rates inscribed in the tariff schedules of each Member. The bound tariffs represent the highest tariffs that a Member can lawfully impose on other Members of the WTO (without resorting to some emergency clause). It is the bound rates that are subject to tariff negotiations in the WTO. But it is not necessarily the rates that governments ultimately care about. A tariff can be bound at 100% while the applied tariff is only 25%. When governments negotiate bound rates they enter these negotiations with the objective of cutting the applied rates in order to improve the market access conditions for the export industry.35 The real target variable is therefore likely to be the applied rates, although the negotiations notionally concern the bound rates. Thus, the averages that interest us in this context are rather the applied MFN rates. The average applied tariff rate imposed by each Member was collected from World Trade Report 2005, an annual publication of the WTO. The average tariff rate faced by each country is derived from the TRAINS database maintained by UNCTAD. To highlight the link to development, the two averages are plotted in Figure 6.7 against the income per capita. The MFN duties are as a general rule higher in poor countries than in rich countries. Poor countries also face higher MFN duties on average because of the high share of agricultural products, textiles, apparel, and other “sensitive” goods. On the other hand, the incidence of the MFN tariffs is limited by the preferential tariff treatment developing countries receive in many markets. How much damage that is undone in this way is difficult to say. There are no public sources on what countries actually pay. The TRAINS database includes preferential rates for some agreements, but unfortunately without an indication if the beneficiaries are able to meet the conditions imposed by the donors, in particular the rules of origin. Studies based on classified customs data suggest that the utilization rate is fairly low. For example, a compilation made by the WTO Secretariat for the Committee on Trade and Development reports that only 46.8% of the eligible imports from LDCs to the QUAD (EC, United States, Canada, and Japan) are actually benefiting from the GSP rates.36 Accordingly, MFN rates ought to be a concern for developed and developing countries alike. Well, are they? Table 6.8 reports the augmented results when tariffs are introduced in the regressions. The surprising finding is that tariffs do not seem to matter at all. This is a puzzling result. We are after all talking about the World Trade Organization as an institution established to remove trade barriers of various kinds. It would 35
36
A reduction in the bound rates may be important even if they do not cut into the applied rates because it reduces the margin of uncertainty for exporters. WTO Secretariat, Market Access issues related to Products of Export Interest Originating from Least-Developing Countries, WT/COMTD/LDC/W/31 (September 29, 2003).
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Average rates (%)
40
30
20
10
0 100
1.000 ,
10,000
100,000
per capita income ($) Tariffs imposed Tariffs faced
Trend Trend
Figure 6.7. The relationship between tariff rates and per capita incomes.
be very odd indeed if the engagement of different Member states is completely unrelated to the trade barriers they face. Perhaps it is the data we use? Tariffs may nowadays be of secondary importance to non-tariff barriers after eight rounds of successful tariff negotiations. However, re-running the regressions using the trade restrictiveness indices calculated by Kee, Nicita, and Olarrega (2005) that include NTBs does not change the result materially.37 The suspicion falls instead on the MFN principle that introduces an element of free-riding in the operation of the WTO. Why bother if the negotiation results accrue to everyone in any case? More research is clearly needed to sort out this puzzle, both conceptually and empirically.
5. Participation in the DDA Negotiations The analysis so far has addressed the overall pattern of participation. In this section we focus on the participation in the DDA negotiations, defined as written submissions to the Trade Negotiations Committee and its subsidiary bodies, the Ministerial Conference at Doha and the Working Groups on the four Singapore issues.38 A total of 367 written submissions fall under this definition, of which 302 37 38
The results are on file with the author for the interested reader. Doha Ministerial Conference (WT/MIN (03)), Trade Negotiations Committee (TN/C), Negotiating Group on Market Access(TN/MA), Committee on Agriculture – Special Session
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175 0.003 (0.008) −0.002 (0.009) Nbreg 128 −416 0.151 0.151 0.000
0.005 (0.016) 0.017 (0.020) Nbreg 128 −262 0.243 0.326 0.000
0.612** (0.128) 0.747** (0.147) −0.066 (0.131)
0.532** (0.139) 0.616** (0.181) 0.020 (0.142) −0.012 (0.011) −0.038 (0.021) 0.015 (0.016) 0.021 (0.016) Nbreg 128 −260 0.248 0.283 0.000
Individual submissions
Note: Languages dummies included in the regression but not reported for space reasons. ** Significant at the 1% level. * Significant at the 5% level. † OLS Adj. R2 (not directly comparable with McFadden’s R2 ).
Method Observations Log Likelihood McFadden’s R2 α H0 : α = 0
Tariffs faced
Tariffs imposed
Ln(XPTAi )
Ln(XFTAi )
0.382** (0.065) 0.210** (0.086) −0.055 (0.067) −0.018** (0.007) −0.048** (0.012) 0.011 (0.008) 0.003 (0.009) Nbreg 128 −406 0.172 0.118 0.000
Total submissions 0.470** (0.063) 0.336** (0.074) −0.160* (0.064)
0.007 (0.009) 0.000 (0.010) Nbreg 128 −385 0.085 0.168 0.000
0.250** (0.074) 0.050 (0.098) −0.048 (0.076) −0.016* (0.008) −0.017 (0.014) 0.011 (0.009) 0.002 (0.010) Nbreg 128 −383 0.091 0.157 0.000
Joint submissions 0.269** (0.070) 0.057 (0.082) −0.078 (0.069)
0.543†
0.523†
0.000 (0.003) −0.005 (0.003) OLS 128
0.069* (0.028) 0.148** (0.035) −0.023 (0.028) −0.007* (0.003) −0.007 (0.005) 0.002 (0.003) −0.004 (0.003) OLS 128
Share individual 0.076** (0.026) 0.149** (0.030) −0.036 (0.026)
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Ln(Xi )
Ln(CAPi )
Ln(POPi )
Table 6.8. The impact of own and others’ tariffs
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40 35
submissions
30 25 20 15 10 5 0 1
11
21
31
41
51
61
71
Individual
81
91 101 111 121
Joint
Figure 6.8. Doha development agenda (distribution of individual and joint submissions).
are individual and 65 joint. The joint submissions were signed by 13.04 members on average, which add up to 848 joint activity points in total. The distribution of submissions is shown in Figure 6.8 and the associated top 50 list in Table 6.9. The DDA top list is similar to the one presented before on overall activities. The United States is now at the top of both as far as total and individual submissions are concerned, followed by the EC. Australia takes the number three spot, but only because of a strong showing in the negotiating group on rules (22 of 30 submissions made by Australia in 2003 were submitted to the rules group). China is again the leading developing country at place four, followed by Japan, Korea, India, Egypt, Chile, and Thailand. The first LDCs on the lists are Burkina Faso, Mali, and Uganda, which have sponsored 12 submissions each (they have no individual records). One finding that is striking is that the distribution is much more compressed in the DDA negotiations (see Figure 6.9). The United States and the EC do not dominate the scene in the same way as they do as far as the overall activity is concerned. Apparently, developing countries prioritize the DDA work, which makes (TN/AG), Council for Trade in Services – Special Session (TN/S), Council for Trade-Related Aspects of Intellectual Property Rights – Special Session (TN/IP), Negotiating Group on Rules (TN/RL), Committee on Trade and Development – Special Session (TN/CTD), Committee on Trade and Environment – Special Sessions (TN/TE), Dispute Settlement Body – Special Session (TN/DS), Working Group on Transparency in Government Procurement (WT/WGTGP), Working Group on Relationship between Trade and Investment (WT/WGTI), Working Group on Interaction between Trade and Competition Policy (WT/WGTCP) and General Council dedicated meetings on trade facilitation (C/C/TradeFacilitation).
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Table 6.9. Top 50 participants – Doha Development Agenda (2003) Rank
Member
Category
Total
Individual
Joint
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
USA EC Australia China Japan Korea, Republic of India Egypt Chile Thailand Switzerland Canada Hong Kong Venezuela Brazil Colombia Costa Rica Chinese Taipei Norway Kenya Cuba Malaysia Argentina Bolivia Peru Mexico Pakistan Paraguay Burkina Faso Mali Uganda Mauritius Indonesia Benin Chad Nigeria Tanzania Zimbabwe Jamaica Israel Guatemala Zambia Turkey Ecuador Rwanda Morocco Botswana Senegal Singapore South Africa
D D D DC D DC DC DC DC DC D D DC DC DC DC DC DC D DC DC DC DC DC DC DC DC DC LDC LDC LDC DC DC LDC LDC DC LDC DC DC DC DC LDC DC DC LDC DC DC LDC DC DC
36 32 30 29 28 28 28 27 26 25 22 20 20 20 20 20 18 17 16 16 15 14 14 14 14 13 12 12 12 12 12 11 11 11 11 11 11 11 10 10 10 10 9 9 9 8 8 8 8 8
31 23 28 19 15 14 11 13 4 4 8 16 7 6 3 2 1 8 4 3 1 5 4 2 1 4 1 1 0 0 0 5 2 0 0 0 0 0 4 3 1 0 2 1 0 3 1 1 1 1
5 9 2 10 13 14 17 14 22 21 14 4 13 14 17 18 17 9 12 13 14 9 10 12 13 9 11 11 12 12 12 6 9 11 11 11 11 11 6 7 9 10 7 8 9 5 7 7 7 7
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DDA submissions
60 50 40 USA EC
30 20 10 0 0
20
40
60
80
100
120
140
Overall submissions Figure 6.9. Overall vs. DDA submissions.
sense in the midst of intense trade negotiations. Indeed, a check with the data reveals that 39.3% of the submissions of developed countries fall within the DDA classification, compared to 54.1% for developing countries and 59.5% for the LDCs. Although the DDA negotiations are less dominated by the EC and the United States than the general work at the WTO, it is not the case that everyone has the same means to contribute. Only 65 Members – half the membership – have submitted a paper in their own name during the course of 2003, and only 35 Members have submitted more than one. As shown in Figure 6.10, the 10 most active Members stand for 60% of all individual submissions and the first 35 Members 100 90 80 share (%)
70 60 50 40 30 20 10 0 1
11
21
31
41
51
61
order Figure 6.10. Cumulative distribution of individual submissions.
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for 90%. Smaller and poorer countries participate almost exclusively by working together with others. A re-run of the regressions on the DDA activity data does not generate any surprises because of the close correlation between overall submissions and DDA submissions (apart from the EC and the United States, which fall somewhat outside the general picture). For completeness, however, we summarize the DDA regressions below. Note that the activity level in the DDA is closely correlated with size and income levels (see Table 6.10). The determinant factor between individual and joint participation is again per capita income. Rich countries make significantly more individual submissions than poor countries as a share of the total. Introducing the level of export as an additional regressor does not change the results significantly. But as stressed in the previous section, the close correlation between export and GDP makes it difficult to distinguish the individual impacts of these variables. Moreover, exports may be a poor proxy for the commercial stakes because of the endogenous nature of exports (i.e., their relationship with current trade barriers). Again, the Members that have the strongest incentives to engage in the negotiations may be the ones that are underperforming today because of unaddressed trade barriers. A sign that trade stakes may matter is the fact that exports to regional and preferential trade partners enter negatively in the regressions. We stress the word “may” because the variables are only significant as far as the total number of submissions is concerned. The evidence of a regional and preferential drag on the multilateral negotiations is thus at best mixed. Moreover, the most direct measure of the commercial stakes – the tariffs imposed and the tariff faced – have no influence on the activity level. Once again, this is a highly puzzling result that calls for more research, both conceptually and empirically. Trade barriers should matter in an organization geared towards their removal. As noted before, perhaps it is the MFN principle that severs the link to the individual stakes and hence incentives to participate in the proceeding?
6. Participation Across Areas and Subjects Do developing countries spread their scarce resources evenly across areas and subjects or do they focus on specific issues? We have shown earlier in Table 6.2 what the distribution of submissions across areas and subjects looks like, or more precisely the distribution across WTO bodies. When translating these submissions into “participation data” we must account for the fact that 120 of the 958 submissions are joint (i.e., signed by more than one country and sometimes by countries from different development categories). The convention employed here is to give each signatory of a joint contribution one point, which means that a paper signed by, say, 30 Members is counted 30 times.39 The relatively few joint submissions by the LDC Members 39
Again, the 30 Members could alternatively have submitted 30 identical papers under their own names.
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Table 6.10. Participation in the DDA (1) Total submissions Ln(GDPi )
(2)
(3)
(4)
(5)
(6)
0.210** (0.024)
0.441** (0.067) 0.275** (0.079) −0.129 (0.067)
0.398** (0.070) 0.203* (0.095) −0.070 (0.071) −0.019** (0.007) −0.037** (0.012)
−375 0.080
−348 0.147
−342 0.162
0.391** (0.074) 0.209* (0.097) −0.068 (0.075) −0.019** (0.007) −0.036** (0.013) 0.008 (0.009) −0.005 (0.010) −341 0.163
0.567** (0.055)
0.635** (0.168) 0.778** (0.198) −0.096 (0.170)
0.674** (0.189) 0.836** (0.259) −0.129 (0.189) −0.010 (0.007) 0.000 (0.027)
−188 0.203
−181 0.235
−181 0.236
0.575** (0.200) 0.838** (0.262) −0.057 (0.204) −0.017 (0.016) −0.018 (0.028) 0.048* (0.022) −0.004 (0.030) −178 0.246
0.111** (0.027)
0.300** (0.072) 0.050 (0.086) −0.070 (0.071)
0.296** (0.076) 0.057 (0.102) −0.052 (0.077) −0.016* (0.008)
0.291** (0.079) 0.059 (0.104) −0.050 (0.081) −0.017* (0.008)
0.252** (0.023)
Ln(POPi )
0.323** (0.026) 0.135** (0.032)
Ln(CAPi ) Ln(Xi ) Ln(XFTAi ) Ln(XPTAi ) Tariffs imposed Tariffs faced Log Likelihood McFadden’s R2
−361 0.114
Individual submissions 0.589** Ln(GDPi ) (0.053) Ln(POPi ) Ln(CAPi )
−350 0.145
0.547** (0.057) 0.676** (0.078)
Ln(Xi ) Ln(XFTAi ) Ln(XPTAi ) Tariffs imposed Tariffs faced Log Likelihood McFadden’s R2 Joint submissions Ln(GDPi ) Ln(POPi ) Ln(CAPi ) Ln(Xi ) Ln(XFTAi )
−182 0.229
−181 0.234
0.147** (0.028) 0.237** (0.029) −0.025 (0.035)
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(1)
(2)
(3)
181
(4)
Ln(XPTAi )
(5)
(6)
−0.013 (0.014)
−0.015 (0.015) 0.004 (0.009) −0.003 (0.010) −325 0.114
Tariffs imposed Tariffs faced Log Likelihood McFadden’s R2 Share individual Ln(GDPi )
−347 0.055
−350 0.145
−351 0.041
−327 0.107
−325 0.113
0.056** (0.009)
0.053 (0.029) 0.120** (0.034) −0.015 (0.029)
0.051 (0.031) 0.127** (0.040) −0.008 (0.031) −0.008** (0.003) −0.006 (0.006)
0.055 (0.032) 0.137** (0.040) −0.016 (0.032) −0.008** (0.003) −0.006 (0.016) 0.003 (0.004) −0.005 (0.004)
0.282†
0.377†
0.404†
0.408†
0.060** (0.010)
Ln(POPi )
0.039** (0.011) 0.104** (0.014)
Ln(CAPi ) Ln(Xi ) Ln(XFTAi ) Ln(XPTAi ) Tariffs imposed Tariffs faced Log Likelihood OLS Adj. R2
0.293†
0.380†
Note: Languages dummies included in the regression but not reported for space reasons. ** Significant at the 1% level. * Significant at the 5% level. † OLS Adj. R2 (not directly comparable with McFadden’s R2 ).
of the WTO, the African Group (many of which are LDCs), and the G90+ (LDC/African Group/ACP) multiply to a relatively large number of activity points for the LDC group as a whole. The main points of Table 6.11 can be summarized in a plot that highlights how developing and LDCs prioritize their resources compared with developed countries. As seen in Figure 6.11, developing and LDCs put relatively more resources on the Ruling Bodies, Agriculture, TRIPS, Development, and the DSU Review and less resources on NAMA, Rules, the Singapore Agenda, and Trade and Environment. The emphasis on GATS is about the same for all three groups. The most interesting finding is that the LDC group use most of their ink at the highest level of the organization: 42.6% of their activity points are recorded at the Ministerial Conference, General Council, and Trade Negotiations Committee compared to 29.9% for developing countries and a mere 7.8% for developed countries. This priority makes good sense if you have few resources. You need to be
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Table 6.11. Participation across areas and subjects – share of total submissions (%) WTO body
DDA
Ruling Bodies Ministerial Conference, Doha General Council Trade Negotiations Committee
x x
Agriculture CMT on Agriculture CMT on Agriculture – Special Session CMT on Sanitary and Phytosanitary Measures Non-Agriculture Market Access (NAMA) Council for Trade in Goods (except trade facilitation) Negotiating Group on Market Access CMT on Market Access CMT on Rules of Origin CMT on Customs Valuation CMT on Import Licensing CMT of Part. on the Exp. of Trade in IT Products CMT on Technical Barriers to Trade CMT on Trade-Related Investment Measures WP on State Trading Enterprises Rules Negotiating Group on Rules CMT on Anti-Dumping Practices CMT on Anti-Dumping Practices – WG on Implementation CMT on Subsidies and Countervailing Measures CMT on Safeguards CMT on Regional Trade Agreements GATS Council for Trade in Services Council for Trade in Services – Special Session CMT on Specific Commitments CMT on Trade in Financial Services WP on Domestic Regulation WP on GATS Rules
x
x
x
x
D
DC
LDC
7.28 1.18 4.33 1.77
29.89 10.49 13.06 6.34
42.60 17.86 24.74
8.86 1.97 2.95 3.94
14.19 4.15 5.13 4.91
8.93
14.17 1.77 3.35 0.59 0.39 0.39 1.18 0.20 5.71 0.39 0.20
10.26 1.36 4.68 0.38 0.23 0.53 0.30 0.23 2.49 0.08
2.55
39.96 15.55 1.57 1.77 15.55 0.39 5.12
21.58 13.74 0.15
9.45 1.38 4.92 0.39 1.18 1.18 0.39
9.58 0.68 7.02 0.23 1.21 0.30 0.15
8.93
6.34 6.26 0.08
13.27 13.27
x
7.68 7.09 0.59
Singapore agenda WG on Relationship between Trade and Investment WG on Transparency in Government Procurement WG on Interaction between Trade and Competition Policy Trade facilitation (General Council)
x x x x
4.33 1.38 0.59 1.38 0.98
1.21 0.30 0.08 0.83
0.59
2.57 0.75 1.21 0.08 0.45 0.08
Trade and environment CMT on Trade and Environment CMT on Trade and Environment – Special Sessions DSB – Special Session
182
x
0.20 0.39
2.55
2.04 2.04
4.91 0.68 2.11
TRIPS Council for TRIPS Council for TRIPS – Special Session
Development CMT on Trade and Development CMT on Trade and Development – Special Session CMT on Balance-of-Payments Restrictions WG on Trade and Transfer of Technology WG on Trade. Debt and Finance
8.42 0.51
x
5.71 3.15 2.56
0.83 0.15 0.68
x
1.97
3.55
7.91 1.02
7.40 0.77 6.38 0.26
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Ruling Bodies Agriculture NAMA
LDC DC
Rules GATS TRIPS
Singapore issues Development Trade and environment DSU Review −40
−30
−20
−10
0
10
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deviation from developed countries (%) Figure 6.11. Priorities of developing and least-developed countries relative to those of developed countries.
represented where the decisions are taken. At the same time, decisions are not shaped at the top of the organization’s food chain, but rather at the bottom at the technical level (Committees/Working Groups/Working Parties). Once a decision has reached the decision-making level, it can only be blocked and referred back to the lower level. If the LDCs want to be part of the policymaking process they must move some resources downward in the organization or add new resources for this purpose. The same applies for developing countries in the lower income brackets. The top-heavy participation pattern of smaller and poorer Members shed ´ some light on the failures of the Ministerial Conferences in Seattle and Cancun (see Figure 6.12). One cannot expect ministers to sign an agreement that they have not had much part in shaping. The key to a successful round is an inclusive process in Geneva, as stressed by the Ministerial Declaration launching the DDA: “The negotiations shall be conducted in a transparent manner among participants, in order to facilitate the effective participation of all.”40 The evidence presented so far suggests that this ambition has not yet been achieved, at least as far as Members in the lowest income brackets are concerned. 40
Ministerial Declaration, supra note 4, para. 49.
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Håkan Nordstr¨ om
100
75
% 50
25
0 100
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Figure 6.12. Share of submissions to ruling bodies.
7. Conclusion The WTO is a Member-driven organization. That much is clear. It is equally clear that not everyone has the same means to participate in the proceedings, at least not individually. It is only the largest and the richest Members that have an individual voice at the WTO. The great majority of Members are only active as part of a wider group with shared identify and/or interests. Members with less means prioritize scarce resources at the upper levels of the organization where the formal decisions are taken. This is a natural if you must choose. The problem with the top-heavy representation is that the decisions are not shaped at the top but at the bottom at the technical level (Committees/Working Groups/Working Parties). Once a decision has reached the decisionmaking level it can only be blocked and referred back to the lower level. Even that requires a lot of backbone. If poor countries want to be part of real action they have no choice than to move some resources downward in the organization or add new resources for that purpose. This is not to say that developing countries as a group lack influence. Quite ´ and Hong the contrary, the two most recent Ministerial Conferences at Cancun Kong demonstrate that developing countries can exercise some considerable influence by pooling their resources and bargaining power. Moreover, although ´ Ministerial was more of a demonstration of vetoing power (e.g., the the Cancun Singapore issues), the Hong Kong Ministerial secured some positive gains for developing countries, notably the commitment by the EU, the United States, and other wealthy Members to phase out export subsidies on agricultural products by 2013. Even the cotton issue raised by four tiny West African cotton-producing Members with extremely limited means was partially addressed against all odds,
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although partly because of a strong external pressure from NGOs and the media. The Doha Development Agenda has to be something more than rhetoric. This paper has only scratched the issue of participation. Our database covers only one year, 2003. We do not know if the pattern is stable over time, although our sense is that developing countries are gradually gaining ground by working more tightly together. Indeed, it was not the ministers of developed countries that returned home with a smile from the Hong Kong Ministerial. Our measure of participation is also too simplistic. A simple count of submissions does not say very much. One good submission may be more worth than 10 bad ones. It is the intellectual and moral sway of the arguments that matters in the end. Some of our empirical results are also puzzling. For example, we are unable to establish a link between trade barriers and participation. Countries that face high trade barriers are no more prone to participate in the proceedings than are countries that face low trade barriers. This result is difficult to square with the objective of the WTO, although we suspect that the culprit is the MFN principle that severs the link between private incentives and private rewards. Another issue that has not been illuminated is the pattern of cooperation. Who is working with whom and why? Are alliances based on shared identity or shared trade interests? Although the paper may have raised more questions than it answered, we hope that it will serve as a catalyst for future research on these issues. The WTO is too important not to be member-driven.
references Blackhurst, Richard (1998). “The Capacity of the WTO to Fulfil its Mandate,” in Anne O. Kruguer(ed.), The WTO as an International Organization. Chicago and London; The University of Chicago Press. Bown, Chad P. (2005). “Participation in WTO Dispute Settlement: Complainants, Interested Parties and Free Riders,” World Bank Economic Review, Vol. 19, pp. 287–310. Cameron, C.and Trivedi, P. K.(1998). “Regression Analysis of Count Data,” Econometric Society Monograph No. 30. Cambridge: Cambridge University Press. Green, William H. (2003). Econometric Analysis. New Jersey: Pearson Education International. Horn, Henrik, H˚akan Nordstr¨omand Petros C. Mavroidis(1999). “Is the Use of the WTO Dispute Settlement System Biased?” CEPR Discussion Paper 2340 (London: Centre for Economic Policy Research). Kee, Hiau-Looi, Alessandro Nicitaand Marcelo Olarreaga (2005). “Estimating Trade Restrictiveness Indices,” World Bank. Michalopoulos, Constantine(1999). “The Participation of Developing Countries in the WTO,” WPS 1906, World Bank.
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JEFFREY L. DUNOFF
Comment on Nordstr¨om’s “Developing Countries and the WTO: What’s Wrong with Inactivity?”
H˚akan Nordstr¨om has developed an original research methodology and presented a thoughtful analysis of developing state participation at the WTO. The Participation of Developing Countries at the WTO analyses empirical data on the participation rates of different states derived from the official documents found on the WTO Members’ password-protected version of Documents Online. Perhaps not surprisingly, Nordstr¨om finds that the activity level is quite uneven across states. In particular, he finds that WTO activity is strongly correlated to income levels and trade stakes. One interesting, albeit tentative, conclusion that Nordstr¨om draws is that developing states are not disadvantaged by their inactivity, at least as measured by the trade barriers they encounter as compared with the barriers faced by active WTO members in the same income bracket. Nordstr¨om’s paper makes at least two important contributions to the literature on developing state participation at the WTO. First, it very usefully directs our attention away from developing state participation in WTO dispute settlement and toward developing state participation in the WTO’s legislative processes.1 In a previous volume in this series, I’ve argued that trade scholars devote undue attention to the WTO’s dispute settlement system.2 The overemphasis on WTO dispute settlement obscures the critical work that is done in other WTO fora, including particularly the various specialized committees that serve as the primary sites 1
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Perhaps a better way to express this is that participation complements Nordstrom’s earlier, and extremely influential, scholarship on developing state participation in dispute settlement processes. See, e.g., Henrik Horn, H˚akan Nordstr¨om, & Petros Mavroidis, Is the Use of WTO Dispute Settlement System Biased? (CEPR Discussion Paper No. 2340, London Center Econ. Pol. Res. 1999). Jeffrey L. Dunoff, Lotus Eaters: Reflections on the Varietals Dispute, the SPS Agreement and WTO Dispute Resolution in Trade and Health in the World Trade Organization (George A. Bermann & Petros Mavroidis, eds. 2006). See also Jeffrey L. Dunoff, Compliance at the WTO: Seduced by the Dispute Settlement System?, in The Measure of International Law: Effectiveness, Fairness and Validity 196 (Canadian Council on International Law ed., Aspen Publishers, 2004).
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for the generation, interpretation, and application of WTO norms. By example, Nordstr¨om invites trade scholars to study these other fora, and the discipline would be well served if other scholars follow his lead. Second, Nordstr¨om’s empirical research provides a large and suggestive body of data that can usefully inform discussions of developing state participation. Nordstr¨om’s empiricism enables him to provide a richness and level of detail in his analysis that are lacking in many discussions of developing state participation at the WTO. Future scholars can build on Nordstr¨om’s data, both by studying years other than 2003 and by exploring relationships that Nordstr¨om does not discuss in his paper. In short, Nordstr¨om’s data and richly suggestive analysis could support an entire research agenda into developing state participation at international organizations. That said, I believe that a paradox lies at the heart of Nordstrom’s analysis and that elucidating that paradox points toward important methodological and normative questions that his paper does not address. Although a full discussion of these methodological and normative questions is not possible in this short comment, I try to identify the paradox in Participation through a discussion of two issues: (1) whether Nordstrom’s analysis establishes that developing states are not active at the WTO; and (2) whether inactivity of developing states is rational behavior. Discussion of these issues leads to the underexplored question of whether developing state activity at the WTO is normatively desirable.
I. The Trouble with Numbers Let’s begin by considering what Nordstr¨om’s figures tell us about developing state participation at the WTO. In particular, does Participation demonstrate that developing states are largely inactive at the WTO? Nordstr¨om’s data track a variety of forms of participation, ranging from the staffing of Geneva trade missions to the number of submissions that states present to various WTO bodies. This is an intriguing and plausible approach to assessing participation, and, for current purposes I accept both Nordstr¨om’s figures and his regression analyses as accurate. The critical question, of course, revolves around the meaning and significance of Nordstr¨om’s data. Participation opens with a quote from the WTO Web site proclaiming that the WTO is a member-driven organization. This claim is accurate as far as it goes; unlike some international organizations, the WTO does not have a particularly strong Secretariat or large institutional budget or bureaucracy, and WTO norms and policies do reflect Member wishes. Moreover, again unlike some other international organizations, the WTO does not have weighted voting or limited membership decision-making bodies. Thus, as Nordstr¨om correctly states, “[t]he official policy is thus one of open doors and equal opportunity for all member states regardless of their weight in international trade.”
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However, another statement from the WTO’s Web site may be more relevant to the current discussion. In the context of a description of the various WTO bodies that are discussed in Part II of Participation, the Web site states: Important breakthroughs are rarely made in formal meetings of these bodies, least of all in the higher level councils. Since decisions are made by consensus, without voting, informal consultations within the WTO play a vital role in bringing a vastly diverse membership round to an agreement.
As this quote suggests, there is little to suggest that the data Nordstr¨om uses – including size of the mission and the number of formal submissions to WTO bodies – are accurate proxies for participation or, more importantly, influence at the WTO. The disconnect between formal submissions and meaningful influence leads to the heart of the methodological puzzle that lies at the center of Nordstr¨om’s paper. Participation uses a rigorous empirical approach and sophisticated statistical analysis to conclude that, in the year 2003, the developing states were largely inactive – and hence presumably largely marginalized – in WTO processes. But I strongly suspect that future trade scholars will draw sharply different conclusions about developing states’ participation in WTO processes in 2003. As Participation suggests, the climactic WTO-related event of 2003 is the “failed” Cancun Ministerial.3 But one cannot understand Cancun’s “failure” without appreciating the roles that developing states played in the Ministerial process. In particular, one of the critical drivers of WTO-related events in 2003, including the Cancun meeting, was the creation of, and interactions among, different coalitions of developing states.4 For example, one of the critical issues leading up the Ministerial was the treatment of the Singapore issues (i.e., competition policy, investment, transparency in government procurement, and trade facilitation). The Doha Declaration established a deadline for deciding how to handle negotiations aimed at adding the Singapore issues to the WTO system. Certain Members read the Declaration to assume that formal negotiations were to begin in Cancun; for example, an EC submission implicitly assumed that negotiations on the Singapore issues would begin after the Cancun meeting.5 Many developing states, on the other hand, 3
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For differing accounts, see, e.g., Jagdish N. Bhagwati, Don’t Cry for Cancun, 83 Foreign Aff. 52 (2004); Sungjoon Cho, A Bridge Too Far: The Fall of the Fifth WTO Ministerial Conference in Cancun and the Future of the World Trade Constitution, 7 J. Int’l Econ. L. 219 (2004); Amrita Narlikar & Rorden Wilkenson, Collapse at the WTO: A Cancun Post-Mortem, 25 Third World Q. 447 (2004). See, e.g., Amrita Narlikar & Diana Tussie, The G20 at the Cancun Ministerial: Developing Countries and Their Evolving Coalitions in the WTO, 27 World Econ. 947 (2004); Andrew Hurell & Amrita Narlikar, A New Politics of Conflict? Developing Countries at Cancun and Beyond (unpublished manuscript, on file with author). WTO Secretariat, Communication from the EC, WT/GC/W/491(February 27, 2003).
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took the position that the Declaration implied that formal negotiations could only start if there was a consensus among WTO members at Cancun to do so. A “Core Group” of developing states – originally consisting of Bangladesh, Cuba, Egypt, India, Indonesia, Kenya, Malaysia, Nigeria, Pakistan, Venezuela, Zambia, and Zimbabwe – attempted to formalize this understanding by issuing a joint statement insisting that negotiations could not start absent an explicit agreement to do so.6 The Core Group also noted that the African Group and the group of least-developed states had adopted a similar position. In the run-up to the Ministerial and at the Ministerial, many other developing states joined with the Core Group in their resistance to adding the Singapore issues. During the Ministerial, discussions over the Singapore issues proved contentious. Over the course of the meeting, various groups of developing states reiterated their opposition to opening negotiations on the Singapore issues. On the final day of the Ministerial, Botswana made a statement on behalf of the African Union threatening to block any agreement that included the opening of negotiations of any of the Singapore issues. South Korea responded by saying that it would not accept any deal that did not include all of the Singapore issues. The lack of consensus over the Singapore issues was the immediate cause of the collapse of the Ministerial.7 Developing states were also at the heart of the issue that received the most media and popular attention at the Cancun Ministerial: developed state cotton subsidies.8 During the run-up to the Ministerial, the four West and Central African states of Mali, Benin, Chad, and Burkina Faso proposed a complete phase-out of cotton subsidies and financial compensation to the least-developed states until the subsidies were eliminated.9 The proposal was supported by 13 other West and Central African states.10 Thereafter, a number of events supporting this initiative were sponsored by both governments and NGOs. Discussion of the so-called Cotton Initiative figured prominently at the Cancun Ministerial. On the first day of the Ministerial, Mali and other states raised the issue, the WTO Director-General, in an unusual development, addressed a plenary session and urged ministers 6
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WTO Secretariat, Comments on EC Communication, (WT/GC/W/491) on the Modalities for the Singapore Issues, WT/GC/W/501 (July 8, 2003). See generally, Cancun Ministerial Collapses over Singapore Issues, Inside U.S. Trade, September 15, 2003. For background on the issue of cotton subsidies, see, e.g., Overseas Development Institute, Developed Country Cotton Subsidies and Developing Countries: Unravelling the Impacts on Africa (2004); Oxfam, Cultivating Poverty: The Impact of US Cotton Subsidies on Africa, Oxfam Briefing Paper 30 (2002). WTO Secretariat, Poverty Reduction: Sectoral Initiative in Favor of Cotton, TN/AG/Gen/4 (May 16, 2003). Id. States supporting the cotton initiative included Cameroon, the Central African Republic, Cˆote d’Ivoire, Gabon, Ghana, Kenya, Madagascar, Mali, Mozambique, Nigeria, Tanzania, Togo, and Uganda.
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to give the Cotton Initiative serious consideration, and developed states such as Australia and Canada strongly supported Mali’s intervention.11 Despite substantial discussions over the next few days, no consensus was reached. Certain Members opposed creation of a transitional compensation mechanism within the WTO system and questioned the wisdom and feasibility of separating the cotton issue from the larger set of agricultural issues. The United States argued that subsidies are not the sole cause of distortions in the cotton market and that any effort should address the multiple causes of falling cotton prices.12 The failure to resolve the Cotton Initiative to the satisfaction of the developing states had a negative impact on the overall tone of the Cancun meeting. Many developing states viewed the cotton issue as a litmus test and reacted strongly to what they viewed as an insufficient response by developed states. Thus cotton assumed a symbolic importance at Cancun, and the failure to reach agreement encapsulated the frustrations that developing states felt over many developed state positions at the Ministerial.13 Finally, developing states played a critical role in discussions over agriculture, which was at the heart of Cancun’s agenda. The run-up to Cancun revealed deep divisions over whether and how to negotiate reforms in three “pillars”: market access, export subsidies, and trade-distorting domestic subsidies. In August 2003, the United States and the EC proposed a joint text designed to advance the negotiations.14 This initiative sparked creation of yet another coalition of developing states, the so-called G20. This group included the most powerful of the emerging powers from the developing world, including Brazil, India, and China. Moreover, unlike many past developing state efforts, the G20 went beyond a simple blocking coalition to one that offered a proactive agenda. The G20 presented a counter framework that implied deeper cuts in domestic agricultural subsidies by developed states, a tariff reduction formula that imposed lesser burdens on developing states, and a total elimination of export subsidies. Again, despite extensive discussions at Cancun, no consensus was reached. In particular, sharp 11
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See, e.g., Cotton – The “TRIPs and Public Health” of Cancun?, Bridges Daily Update, September 11, 2003. See World Trade Organization, Summary of 10 September 2003, Day 1: Conference kicks off with “facilitators” named and cotton debated, available at http//www.wto.org/english/ thewto e/minist e/min03 e/min03 e 10sept e.htm. Despite the lack of agreement at Cancun, the initiative sparked a number of activities both inside and outside the WTO. For example, in 2003, Brazil filed what would ultimately become a successful complaint alleging that the United States had granted excessive subsidies to its cotton growers between 1999 and 2002. In March 2004, the WTO Secretariat organized a workshop on Cotton in Cotonou. Later that year, the General Council specifically recognized “the importance of cotton for a certain number of countries” and stated that cotton would be addressed “ambitiously, expeditiously, and specifically, within the agriculture negotiations,” and created a special subcommittee on cotton. WTO Secretariat, Doha Work Programme Decision, WT/L/579 (August 2, 2004). See United States Department of Agriculture, Statement Regarding the US-EU Framework for WTO Agricultural Negotiations, August 13, 2003.
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divisions remained over the elimination of all export subsidies and the extent to which developing states should open their markets. In short, far from being marginalized bit players, developing states played a crucial role in the Cancun Ministerial. On each of the most important issues, they formed coalitions that substantially shaped – and ultimately stymied – the negotiations. Essentially, developing states sought provisions that focused on their development needs. When they felt that their needs were not being adequately addressed, they created – and maintained – coalitions that were able to block consensus. As one U.S. government report summarized the role of developing states at Cancun, “[i]n the end, their views were decisive.”15 Although this characterization may be overstated, it is clear that one of the key developments at the WTO in 2003 was the important role that various coalitions of developing states played in the run-up to the Ministerial as well as at the conference itself. Thus, although the data that Nordstr¨om presents provide one way to understand developing state participation in 2003, I would suggest that at a minimum this data would need to be supplemented by an account of that year that includes the elements mentioned above. Although it is well beyond the scope of this short paper, I simply note that the gap between Nordstr¨om’s reading of developing state activity in 2003 and the alternative account outlined above suggests large and important methodological questions regarding the use – and the limits – of the sort of qualitative analysis that Participation employs.
II. Should Developing States Participate in WTO Activities? Putting these larger interpretative and methodological issues to the side, we can turn to a second issue regarding developing state participation. For current purposes, let’s take Nordstr¨om’s data and conclusions at face value and assume that developing states are infrequent if not marginal participants in WTO processes. Is inactivity a rational behavior? Participation suggests one reason why it might be rational for developing states not to become active participants at the WTO. Nonparticipation does not entail a trade cost, in the sense that the non-participants do not face higher trade barriers. As Nordstr¨om explains, his data show that active and passive countries in the same income bracket face equal trade barriers abroad. If this is true, then a developing state might well decide to free-ride on the efforts of others and not devote scarce resources to WTO processes in Geneva, Cancun, or elsewhere. Participation also suggests that low participation rates reflect resource constraints. Quite simply, it is expensive, in terms of personnel, analytic capacity, 15
U.S. General Accounting Office, Cancun Ministerial Fails to Move Global Trade Negotiations Forward; Next Steps Uncertain at 30, GAO-04-250 (2004). United States Trade Representative Robert Zoellick offered a similar analysis. Robert Zoellick, Op-Ed., America will not Wait for the Won’t do Countries, FIN. TIMES, September 22, 2003.
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and financial resources, to participate fully in all of the WTO’s activity. States with limited budgets will find it hard to do so. Participation also suggests that low participation reflects small stakes in trade issues, in absolute and perhaps in relative terms as well. All of these explanations are entirely plausible. However, it is worth considering whether there are other explanations for low rates of developing state participation. Much recent scholarship has attempted to identify the determinants of development.16 There is a strong line of thought that views economic liberalization and openness to the global economy as essential to development. But some empirical data give reasons to question this conventional wisdom. Dani Rodrik and others argue that states that have followed the “Washington Consensus,” including trade liberalization, have experienced disappointing economic results. States that followed this path experienced economic growth rates that were low in absolute terms as well as relative to other states that were reluctant reformers and relative to the reforming states’ own historical experience.17 Moreover, many of the states that experienced the most successful growth rates followed heterodox policies.18 For example, high-growth states like China and Vietnam have become more market-oriented, but have done so through highly unorthodox means. The recent development experience of developing states thus suggests another reason why non-participation in WTO processes might be a rational strategy. The argument would be that if a state had limited trade policy capacity and a limited capacity to engage in sustained analysis of trade issues, that it might do well to focus internally rather than externally, and that it might obtain greater benefits by keeping its best and brightest at home in the national capital rather than in Geneva. This argument builds upon the claim that economic growth has at least as much to do with domestic institutions as it does with integration into the world economy and that developing states profit by focusing on domestic policy factors – including infrastructure and human resources development; stable macro-economic management; and the volume, structure, and direction of investment.19 In short, developing states might reason that attention to these
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The literature is, of course, vast. For a sampling of influential approaches, see, e.g., Elhanan Helpman, The Mystery of Economic Growth (Harvard University Press 2004); Amartya Sen, Development as Freedom (Knopf 1999); Robert Barro, Determinants of Economic Growth: A Cross-Country Empirical Study (MIT Press, 1997); Dani Rodrik, et al., Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development, 9 J. Econ. Growth 131(2004); Jeffrey D. Sachs & Andrew Warner, Natural Resource Abundance and Economic Growth, in Leading Issues in Economic Development(Oxford Univ. Press 2000). See, e.g., Nancy Birdsall, et al., How to Help Poor Countries, 84 Foreign Aff. 136 (July/August 2005). See, e.g., Dani Rodrik, Rethinking Growth Policies in the Developing World (unpublished manuscript on file with author). See, e.g., Douglass C. North, Institutions, Institutional Change and Economic Performance (1990). Dani Rodrik, et al., supra note 18; Daron Acemoglu, et al., The Colonial Origins of Comparative Development: An Empirical Investigation, 91 Am. Econ. Rev. 1369
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matters is at least as important as their participation rates in WTO meetings. And if this is true, it may provide an additional reason why non-participation at the WTO is a rational, rather than a suboptimal, strategy.
III. What’s So Great about Participation Anyway? Having considered whether developing states are active participants at the WTO and if not, whether inactivity is a rational strategy, it is worth exploring whether low rates of participation are problematic. In short, what’s wrong with inactivity? The implicit assumption in many of the debates over developing state participation is that higher rates of participation are desirable, but it is worth asking why this would be the case. I simply outline here rather than defend two thoughts concerning developing state participation. First, greater participation could go a long way toward addressing the WTO’s legitimacy crisis.20 Ever since the end of the Uruguay Round, developing states have raised strong concerns about the nature and quality of their participation in WTO processes.21 Nordstr¨om’s data seems to support these concerns. Greater and more meaningful participation would presumably address, at least to some extent, the legitimacy critique. The second thought is a variation on an idea that is in play in Participation. Nordstr¨om suggests that the main consequence of being inactive is the lost opportunity to reform WTO rules. One might understand this comment as focused on the international level. But I would suggest that, for many developing states, the impact of many WTO rules is felt in unexpected ways on the domestic level. Particularly in new areas of WTO disciplines, such as SPS measures, TBT measures, intellectual property measures, and the like, changing rules reverberate in the life of developing states in multifarious and often surprising ways. A recent World Bank report on the challenges and opportunities presented by food safety and agricultural health standards illustrates the unexpected and underappreciated ways that WTO norms can affect economic, political, and social actors on the domestic plane.22 So it is possible that greater participation by developing states
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(2001); Robert Hall & Chad I. Jones, Why Do Some Countries Produce So Much More Output per Worker than Others, 114 Q. J. Econ. 83 (1999). See, e.g., Efficiency, Equity, and Legitimacy: The Multilateral Trading System at the Millennium 227 (Roger B. Porter et al. eds., 2001); Robert Howse, The Legitimacy of the World Trade Organization, in The Legitimacy of International Organizations (JeanMarc Coicaud & Veijo Heiskanen eds., 2001); Andrew T. Guzman, Trade, Labor, Legitimacy, 91 Cal. L. Rev. 885 (2003); Jeffrey L. Dunoff, The WTO’s Legitimacy Crisis: Reflections on the Law and Politics of WTO Dispute Resolution, 13 Am. Rev. Int’l Arb. 197, 199–205 (2002); Daniel C. Esty, The World Trade Organization’s Legitimacy Crisis, 1 World Trade Rev. 7 (2002); Markus Krajewski, Democratic Legitimacy and Constitutional Perspectives of WTO Law, 35 J. World Trade167 (2001). Jeffrey L. Dunoff, The WTO in Transition: Of Constituents, Competence and Coherence, 33 Geo. Wash. Int’l L. Rev. 979 (2001). World Bank, Food Safety and Agricultural Health Standards; Challenges and Opportunities for Developing Country Exports, World Bank Report No. 31207 (2005).
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at the international level might enable them to mitigate or modify the effects of WTO norms at the domestic level.
Conclusion Participation of Developing Countries at the WTO provides a useful corrective to the conventional overemphasis on dispute settlement and underappreciation of the WTO’s legislative processes. Its empirical examination of participation rates in various WTO organs provides an original and useful way to begin to understand the role of developing states at the WTO. However, the link between rates of formal submissions and meaningful influence in the WTO is neither direct nor obvious. Although Nordstr¨om’s data seem to suggest that developing states played a relatively minor role in WTO processes during 2003, I believe this conclusion to be highly misleading. To the contrary, the alternative account that I outlined above underscores the critical role that developing states played in 2003. It is difficult to square these two accounts, and the tension between them suggests difficult methodological questions about how to measure participation and influence at the WTO. Participation offers a few explanations for low developing state participation rates, including developing states’ limited resources and relatively small trade stakes. These are certainly plausible, but there are other reasons why a low-participation strategy is a rational strategy. In particular, developing states may conclude that their limited trade policy resources are better deployed in the service of domestic reform than in WTO activities. Finally, we should not necessarily assume that more developed state participation is better than less participation. Many U.S. and European trade negotiators experienced more developing state participation at the WTO than they wanted in 2003. To be sure, I am not suggesting that their perspective is the only appropriate one when it comes to thinking about increased developing state participation. But Cancun’s failure does suggest the need to think carefully about both the virtues and the drawbacks of increased developing state participation at the WTO.
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MARC L. BUSCH AND ERIC REINHARDT
7 Developing Countries and GATT/WTO Dispute Settlement
I. Introduction It has long been observed that developing countries made scant use of dispute settlement under the General Agreement on Tariffs and Trade (GATT). Less clear are the reasons for this limited usage. Most observers insist that the various GATT reforms designed to help developing countries failed to insulate them from the “power politics” of the system (Kuruvila 1997). Not surprisingly, many of these same observers predict that the greater “legalism” of the World Trade Organization (WTO) and of the Dispute Settlement Understanding (DSU) in particular will encourage more participation by developing countries. Indeed, some go so far as to suggest that, enticed by a system in which, unlike in the GATT years, “right perseveres over might” (Lacarte-Muro and Gappah 2000, 401), developing countries will have greater recourse to multilateral dispute settlement. The underlying presumption, of course, is that developing countries were especially ill served by GATT’s diplomacy and are better poised to benefit from the WTO’s more legalistic architecture. We argue that this conventional wisdom is wrong on both counts. In assessing how developing countries have fared in dispute settlement, two questions beg empirical attention. First, have developing countries secured more concessions, by which we mean favorable trade policy outcomes, in WTO
A shorter version of this paper appeared in Journal of World Trade 37 (4) 2003: 719–735. For comments, we thank Karen Alter, Howard Chang, Bill Davey, Andrew Guzman, Rob Howse, Petros C. Mavroidis, Beth Simmons, Richard Steinberg, and seminar participants at the Advisory Centre on WTO Law, Berkeley’s Boalt Hall School of Law, and the Swedish International Development Agency. We also thank Alex Muggah for research assistance. We owe a great debt to Bob Hudec, whose work inspires our own, and who was a gracious mentor and colleague. Busch thanks the Social Sciences and Humanities Research Council of Canada and the Canadian Institute for Advanced Research for financial support; Reinhardt thanks the University Research Committee of Emory University.
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versus GATT dispute settlement? And second, what explains any differences in the outcomes realized by developing as opposed to developed countries? As a first cut, most observers note that developing countries have, in fact, been more active in WTO dispute settlement. This greater participation is typically traced to the legal reforms ushered in by the DSU, notably the “right” to a panel and automatic adoption of panel reports. The argument is that these reforms have done much to temper the power politics that permeated GATT and, together with the WTO’s greater clarity of law, should prompt developing countries to take more meritorious cases to Geneva. We dissent from this view. As we argue elsewhere (Busch 2000; Busch and Reinhardt 2000, forthcoming; Reinhardt 2001), “early settlement” offers the greatest likelihood of securing full concessions from a defendant at the GATT/WTO, a pattern that has been less evident in cases involving developing countries. In general, defendants tend to offer the greatest concessions in the consultation stage or at the panel stage but before a ruling. These negotiations in the “shadow of the law,” as opposed to even pro-plaintiff rulings at the panel or Appellate Body (AB) stage, account for most of the concessions that resolve cases and most of the fullest concessions, in particular. It is thus the threat of legal condemnation, rather than a ruling per se, that induces settlement. If defendants do not settle early, they tend to dig in their heels, lowering the prospects for the successful resolution of disputes. As Hudec (1993, 360) put it, “No functioning legal system can wait until [the verdict stage] to exert its primary impact.” In this light, it is interesting to note that most of the GATT-era reforms favoring developing countries focused on helping them litigate at the panel stage, notably the 1966 Decision (Hudec 1980). Perhaps not surprisingly, developing countries have been more likely to panel disputes against developed countries (Busch 2000). Yet, as a result, they have fared less well in exacting concessions from defendants. We argue that the DSU system only serves to reinforce this tendency, given both the incentives to litigate and developing countries’ lack of capacity to push for early settlement. The data clearly bear out our argument. First, poorer countries have not secured significantly greater concessions under the WTO than under GATT. This is true despite the fact that the DSU has facilitated more favorable outcomes for wealthier complainants (except in the special climate of U.S.-EC disputes). The result is a new and growing gap between rich and poor Member states in the performance of the dispute settlement component of the global trade regime. More telling still, our results indicate that the central problem for developing countries is that they are missing out on early settlement, not that they boast a worse record in winning pro-plaintiff rulings from panels or the AB. Second, and related, we find that this gap owes to a lack of legal capacity, not a lack of market power with which to threaten retaliation. The main implication of this, as we argue elsewhere (Busch and Reinhardt 2000), is that developing countries need more assistance before litigation commences.
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The paper proceeds in three sections. Section II elaborates our argument. Section III sets out our empirical tests. Section IV concludes with several of the most salient implications of our findings.
II. Argument One could be forgiven for wondering why any country ever used GATT dispute settlement, let alone why developing countries seldom used it. Indeed, the system seemed riddled with exceptions and yet somehow worked quite well (Hudec 1993). First codified in a small annex attached to the 1979 Understanding on Dispute Settlement, the system lacked a consistent set of rules, never mind the “teeth” to enforce rulings. By way of contrast, the DSU offers a single set of procedures for disputes raised under any of the covered agreements, marking an important improvement over the GATT (see Horn and Mavroidis 2001; Petersmann 1997; Steger and Hainsworth 1998). Among the DSU’s more notable reforms are stricter timelines on proceedings, the right to a panel (carried over from the 1989 Dispute Settlement Procedures Improvements), automatic adoption of reports (except by “negative consensus”), and review by the standing AB. For developing country complainants, in particular, this means a more timely “trial,” free from the threat that a defendant could block or significantly delay a case from being heard. In addition, standard terms of reference and the automatic adoption of rulings lend greater legal coherence to the system as a whole and remove the potential for a recalcitrant defendant to block a ruling (Palmeter and Mavroidis 1998). Last, the option of appellate review promises more consistency across rulings, resulting in a better-informed body of case law with which to think through the merits of a case ex ante (Howse 2000). Taken together, these reforms are expected to promote errant defendants to liberalize in a timely manner and to encourage developing countries to bring more cases to the WTO than they did to GATT. The problem is that these reforms have also raised the transaction costs of settling disputes (see Busch and Reinhardt forthcoming). This is a regrettable side effect of the much-vaunted move toward a more rule-oriented system. At the outset of a case, for example, the tight enforcement of newly standardized terms of reference, legal disincentives for disclosure, and the rules on standing all serve to place the onus on disputants and third parties to legally mobilize as soon as possible to avoid losses on technicalities later on (i.e., having the panel or AB deem a certain argument outside its terms of reference). Indeed, in a way that few have recognized, the mere fact that powerful defendants can no longer significantly delay or block panel establishment itself means that legal preparation carries more weight in pre-panel bargaining. Moreover, after a ruling, the prospect of an Article 21.5 “compliance” panel review (and possibly appeal) and Article 22 “arbitration” of the suspension of concessions greatly increases the incentives for foot-dragging, motivating errant defendants to delay making concessions (Reinhardt 2002; Shoyer 1998).
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The new premium on legal capacity under the DSU is likely less burdensome for most of the advanced industrial states, which generally maintain large, dedicated, permanent legal and economic staffs tasked with WTO and trade law matters.1 For these countries, the move from a “power-oriented” to a more “rule-oriented” system contains little additional ambiguity. But for poorer countries, such a move simply substitutes (or compounds) the traditional source of weakness – namely, their lack of market size and thus retaliatory power – with a new one: legal capacity. For developing countries, in particular, this move bodes especially poorly for settling a dispute early. Under GATT, developing countries were fully 25 percent more likely to panel cases against wealthier economies than developed country complainants (Busch 2000), thereby reducing their odds of early settlement, which tends to yield the most favorable concessions (see Busch and Reinhardt 2000, forthcoming). Under the WTO, developing countries may potentially find it even more difficult to negotiate in the shadow of the law, given the incentive to litigate fully (Hudec 2002), the greater likelihood that multiple complainants and third parties will join their case, and the limited legal resources at their disposal to capitalize on early settlement. Our argument draws on the intuitive logic of well-established formal models of pre-trial bargaining. Consider an environment in which both the plaintiff and defendant have private information, whether about the level of violation or, perhaps, the intensity of political pressures on each side to induce or resist concessions, respectively. The problem for the plaintiff at the consultation stage is to make credible its threat to push the case to completion, whatever the cost. The question, then, is how the prospects for early settlement change as the cost (in terms of expense and complexity) of litigation increases, relative to the political rewards of inducing liberalization by the defendant. The basic idea is that the defendant with a weak case becomes more entrenched, gambling that the extra burdens of pursuing the case will deter further action by the complainant (Baker and Mezzetti 2001, 163; Fournier and Zuelhke 1989, 193; Nalebuff 1987, 204). In addition, the added complexity of litigation may decrease the complainant’s likelihood of victory in any resulting ruling, holding the objective facts of the case constant (Meurer 1989, 87). Both prospects make the defendant more reluctant to settle early, whereas a plaintiff facing lower litigation costs will be more successful in inducing defendants (at least those with weaker cases) to concede before a ruling.2
1
2
However, even for them, the costs of legal work related to trade disputes have mushroomed in recent years. For instance, expenditures by the Canadian Department of Foreign Affairs and International Trade on just the private component of legal representation for trade disputes tripled from 2000 to 2002 alone (Ottawa Citizen, May 21, 2002, A3). Reinhardt’s (2001) model of GATT dispute bargaining with two-sided incomplete information has a similar implication. Specifically, although that model has zero transaction costs, we can interpret its parameter for the probability of a pro-plaintiff ruling as partly a function of the plaintiff’s legal capacity or litigation costs. In that model, given that there is a window of agreement for settlement in the first place, the greater resolve the plaintiff acquires from
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Interestingly, this argument does not yield a determinate prediction regarding the probability of victory in the subset of cases that reach a verdict. A poor plaintiff – one possessing less legal capacity or facing higher transaction costs, relative to the potential winnings of the case – might file weaker cases on average in the first place or might lose “winnable” cases more often if it went to trial. Yet, by virtue of its relative failure to peel “guilty” defendants off before a ruling, a poorer plaintiff will tend to face systematically “guiltier” defendants on average in cases that do reach a verdict. These countervailing tendencies may wash each other out. Hence, although complainants for whom litigation is costly or difficult should be less likely to induce early settlement by defendants, they may not be any less likely to win the verdicts ultimately issued. Extending this logic to WTO dispute settlement, we conjecture that, compared with GATT, the DSU regime has not increased the level of concessions that poorer complainants are able to elicit from defendants, even if it has improved matters for developed country complainants. We also conjecture that, under the WTO, poorer complainants are likely to have become significantly less able to induce early settlement by defendants than wealthy complainants (which is not to say that they are less likely to win cases in which a verdict is ultimately issued). Finally, we conjecture that developing countries are disadvantaged in achieving early settlement because of their limited legal capacity, not their inability to threaten retaliation (i.e., given their market share). A possible objection to this last hypothesis merits attention. In particular, it might be argued that developing countries gain more early settlement as a result of the DSU’s potential to better “enforce” rulings, which in turn might encourage greater participation (Gabilondo 2001, 484). Like Hudec (1993, 360–1; 1999, 9–10; 2002, 90) and other observers (Mavroidis 2000; Valles and McGivern 2000; Reinhardt 2001, forthcoming), however, we find little merit in this logic, the reason being that the main obstacle to retaliation is mustering the political will to follow through on authorization, rather than securing authorization. The DSU has, of course, only improved on the latter.
III. Empirical Tests To find out how developing complainants have fared under the evolving dispute settlement provisions of the global trade regime, we compiled a dataset of 380 concluded GATT/WTO disputes filed from January 1, 1980, through December 31, 2000. Of these, 154 occurred under WTO rules.3 The list of participants includes
3
the expectation of better litigation results induces deeper concessions from the defendant in pre-ruling bargaining. This list of 154 WTO cases includes five disputes initially filed under GATT but continuing under WTO procedures. It does not include nineteen GATT cases ending after 1994 without invoking WTO rules.
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a wide variety of countries, with 46 separate complainants (and 43 defendants), of which 31 (21) could be classified as “developing.”4 Our time period begins in 1980 to ensure that the comparison across regimes uses only the mature GATT era as a reference point.5 The dataset does not include WTO cases beginning after 2000 because those 59 subsequent cases have not had sufficient opportunity to conclude.6 Following Hudec (1993), we only count complaints in which formal GATT/ WTO proceedings were explicitly invoked (i.e., naming defendants and alleging the infringement of specific legal rights, most often in the form of an initial “request for consultations”). Because we are interested in characterizing patterns of settlement and because settlement may occur bilaterally in disputes involving multiple complainants or defendants, for counting purposes we break multistate complaints into each constituent pair of complainant and defendant (Busch and Reinhardt 2002, 460; Horn, Nordstr¨om, and Mavroidis 1999, 9; Reinhardt forthcoming). We also eliminate redundancy in the list of cases to avoid doublecounting, following the approach of Horn, Nordstr¨om, and Mavroidis (1999).7 To compare the ability of developing country complainants to induce concessions by defendants under GATT and the WTO, we need to control for the differing legal dispositions of each case. We thus identify the stage reached and the direction of rulings for all disputes. Of the 380 disputes in our dataset, a panel was established in 191 cases (107 of 226 GATT complaints and 84 of 154 WTO complaints). Of those 191 panels, 152 issued substantive reports, which were appealed in 47 of the 64 WTO cases. Notably, a large majority – 58 percent – of WTO-era disputes have been resolved or dropped in consultations or during panel deliberations in advance of a ruling. This percentage speaks to the importance of early settlement under the WTO and is entirely in keeping with figures drawn from 4
5
6
7
We must emphasize that “developing” countries are not all equally disadvantaged in terms of legal capacity, market power, and general experience in the trade regime. Accordingly, the tests below use a more refined measure of level of development (i.e., per capita income). However, for the simple purpose of enumeration, we group the United States, Canada, Japan, Norway, Switzerland, Australia, New Zealand, and the EU15 as “developed,” with the remaining GATT/WTO members (all of which were, for instance, beneficiaries of a non-reciprocal Enabling Clause preferences scheme such as the Generalized System of Preferences at some point) as “developing.” The late 1970s began a long period (still underway) of increases in the frequency of disputes (Hudec 1993, 13–14), and the first codification of GATT dispute settlement practices in the 1979 Understanding offers a useful breakpoint for analysis. Furthermore, our list of 380 cases does not include 43 GATT and 73 WTO complaints begun in our sample period for which outcome data were unavailable. Many in the WTO subset remain underway as we write. Nonetheless, our dataset covers 77 percent of the total number of complaints from 1980 through 2000, 84 percent of those under GATT, and 68 percent of those under the WTO. In future work we will be able to improve upon at least the latter statistic. For example, we do not count DS16 (the first WTO Bananas complaint) separate from DS27 (the second, filed just four months later). Likewise, we merge complaints by a given complainant against a given defendant’s provisional and final anti-dumping determinations, at least when separate panels and legal arguments were not made.
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empirical work looking at the broader set of all GATT-era disputes, and U.S.-EU disputes under the WTO (Busch and Reinhardt 2000, forthcoming). In terms of the direction of any decisions rendered, we code the initial panel report, or the initial AB report, if appealed, according to whether it substantially favored the complainant, was mixed, or favored the defendant. Of the 152 rulings, 109 favored the complainant, 26 were mixed, and 17 found for the defendant. This pro-plaintiff leaning also accords with previous studies of GATT (Reinhardt 2001). Interestingly, however, the tendency of WTO rulings to lean for the complainant is somewhat weaker (64 percent of rulings) than was true of GATT-era panels (77 percent of rulings). We also follow Hudec (1993) in defining outcomes as the policy result of a dispute, rather than the nature of a ruling per se (see Busch and Reinhardt 2002, 470). In other words, the question of interest is whether the defendant liberalized the disputed trade policy practice(s), thereby conceding to some or all of the complainant’s demands, and not simply whether a ruling – if in fact there was one – favored one side or the other. Using a measure that has meaning at each stage of dispute settlement, from consultations to a decision by the AB, we code outcomes according to whether substantial, partial, or no concessions were made with regard to the contested trade measure(s). Although such an approach has been used to study GATT-era disputes (Busch 2000; Hudec 1993; Reinhardt 2001, 2002, forthcoming), this chapter is one of the first to systematically characterize WTO outcomes in this way (but see Busch and Reinhardt forthcoming). By way of illustration, Hormones (DS26) scores as no concessions, and Duties on Imports of Grains (DS13) ended with full concessions. Bananas (DS27) is perhaps the most difficult case to score; we give it a partial concessions outcome because of the long delay before settlement, the multi-year time frame allowed for implementation afterward, and the incomplete relaxation of the discriminatory barriers in any case. Of the 380 GATT/WTO disputes, 50 percent ended with substantial concessions, 19 percent ended with partial concessions, and 31 percent with no concessions. Before turning to the empirical tests, a word is in order about the potential for selection bias. The fact that there is a process by which certain cases are selected for litigation does not, itself, necessarily bias the findings particular to our argument. Rather, there is selection bias if (and only if) the likelihood of filing a case is a function of some unobserved variable(s) that, in turn, is highly correlated with our variables of interest. Because we compare the performance of developed and developing country complainants across GATT and WTO dispute settlement, our results would be biased if the DSU’s reforms led poorer complainants to bring less meritorious cases under the WTO than under GATT, without affecting the selection of complaints by wealthier complainants. As we detail more fully below, however, no such pattern is evident. First, the probability of a complaint being filed by a developing country has not increased from GATT to the WTO, after controlling for trade patterns and a host of other characteristics (Reinhardt 2000), suggesting that poorer complainants are not quick to file frivolous lawsuits under the DSU, as
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Table 7.1. GATT/WTO dispute outcomes by complainant’s development status Level of concessions GATT WTO GATT+WTO Developing
Complainant’s development status
None 32 (44%)
13 (27%)
Partial 14 (19%)
45 (38%) Developed
53 (34%)
19 (18%)
85
32 117
Full 26 (36%)
25 (21%) 40 (26%)
72 (28%) Total
11 (23%)
9 (8%)
49 (19%) 54
20 74
24 (50%)
50 (42%)
Total 72
48
120
61 78 (40%) (74%) 139 (53%)
154
87
226 154 380
102 189
106
260
Note: The table includes all GATT or WTO complaints initiated from 1980 through 2000, inclusive, for which we have outcome data at present (i.e., 380 of 496, or 77% of the total number of complaints begun in this period). “Developing” countries for these purposes are all those except for the Quad (United States, Canada, Japan, and the EU15), Norway, Switzerland, Australia, and New Zealand.
per this concern for selection bias. Second, poorer complainants are not losing a greater proportion of their WTO rulings, relative to wealthier complainants, than they were under GATT, indicating that, at least in those cases that go on to a ruling, there is no apparent (new) gap in the merits of their cases. And third, the attributes that make a case easier to argue (such as targeting discriminatory measures and avoiding claims of non-violation nullification and impairment) are more evident in WTO-era, as opposed to GATT-era cases filed by poorer complainants, suggesting that their suits are more meritorious today, not less. These facts all undermine the view that selection bias is responsible for our findings. As a first cut at the data, consider a simple breakdown of these dispute outcomes by regime (GATT versus WTO) and by the complainant’s level of development. In Table 7.1, developing country complainants saw defendants fully liberalize disputed measures 36 percent of the time under GATT, increasing to 50 percent under the WTO. As we show below, however, this association is partly spurious. It is also far outstripped by the gain experienced by developed country complainants, who shifted from an initially comparable success rate of 40 percent under GATT to a remarkable 74 percent success rate under the WTO. This point becomes even more profound when we recognize the great diversity within the category of “developing countries” in the table. Seventeen of the 24 WTO-era developing country complaints (71 percent) yielding full concessions – the basis for whatever gains such plaintiffs have made under the DSU – came from the wealthiest and most dominant developing countries in the system, notably the four major Latin American states (Brazil, Argentina, Mexico, and Chile) plus Korea, Singapore, India, and Thailand. This phenomenon is actually more characteristic of the WTO era than the GATT era. Specifically, developing country complainants
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winning full concessions under GATT were no richer than those failing to win full concessions (with per capita incomes of $3,450 versus $3,750, in 1995 U.S. prices), whereas those winning full concessions under the WTO were notably wealthier than their losing counterparts ($5,150 versus $3,350). The small gains for developing country complainants, moving from GATT to the WTO, that are shown in Table 7.1 thus overstate the likely effects of the reforms for more typical developing countries. What we need to ask, then, is how much of the success that poor complainants have realized in inducing concessions from defendants (as opposed to winning panel reports) is attributable to the WTO’s more legalistic DSU, controlling for other factors. Put more simply, has the WTO leveled the playing field in dispute settlement? Our technique for answering these questions is to estimate an ordered probit model of the defendant’s level of concessions, with the regime (a variable coded 1 for the WTO period, and 0 otherwise) and the complainant’s level of development (per capita income in constant 1995 U.S. dollars, logged) as the central explanatory variables. We control for the complainant’s absolute market size (overall GDP in constant 1995 U.S. dollars, logged), plus the income and GDP of the defendant as well. Thus our analysis explicitly recognizes the great heterogeneity within the developing country category, and it represents that diversity using continuous indicators of income as well as market power. For instance, the reflected difference in income between Honduras (with a 2000 per capita figure of $711, the log of which is 6.57) and Brazil (with $4,624, logged at 8.44) is about the same, once logged, as that between Brazil and the United States ($31,072, logged at 10.34). This is even more true when comparing the logs of the three countries’ GDPs for 2000 (22.2, 27.4, and 29.8, respectively). The regression also includes dummy variables for panel establishment and ruling direction, if any, as defined earlier. Finally, the regression adds dummy variables denoting cases with more than two disputants or with third parties (“multilateral” cases), cases disputing measures protecting the agricultural sector, cases involving just policies discriminating among trade partners, and politically “sensitive” cases attacking measures justified on grounds of biosafety, environmental protection, cultural preservation, or national security. Table 7.2 gives descriptive statistics on these variables for the entire sample of 380 disputes, along with the GATT and WTO subsets. Table 7.3 reports the estimates from two such regressions. Model 1 includes all 380 disputes. To identify the effect of the complainant’s level of development as conditioned by the regime, we add an interaction term, the WTO dummy times the complainant’s income. Model 2 focuses solely on the WTO subsample, thereby excluding the interaction term. The results are telling. Both models adequately fit the data, correctly predicting three-fifths to two-thirds of the observations. In Model 1, the interaction term is positive and statistically significant, with a one-tailed p = 0.036. This is
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2.19 0.41 9.35 9.65 27.62 28.29 0.50 0.29 0.07 0.04 0.47 0.62 0.55 0.16 1991.32 1993.12 2.80
Concessions WTO Complainant’s per capita income Defendant’s per capita income Complainant’s GDP Defendant’s GDP Panel established Ruling for complainant Mixed ruling Ruling for defendant Agricultural case Multilateral case Discriminatory measure “Sensitive” case Start year End year Duration
SD 0.88 0.49 1.20 1.04 2.17 1.76 0.50 0.45 0.25 0.21 0.50 0.49 0.50 0.37 5.69 5.95 1.54
1 0 5.42 5.63 21.26 21.58 0 0 0 0 0 0 0 0 1980 1980 1
Min 3 1 10.72 10.71 29.91 29.91 1 1 1 1 1 1 1 1 2000 2002 8
Max 2.01 0 9.28 9.90 27.33 28.68 0.47 0.30 0.05 0.04 0.54 0.52 0.52 0.16 1987.49 1989.20 2.73
Mean
SD 0.87 – 1.16 0.64 2.16 1.38 0.50 0.46 0.22 0.19 0.50 0.50 0.50 0.37 4.06 4.36 1.54
1 0 5.42 5.63 21.26 23.34 0 0 0 0 0 0 0 0 1980 1980 1
Min
GATT
3 0 10.63 10.71 29.69 29.69 1 1 1 1 1 1 1 1 1994 1997 8
Max
2.45 1 9.45 9.29 28.05 27.71 0.55 0.27 0.09 0.06 0.38 0.77 0.59 0.16 1996.96 1998.86 2.90
Mean
SD 0.82 – 1.25 1.36 2.11 2.08 0.50 0.44 0.29 0.24 0.49 0.42 0.49 0.36 1.53 2.01 1.55
1 1 5.83 5.99 22.14 21.58 0 0 0 0 0 0 0 0 1993 1995 1
Min
WTO
3 1 10.72 10.70 29.91 29.91 1 1 1 1 1 1 1 1 2000 2002 7
Max
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Total, GATT, and WTO figures are reported by color. N = 380, 226, and 154, respectively. Per capita income and GDP figures in logged constant 1995 US dollars.
Mean
Variable
Total
Table 7.2. Descriptive statistics for 380 GATT/WTO disputes filed from 1980 through 2000
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Table 7.3. Ordered probit models of GATT/WTO dispute outcomes, 1980–2000
Dependent variable: level of concessions Intercept 1 Intercept 2 Panel established Ruling for complainant Mixed ruling Ruling for defendant WTO WTO*complainant’s per capita income Complainant’s per capita income Defendant’s per capita income Complainant’s GDP Defendant’s GDP Agricultural case Multilateral case Discriminatory measure “Sensitive” case Number of observations Model χ 2 Pseudo-R2 Percentage correctly predicted
Model 1
Model 2
GATT & WTO 1980–2000
WTO only 1995–2000
Coefficient
Robust SE
1.382 1.589 1.982 1.599 0.973** 0.240 −0.363 0.256 −0.924** 0.267 −2.069** 0.334 −0.839 0.838 0.159* 0.088 0.028 0.095 −0.144* 0.087 0.050 0.047 0.045 0.056 0.119 0.124 −0.044 0.133 −0.023 0.146 −0.448** 0.179 380 (226 GATT, 154 WTO) 129.15** , 14 d.o.f. 0.12 58.2
Coefficient
Robust SE
1.411 1.903 1.880 1.908 0.959** 0.343 −0.584 0.417 −0.563 0.459 −1.791** 0.464 – – – – 0.219* 0.103 −0.050 0.108 0.008 0.067 0.009 0.058 −0.089 0.207 0.463 0.307 −0.163 0.222 −0.908** 0.245 154 42.26**, 12 d.o.f. 0.12 66.2
* Denotes one-tailed p < 0.05. ** p < 0.01. Per capita income and GDP figures in logs. Robust standard errors clustered across dyads.
remarkable, given that a relatively high correlation among the term’s constituent variables, plus the complainant’s GDP, is undermining the efficiency of the estimates (and thus making our test more conservative). Together with the negative coefficient on the WTO variable and the positive coefficient on the complainant’s income by themselves, this means that the WTO has exaggerated the gap between developed and developing complainants with respect to their ability to get defendants to liberalize disputed policies. In short, rich complainants have become significantly more likely to secure their desired outcomes under the WTO, but poorer complainants have not. Substantively, this shift is quite large, as displayed in Figure 7.1. Holding all other variables at their sample means, the predicted probability of a poor complainant (with a 10th percentile GDP per capita value of about $2,150) winning full concessions was between 0.27 and 0.49 under GATT, and between 0.41 and 0.64 under the WTO. These ranges are 90 percent confidence intervals, so the fact that there is still wide overlap between them (from 0.41 to 0.49) is revealing. In other words, the hint in the data that developing countries have improved their performance as complainants by no means rises to the level of statistical significance. At the same time, the situation for a rich-country complainant (e.g., one with the 90th percentile GDP per capita value, of $29,250) has improved
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Prob (Full Concessions)
100 90 80 WTO Developed
70 60 50 40
WTO Developing GATT Developing
GATT Developed
30 20 10 0 Complainant Status by Period
Figure 7.1. Probability of full concessions by complainant status and period. Note: Displays predicted probabilities from Model 1, holding all other variables at their sample means, moving WTO from 0 to 1 and Complainant’s Per Capita Income from its 10th percentile value ($2,152) to its 90th ($29,251), with 90 percent confidence intervals.
unambiguously under the WTO. The predicted probability of full concessions in this scenario lay between 0.33 and 0.48 in the GATT era – essentially indistinguishable from that faced by an equally sized poorer complainant, but this figure rose to between 0.63 and 0.78 under the WTO. Interestingly, this finding for wealthier economies is not true of U.S.-EC disputes, which in fact have been no more likely to end favorably under the WTO (Busch and Reinhardt forthcoming). In reconciling these apparent discrepancies, it is important to note that wealthier complainants have dramatically increased the proportion of their complaints filed against developing country targets, with developing countries increasing from 8 to 37 percent of the defendant pool in the GATT versus the WTO eras (Busch and Reinhardt 2001, 466). The fact that poor defendants are significantly more likely to concede, in Model 1, thus suggests that many of the gains that richer complainants have made in inducing concessions under the WTO have come from a shift in the target mix. In any case, however, note that none of the findings reported here are being driven by the sizable number of disputes filed by the United States or EC, as our results are robust to the inclusion of a dummy for cases brought by either as the complainant. Model 2 clarifies the current gap between developed and developing complainants, looking just at WTO disputes. The statistically significant ( p = 0.016) and positive coefficient for the complainant’s income reinforces Model 1’s results, showing that, under the WTO, poorer complainants indeed fare worse than
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equally sized, wealthier complainants. Once again, holding all other variables at their sample means, as we vary the complainant’s per capita GDP from its 10th to 90th percentile values, the predicted probability of full concessions by the defendant more than doubles, shifting from 0.22 to 0.47. Consider the case of India and Australia, two countries with nearly identical GDPs in 2000 (460 billion 1995 US$), but very different income levels of $459 and $23,837, respectively. Model 2 predicts that India would have a 41 percent chance of getting the average defendant to concede, whereas Australia’s comparable figure is a striking 73 percent.8 To see how the model reflects heterogeneity within the developing world, contrast the Philippines and Chile. In the late 1990s, these two countries had virtually the same GDP level (about $75 billion), but Chile’s per capita income (around $5,000) was more than four times as large as that of the Philippines. Holding other variables at their sample means, Model 2 predicts that a hypothetical complaint by Chile would have a 60.5 percent chance of ending in full concessions from the typical defendant, whereas an otherwise identical case by the Philippines would have only a 47.5 percent chance.9 We emphasize that these contrasts hold true even when controlling for the complainant’s GDP, characteristics of the defendant, GATT/WTO panel formation and rulings, and observable aspects of the disputed policy likely to make the dispute easier or harder to resolve. Of course, this is a preliminary analysis. We have more WTO dispute outcomes to code and more years to wait before the regime’s full effects may be manifested. Judging from these estimates, however, the answers to our earlier questions are clear. The WTO dispute settlement reforms have not made developing country complainants significantly more likely to get defendants to liberalize disputed policies. Poor countries are still less likely to get what they want when filing disputes, irrespective of their market size. Furthermore, because the WTO improvements have simultaneously increased the success rates of richer complainants, this inequity, patterned according to the complainants’ income levels, has sharply inflated since 1995. Thus, the key question is what accounts for this phenomenon. Put differently, at what point in the escalation of a case does the complainant’s level of development impair its chances for securing desired policy changes by the defendant? To find out, we run a series of regressions on nested subsamples of the set of all WTO disputes, looking at the effect of the complainant’s income, controlling for the complainant’s overall market size and other dispute characteristics. Table 7.4 reports these analyses. The first column, Model 3, asks which cases get settled 8
9
Indeed, our sample has Australia getting defendants to concede in three of three WTO complaints, whereas India has secured only partial liberalization in three of its six complaints, with no concessions whatsoever in a fourth. In the WTO part of our sample, Chile indeed won full concessions in its two complaints, whereas the Philippines got no concessions in its two cases.
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Table 7.4. Models of WTO dispute escalation and outcomes, 1995–2000
WTO sample dependent variable model Intercept 1 Intercept 2 Complainant’s per capita income Defendant’s per capita income Complainant’s GDP Defendant’s GDP Agricultural case Multilateral case Discriminatory measure “Sensitive” case Number of observations Model χ 2 Pseudo-R2 Percentage correctly predicted
Model 3 all cases early settlement probit Coefficient
Robust SE
Model 4 cases with rulings for complainant compliance ordered probit Coefficient
Robust SE
2.611 – 0.274*
1.819 – 0.140
1.237 1.862 0.182
8.119 8.111 0.237
0.090
0.119
0.121
0.229
−0.095 −0.126 0.390 −0.279 −0.016 −0.824
0.067 0.078 0.268 0.259 0.256 0.530
0.063 −0.061 −0.714* –a 0.056 −0.534
0.184 0.226 0.336 – 0.537 0.523
154 16.03*, 8 d.o.f. 0.09 69.5
41 21.50**, 7 d.o.f. 0.12 73.2
* Denotes one-tailed p < 0.05. ** p < 0.01. Per capita income and GDP figures in logs. Robust standard errors clustered across dyads. a All but 3 of this subsample of 41 cases meet our definition of “multilateral.” Because it varies so little, we accordingly exclude Multilateral Case from this column’s regression.
early. The dependent variable, early settlement, is 1 if the case ends with no ruling and full concessions by the defendant and 0 otherwise, with the full sample of 154 WTO disputes. The complainant’s income is once again statistically significant and positive. In other words, rich complainants are much more likely to get defendants to concede before a ruling is issued than poor complainants, holding GDP constant. Developing country complainants thus disproportionately fail to win disputes during consultations or panel deliberations prior to a ruling. Is this gap also attributable to patterns of rulings? In other words, could developing countries be litigating poorly and thus losing cases disproportionately, once rulings are foreordained? The answer is no. If we take only those WTO cases in which rulings are issued and estimate an ordered probit model of the direction of ruling with the same covariates as in Model 3, the model as a whole fails to pass muster, with not a single variable significant. Hence, Table 7.4 does not even report it. But, for our purposes, this finding is quite informative: the complainant’s income (and, likewise, market size) has no effect on its prospects of winning a judgment, given that one is going to be issued. Model 2’s gap between developed and developing country complainants is not a function of poor legal performance once litigation is under way. Rather, a poor complainant’s disadvantage in terms of legal capacity manifests itself entirely in pre-litigation negotiations, just as we hypothesized.
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Could the gap, instead, be a result of developing countries’ failure to secure compliance by defendants against whom adverse rulings have been issued, perhaps because these complainants’ retaliatory threat is not sufficiently credible? Model 4 takes up this question, looking at the level of concessions in the 41 coded WTO cases in which the WTO ruled fully against the defendant. Here, too, the complainant’s per capita income has no effect. A rich complainant has no special advantage over a poor but equal-sized complainant in securing compliance from a defendant found in violation of WTO obligations. Hence the primary difficulty, from the poor complainant’s standpoint, lies early in a dispute’s origins, not in litigation once it is embarked on, nor in the retaliatory endgame, despite the oft-noted (and valid) point that weak market power severely curtails a complainant’s leverage, even if it wins a ruling. This point, after all, is just as applicable to Switzerland as it is to Ecuador. Our point is quite different. The complainant’s level of development speaks directly to its capacity for recognizing, and aggressively pursuing, legal opportunities as a complainant. Having this capacity, a complainant is in a much better position to hit the right legal buttons in the request for consultations, to pressure the defendant on its weakest legal points during consultations, and to give the impression that the issue might well be pushed to a successful conclusion. Especially with the recent trend in legal aid and bilateral technical assistance, even a poor developing country may hire litigators once a dispute is before a panel. Our findings suggest that legal capacity, as evidenced by level of development, ironically matters less once the parties resolve to litigate, rather than settle. This is no doubt because its effects on litigation performance are largely anticipated during consultations.
IV. Implications Several implications follow from our results. First, and most important, developing countries require more assistance in the lead-up to a case, not just in litigating before a panel or the AB. Indeed, we find that the gap between developed and developing countries in winning concessions from a defendant owes to their differential rates of securing early settlement. Interestingly, nearly all the GATT/WTO legal reforms focus on helping developing countries get more quickly to a panel and then to litigate through to a ruling. We submit that more attention needs to be directed to helping developing countries make more of consultations and of negotiations at the panel stage prior to a ruling. The Director-General has recently made much of the fact that DSU 5 (“good offices and mediation”) is seldom used (WT/DSB/25), whereas others urge a closer look at DSU 25 (“arbitration”) as a way to encourage negotiated settlement. In line with these pleas, we argue that more negotiations in the shadow of the law, rather than litigation per se, will help level the playing field for developing countries at the WTO. Second, and related, negotiations are still the driving force behind WTO dispute settlement, notwithstanding the more legal architecture of the DSU. As we
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argue elsewhere (Busch and Reinhardt 2000, forthcoming), most cases settle early, and most of the fullest concessions are had in early settlement. Here, our results make clear that wealthier countries have realized more favorable outcomes since 1995 (except in U.S.-EC disputes), in all likelihood because of the WTO’s greater clarity of law. But it is important to recognize that these gains are largely being made in advance of a ruling. Although developing countries are relatively disadvantaged in this regard and thus require assistance prior to litigation, the more general implication is that the system as a whole works best when its members are able and willing to resolve matters shy of a verdict (Hudec 1993, 2002). This is not a plea for a return to the more diplomatic orientation of GATT, for it is obvious that members can now bargain in the shadow of stronger law. Rather, our plea is for members to avoid litigating simply because the DSU makes it easier to litigate. Third, and following from the first two implications, we endorse further reforms that would limit post-ruling foot-dragging. Two recommendations stand out in this regard. First, although the “sequencing” question may well have been informally answered, we concur with the recommendation that a formal answer be found, as per Article 21bis (Valles and McGivern 2000; WT/MIN(99)/8; TN/DS/W/1). Doing so would help streamline litigation in the post-ruling phase of a dispute by requiring a compliance panel in advance of an arbitration panel and by clarifying the appeals process with respect to 21.5 panels, in particular. Second, although it is well known that the DSU is about compliance with obligations, not retaliation, we concur with a growing number of scholars who favor retroactive damages (Mavroidis 2000; Pauwelyn 2000) as a way to curb the temptation for governments to act on domestic demands for protection, reaping electoral returns while awaiting a negative ruling at the WTO. We wish to emphasize a final point in the strongest possible terms: the findings here do not in any way suggest that the DSU regime has newly harmed developing country interests, on balance. The evolving record of WTO dispute settlement, especially given the new forms of legal aid and the growth of the private legal services market in the area of WTO trade law, could one day negate the emerging inequities we have established here, although this outcome is less likely if prepanel bargaining remains underappreciated. Regardless, however, the move to the WTO has not actually reduced a poor complainant’s prospects of inducing concessions from a defendant; it has merely left the poorest complainants behind. Yet we should not stray from the ultimate objective. The promise of a rule-of-law system is to level the playing field between the mighty and the weak (Hudec 1978, 3; 1999, 10). To abandon that objective would be to accept permanent inequity, which stifles the incentives for wealth-creating trade policies on all sides, both rich and poor (Hudec 1987, 2002). Our point here is rather that the rule-of-law system does not by itself guarantee efficient outcomes. For that, one also needs an adequate level of legal capacity and expertise to realize the full promise of such a system.
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references Baker, Scott, and Claudio Mezzetti. 2001. “Prosecutorial Resources, Plea Bargaining, and the Decision to Go to Trial.” Journal of Law, Economics, and Organization 17 (1): 149–167. Busch, Marc L. 2000. “Democracy, Consultation, and the Paneling of Disputes Under GATT.” Journal of Conflict Resolution 44 (4): 425–46. Busch, Marc L. and Eric Reinhardt. 2000. “Bargaining in the Shadow of the Law: Early Settlement in GATT/WTO Disputes.” Fordham International Law Journal 24 (1 & 2): 158–172. Busch, Marc L. and Eric Reinhardt. 2002. “Testing International Trade Law: Empirical Studies of GATT/WTO Dispute Settlement.” In Daniel M. Kennedy and James D. Southwick (eds.), The Political Economy of International Trade Law: Essays in Honor of Robert Hudec. New York: Cambridge University Press. Busch, Marc L. and Eric Reinhardt. Forthcoming. “Transatlantic Trade Conflicts and GATT/ WTO Dispute Settlement.” In Ernst-Ulrich Petersmann and Mark A. Pollack (eds.), Transatlantic Economic Disputes: The EU, the US, and the WTO. Oxford: Oxford University Press, 2003. Fournier, Gary M. and Thomas W. Zuelhke. 1989. “Litigation and Settlement: An Empirical Approach.” Review of Economics and Statistics 71 (2): 189–195. Gabilondo, Jose Juis Perez. 2001. “Developing Countries in the WTO Dispute Settlement Procedures.” Journal of World Trade 35 (4): 483–488. Hoekman, Bernard M. and Michel M. Kostecki. 2001. The Political Economy of the World Trading System. 2nd Ed. Oxford: Oxford University Press. Horn, Henrik, Hkan Nordstr¨om and Petros C. Mavroidis. 1999. “Is the Use of the WTO Dispute Settlement System Biased?” CEPR Discussion Paper 2340. London: Centre for Economic Policy Research. Horn, Henrik and Petros C. Mavroidis. 2001. “Economic and Legal Aspects of the MostFavored-Nation Clause.” European Journal of Political Economy 17 (2): 233–279. Howse, Robert. 2000. “Adjudicative Legitimacy and Treaty Interpretation in International Trade Law: The Early Years of WTO Jurisprudence.” In J.H.H. Weiler (ed.), The EU, the WTO and the NAFTA: Towards a Common Law of International Trade. Oxford: Oxford University Press. Hudec, Robert E. 1978. “Adjudication of International Trade Disputes.” Thames Essay No. 16. London: Trade Policy Research Centre. Hudec, Robert E. 1980. “GATT Dispute Settlement After the Tokyo Round: An Unfinished Business.” Cornell International Law Journal 13 (2): 145–203. Hudec, Robert E. 1987. Developing Countries in the GATT Legal System. Brookfield, VT: Gower. Hudec, Robert E. 1993. Enforcing International Trade Law: The Evolution of the Modern GATT Legal System. Salem, NH: Butterworth Legal Publishers. Hudec, Robert E. 1999. “The New WTO Dispute Settlement Procedure: An Overview of the First Three Years.” Minnesota Journal of Global Trade 8 (Winter): 1–53. Hudec, Robert E. 2002. “The Adequacy of WTO Dispute Settlement Remedies.” In Bernard Hoekman et al. (eds.), Development, Trade, and the WTO. Washington, DC: World Bank. Kuruvila, Pretty Elizabeth. 1997. “Developing Countries and the GATT/WTO Dispute Settlement Mechanism.” Journal of World Trade 31 (6): 171–208. Lacarte-Muro, Julio and Petina Gappah. 2000. “Developing Countries and the WTO Legal and Dispute Settlement System: A View from the Bench.” Journal of International Economic Law 3 (3) 395–401.
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Mavroidis, Petros C. 2000. “Remedies in the WTO Legal System: Between a Rock and a Hard Place.” European Journal of International Law 11 (4): 763–813. Meurer, Michael J. 1989. “The Settlement of Patent Litigation.” RAND Journal of Economics 20 (1): 77–91. Nalebuff, Barry. 1987. “Credible Pretrial Negotiation.” RAND Journal of Economics 18 (2): 198–210. Palmeter, David and Petros C. Mavroidis. 1998. “The WTO Legal System: Sources of Law.” American Journal of International Law 92:398–413. Pauwelyn, Joost. 2000. “Enforcement and Countermeasures in the WTO: Rules are Rules – Toward a More Collective Approach.” American Journal of International Law 94 (2): 335– 347. Petersmann, Ernst-Ulrich. 1997. International Trade Law and the GATT/WTO Dispute Settlement System. London: Kluwer. Reinhardt, Eric. 2001. “Adjudication without Enforcement in GATT Disputes.” Journal of Conflict Resolution 45 (2): 174–195. Reinhardt, Eric. 2002. “Tying Hands Without a Rope: Rational Domestic Response to International Institutional Constraints.” In Daniel Drezner (ed.), Locating the Proper Authorities: The Interaction of Domestic and International Institutions. Ann Arbor: University of Michigan Press. Reinhardt, Eric. Forthcoming. Legislative Politics and GATT Trade Disputes, 1948–1994. Cambridge University Press. Shoyer, Andrew W. 1998. “The First Three Years of WTO Dispute Settlement: Observations and Suggestions.” Journal of International Economic Law 1: 277–302. Steger, Debra P. and Susan M. Hainsworth. 1998. “World Trade Organization Dispute Settlement: The First Three Years.” Journal of International Economic Law 1: 199–226. Valles, Cherise M. and Brendan P. McGivern. 2000. “The Right to Retaliate Under the WTO Agreement: The ‘Sequencing’ Problem.” Journal of World Trade 34 (2): 63–84. WT/DSB/25. Article 5 of the Dispute Settlement Understanding. Communication from the Director-General. Submitted by the Director-General July 13, 2001. WT/MIN(99)/8. Proposed Amendment of the Dispute Settlement Understanding. Communication from Canada, Costa Rica, Czech Republic, Ecuador, the European Communities and its member States, Hungary, Japan, Korea, New Zealand, Norway, Peru, Slovenia, Switzerland, Thailand, and Venezuela. Submitted by Japan on November 16, 1999. TN/DS/W/1. Contribution of the European Communities and its Member States to the Improvement of the WTO Dispute Settlement Understanding. Submitted by the EC, March 13, 2002.
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NIALL MEAGHER
8 Representing Developing Countries in WTO Dispute Settlement Proceedings
1. Introduction This paper sets forth some thoughts based on my personal experience in representing developing countries in WTO dispute settlement proceedings. There have been many very thorough statistical studies relating to the dispute settlement system and, in particular, developing country participation.1 This paper is not intended to duplicate that work. Rather than trying to draw empirical conclusions from the statistics as to which developing countries2 have participated in the system, and the rate at which they participate, I propose instead to discuss some practical aspects of the resource constraints facing developing countries in participating in WTO dispute settlement. Any discussion of representing developing countries in WTO dispute settlement proceedings must probably begin and end with the question of the resources available to developing countries and whether these resources enable them to participate on equal terms with developed countries. The question of resources is frequently approached simply from the point of view of developing countries’ 1
2
See, e.g., William Davey, The WTO Dispute Settlement System: The First Ten Years, 8 (1) Journal of International Economic Law, 17 (2005); Kara Leitner and Simon Lester, WTO Dispute Settlement 1995–2004: A Statistical Analysis, 8 (1) Journal of International Economic Law 231 (2005); Chad Bown and Bernard Hoekman, WTO Dispute Settlement and the Missing Developing Country Cases: Engaging the Private Sector, 8 (4) Journal of International Economic Law 1 (2005); M. L. Busch and E. Reinhard, Developing Countries and GATT/WTO Dispute Settlement, 37 Journal of World Trade 719 (2003). Throughout this chapter, the term “developing country” should be read to include customs territories and countries with economies in transition.
Although this chapter is, of course, based in part on my personal experience as senior counsel at the ACWL, I would like to emphasise that the normal disclaimer that the views expressed herein are the personal views of the author alone and do not in any way represent the views of the ACWL or its Members fully applies. I would like to thank William Alford, Chad Bown, and David Palmeter; my colleagues Frieder Roessler and Tom Sebastian; as well as Greg Shaffer and Bernard Hoekman, for their comments on a draft of this paper. I also appreciated the comments provided by the students of the seminar at which this paper was presented.
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financial ability to obtain adequate legal advice. This is, of course, an important factor – perhaps the most important factor – but resource constraints are not limited simply to the ability of a developing country to retain good legal counsel. Instead, such constraints can manifest themselves in many other ways and influence every aspect of the decision of whether to participate in dispute settlement proceedings. These resource constraints condition developing countries’ ability to participate in and benefit from not only the dispute settlement system but also all aspects of the WTO. This paper, therefore, reviews some of the practical ways in which these constraints – financial and otherwise – impede developing country participation in the dispute settlement system on an ongoing basis.
2. The Dispute Settlement System and Developing Countries Before discussing these various resource constraints, it is worthwhile first to consider why developing country participation is important to the WTO dispute settlement system. This system has just completed its first 10 years. By any measure, the system has been a remarkable success. Before it came into operation, Daniel Patrick Moynihan wrote, “The General Agreement on Tariffs and Trade adjudicates international disputes by the hour. If such disputes seem marginal today, it may be remembered that for centuries European powers routinely went to war over trade issues.”3 This statement seems particularly apt, given that over 300 WTO disputes were initiated in the first 10 years of the system’s existence. It may seem far-fetched to suggest that this system prevents wars between the countries that most use it, but we do not live in such placid times as to permit us to take for granted the benefits of resolving any international disputes by peaceful legal means. The WTO dispute settlement system improved on the GATT system in important ways. The creation of a standing Appellate Body with automatic jurisdiction over appeals from decisions of panels was a unique innovation in international tribunals. There were concerns that increasing the legality and complexity of the process may have impeded the access of developing countries to the system. Nevertheless, as the recent report of the Consultative Board points out, “developing countries – even some of the poorest (when given the legal assistance available to them) – are increasingly taking on the most powerful. That is how it should be.”4 But why should it be? Why does it benefit the world trading system when the poorest countries take on the wealthiest in dispute settlement proceedings? The short answer, of course, is that the multilateral system benefits from the uniform and consistent interpretation of rules that apply to all. If it were not 3 4
Daniel Patrick Moynihan, on the law of nations, 156 (1990). World Trade Organization, Report by the Consultative Board to the Director General, The Future of the WTO: Addressing Institutional Challenges in the New Millennium, para. 222 (2004) (emphasis added).
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possible for the poorest of countries to enforce their rights and understand their obligations, the system as a whole would be less effective. To the extent that this point seems too dependent on free trade theory, it should be noted that the rationale for developing country participation is even stronger from a mercantilist perspective, in which a country’s ability to obtain concessions from its trading partners assumes even greater significance. A WTO Member’s ability to make concessions in WTO negotiations is enhanced when it knows that there is an effective means of clarifying disputes as to the scope of those concessions and of enforcing any reciprocal concessions. As we discuss, developed countries participate in dispute settlement proceedings for reasons broader than simply a desire to prevail on a particular point of dispute with a trading partner. A dispute settlement system to which developing countries have full access enables those countries not merely to assert their rights under the WTO Agreements but also permits them to fulfill their obligations under those agreements with the confidence that they can fully defend their interests in any disputes regarding their compliance with those obligations. Thus, developing countries’ understanding of and participation in the dispute settlement system can make an important contribution to their overall ability to benefit from their rights and obligations under the WTO Agreements. The Advisory Center on WTO Law (ACWL) was established with these concerns in mind. Its mission is not limited to representing least-developed countries (LDCs) and developing countries in dispute settlement proceedings, although this is perhaps the highest profile aspect of its work.5 Instead, its mission is to enhance the credibility of the WTO dispute settlement system by assisting developing countries, customs territories, and LDCs both in dispute settlement proceedings and by providing legal advice on their rights and obligations under the WTO agreements. In practice, the ACWL has represented developing countries and one LDC in more than 20 dispute settlement proceedings in the first four years since its inception.6 But this by no means represents the only service provided by the ACWL. It also provides, free of charge, legal opinions on any issue of WTO law of concern to its developing country, customs territory members, and LDCs. It is interesting to note that the ACWL’s records indicate that approximately three-quarters of these
5
6
Additional information regarding the ACWL’s mission and objectives can be found on its Web site, available at www.acwl.ch. For an interesting discussion of the circumstances surrounding the establishment of the ACWL, see Andrea Greisberger, Enhancing the Legitimacy of the World Trade Organization: Why the United States and the European Union Should Support the Advisory Centre on WTO Law, 37 Vand. J. Transnat’l L. 827 (2004). (Ms. Greisberger’s analysis does not appear to give sufficient consideration to the issues of conflicts – whether real or, as importantly, perceived – that might arise were the ACWL supported by two entities that it may frequently oppose in dispute settlement proceedings.) A list of these cases is available at the ACWL’s Web site, available at www.acwl.ch.
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opinions concern systemic issues of WTO law or measures taken or planned by the WTO Member seeking the advice itself. Only approximately one-quarter of the ACWL’s opinions concern measures taken by a WTO Member other than the one seeking the advice.7 This would suggest that developing countries view the dispute settlement system as not merely (or perhaps not even) a forum for the righting of specific wrongs but also as a means to enhance their ability to participate fully in the WTO, even if they never participate in dispute settlement proceedings.
3. Dispute Settlement Proceedings In many respects, the representation of developing countries in WTO dispute settlement is no different from the representation of any other client.8 Practitioners representing developing countries face the same basic question in deciding whether and how to pursue WTO dispute settlement proceedings as any other litigant in any other type of litigation. Counsel must assist the client in performing a cost-benefit analysis that examines whether the costs of pursuing the litigation and the costs of any failure to prevail in the proceeding are outweighed by the probability of success and the benefits of the eventual remedy. Nevertheless, the situation of developing countries in pursuing dispute settlement proceedings presents unique considerations that are considered in turn in this chapter. First, even before the proceedings commence, there is the decision whether to litigate or negotiate. This decision must be made in most types of litigation, but given the diplomatic origins of the WTO dispute settlement process, it probably looms larger in WTO dispute settlement than in other types of litigation or, indeed, other kinds of international arbitration. Second, the costs of pursuing dispute settlement proceedings may be at least as high – even in absolute terms – for developing countries as for developed countries. Even with the legal assistance available through the ACWL, developing countries still face a considerable bill for both direct and incidental costs of litigation.9 In relative terms, the direct costs may be much higher for developing 7
8
9
Further details regarding the ACWL’s operations are available in The ACWL after Four Years – A Progress Report by the Management Board (October 5 2005) and the ACWL’s Report on Operations 2005 (January 2006), both of which are also available on the ACWL’s Web site, available at www.acwl.ch. As William Alford points out, the representation of sovereign governments necessarily differs from the representation of private corporations. In my view, the material difference is that sovereign governments must balance a much wider range of considerations before deciding on a course of action than must a private corporation. In other words, the cost-benefit analysis described in this paragraph is more straightforward for private corporations than for sovereign governments and, as is explained, probably more straightforward for developed country governments than for developing country governments. The ACWL charges fees for support in dispute settlement proceedings, but all other legal advice is provided free of charge. The fees charged for support in dispute settlement proceedings are based on a fixed time budget for each stage of a dispute settlement proceeding
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countries than for developed countries. In addition, the hidden costs – information, education, political – are higher for developing countries. Third, the costs of failure – not just in trade damage but also in loss of prestige and bargaining power – are likely to be higher for developing countries that infrequently resort to dispute settlement than for developed countries that are frequently involved in these proceedings. Fourth, the probability of success may be lower, especially where a developing country challenges a developed country with superior resources, in large part because of the disparity in resources. Fifth, the available remedies are, as a practical matter, less beneficial to developing countries. An analysis of each factor of the equation, therefore, suggests that representing developing countries in WTO dispute settlement is likely to be far more challenging than representing the interests of developed countries. These factors inform not just the decision whether to proceed with dispute settlement proceedings but also the conduct of the litigation once it is under way. From a practitioner’s perspective, therefore, it is important to keep these considerations in mind throughout the process. Of course, much – or perhaps even all – of these considerations can be explained very simply in terms of the disparity in resources of various kinds available to developing and developed countries. Nevertheless, to determine how best they should be addressed, it seems worthwhile to consider in detail where these disparities lie and how precisely they affect the participation and representation of developing countries in the dispute settlement process.
(a) To Litigate or to Negotiate A WTO Member that considers that another WTO Member may have acted inconsistently with its obligations under the WTO Agreements has several options. It may raise the issue bilaterally without going through the WTO dispute settlement system – the negotiate option. Alternatively, it may decide that it should proceed directly to the dispute settlement system – the litigate option. Whether to negotiate or litigate is a complex decision that can be influenced by several factors, including the type of infringement alleged, the amount of trade involved, and the nature (or political importance) of the domestic stakeholder whose interests need vindication.10 WTO Members that participate frequently in WTO dispute settlement proceedings – generally developed countries – have in place informal mechanisms or processes to address the litigate-or-negotiate decision. Developing countries that participate less frequently in the system are less likely to have those kinds of
10
and an hourly rate that varies according to the income level and trade share of the developing country involved. The ACWL’s billing policy is also available at www.acwl.ch. In practice, I would estimate that the ACWL’s fees for support in dispute settlement proceedings are roughly 20 percent of those charged by private law firms. The political influence of any competing domestic stakeholder may also be a factor to be considered.
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mechanisms in place before the question arises and therefore are likely to expend more time, energy, and possibly money in making this threshold decision.
(b) The Costs of Dispute Settlement Proceedings The increasing costs of WTO dispute settlement proceedings have been widely reported. Estimates of these costs vary from several hundred thousand dollars to several million, depending on the complexity of the case. Whether these amounts are attributable to the involvement of private lawyers in the proceedings or are an inevitable result of the increasingly legalistic nature of the WTO dispute settlement system is a question of chickens and eggs. In any event, it is beyond dispute that WTO dispute settlement proceedings are an expensive proposition, and increasingly so. And, in relative terms, these costs are much higher for developing countries than developed countries. For governments in developed countries, these costs, although not necessarily welcomed, are managed more readily. Even if the government itself does not have either the internal legal resources to pursue the proceeding fully and effectively or a budget to pay outside legal counsel to do so, there is very often a well-funded, well-informed, and highly motivated private sector interest that is ready and willing to bear the costs.11 These private sector interests are frequently as well informed as the government lawyers on both the substance of the issues in dispute and on the WTO procedures themselves. For example, WTO dispute settlement proceedings, such as the wars between the U.S. and the Canadian softwood lumber industry, the Japanese/European and U.S. steel industries, and, most recently, Boeing and Airbus, are simply the latest iterations of long-running disputes in those industries. In many of these instances, the WTO dispute settlement proceedings are but one aspect of a larger political strategy to gain economic advantage. In contrast, for a developing country to initiate dispute settlement proceedings against the United States regarding its steel or agriculture protectionism requires a major commitment of both internal government and industry resources. And the developing country governments and industries are simply much less experienced at waging these battles than their European or American counterparts. Forty-six percent of all dispute settlement proceedings have involved either the EC (68 cases) or the United States (80) as complainants.12 In contrast, Brazil, the most active developing country, has been a complainant 11
12
Greg Shaffer has written extensively on the issue of public-private partnerships in WTO litigation and how those partnerships might be adopted to the situation of developing countries. See Gregory C. Shaffer, Defending Interests: Public–Private Partnerships in WTO Litigation (Washington, DC: The Brookings Institution Press, 2003); Gregory C. Shaffer, The Challenges of WTO Law: Strategies for Developing Country Adaptation, World Trade Review (forthcoming, July 2006). Leitner and Lester, supra note 2, at 233.
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in only 22 disputes.13 A developing country therefore has fewer internal – government or private sector – resources available when it decides to pursue such a dispute. When there are fewer resources immediately at hand, the start-up costs of acquiring the resources are greater. For example, developing countries may not have as ready access to experts and other resources as developed countries and therefore may have to pay more to obtain these resources on an ad hoc basis for the purposes of particular litigation. Developing countries may have much fewer human resources at their WTO missions in Geneva – or may not even have a WTO mission in Geneva (approximately one-quarter of WTO Members do not). Developing countries may therefore have to cast their net wider, and possibly spend even more money in absolute terms than developed countries to bring the same resources to bear in a dispute. The ACWL is, of course, intended to offset these discrepancies by making available to developing countries a group of lawyers with experience comparable to that of the staffs of the European Commission or the U.S. Trade Representative. Moreover, the time taken to put the resources in place is greater for developing countries. This can affect litigation strategy in that one has to constantly consider both whether it is affordable to obtain resources, such as expert witnesses, and whether the capacity can be developed sufficiently quickly enough to be effective in the litigation. This increased time also increases the effective cost of the litigation. This problem is exacerbated in cases brought against developing countries, for which the defending party may have less notice and therefore less time to prepare its case. The political costs of pursuing WTO dispute settlement proceedings are also greater for developing countries. There may be very few political costs for the United States or the European Communities in initiating dispute settlement proceedings. These disputes generally do not resonate loudly with the public at large (and when they do, the political imperatives may make the decision to litigate very easy). A decision to initiate proceedings may be viewed by the public at large either neutrally, as a routine exercise of a governmental function, or indeed positively, as a means of enforcing rights. And, as noted above, the WTO dispute settlement proceedings may be just one aspect of a broader political strategy. For developing countries, the decision to pursue dispute settlement is much more likely to be fraught with additional political costs, even if it is seen in part as an attempt to enforce the country’s rights. For example, Bangladesh was the first LDC to initiate dispute settlement proceedings, bringing a case (subsequently settled) challenging India’s imposition of anti-dumping measures against imports of batteries from Bangladesh.14 It seems a safe assumption that for Bangladesh to 13 14
Id. The statistics for respondents reveal a very similar pattern. Request for Consultations, India – Antidumping Measures on Batteries from Bangladesh, WT/DS306/1 (January 28, 2004).
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initiate a formal legal challenge against India at the WTO raises weightier internal political issues for Bangladesh than for the United States to initiate yet another proceeding against the EC. The developing country may find it more difficult to resolve internal political debate – with consequent additional pressure on individual government officials – than the developed country. Thus, the initial question in deciding whether to initiate dispute settlement proceedings – whether the costs are affordable – is harder for developing countries than developed countries to answer in the affirmative.
(c) The Costs of Failure to Prevail in WTO Dispute Settlement Proceedings As a practical matter, the costs of failure to prevail in WTO dispute settlement proceedings are likely to be much higher for a developing country than for a developed country. Failure can take two forms: a failure to prevail in a case as complainant and a failure to defend measures successfully as a respondent. In both instances, on a macroeconomic level, the developed country can more readily spread the financial costs of failure (whether involving the loss of any anticipated trade gains or the costs of implementation or counter-measures imposed by a complainant WTO Member) throughout its economy. A developing country, with a smaller and less diverse economy, may have fewer options for spreading these costs. A developing country is also more likely to face a loss of confidence in the WTO system generally as a result of a failure to prevail as a complainant in a WTO dispute.15 These factors can affect a developing country’s decision both to initiate dispute settlement proceedings to challenge another WTO Member’s measures and to defend a case brought challenging its own measures. There is also the human factor. Lawyers at the office of the U.S. Trade Representative (USTR) or the European Commission know that they are going to work on many dispute settlement cases. Although they would obviously like to win all of their cases, they neither expect nor are expected to do so. If they lose a case, they can simply analyze it and move on to the next one. A lawyer in the trade ministry of a developing country who is deciding whether to initiate his country’s first or second ever WTO case is in a far different position. He may require far greater comfort that he is likely to prevail before deciding to go ahead with the case.16 He 15
16
I do not mean to suggest that developed country Members that fail to prevail in WTO disputes do not also have to face vocal domestic criticism of the system. The lawyers in developed and developing countries may even have different concepts of “winning” and “losing” WTO cases. Because most WTO panels (more than 85 percent) have upheld at least some of the complainant’s claims, arguably most cases can be “won.” But the claims on which the complainant prevails may not necessarily be the most important claims. It would seem that lawyers for developed countries could take a broader view of “winning,” and being more satisfied with “winning” on some but not all claims than lawyers in developing countries, for whom Pyrrhic victories are likely to be less satisfying.
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may have to convince more senior government colleagues that it is worthwhile to proceed. “Once bitten, twice shy,” as the expression goes, is far more likely to be the reaction to defeat in dispute settlement proceedings in the trade ministry of the developing country than in the office of the USTR. Again, this factor affects both the decision to initiate proceedings and the decision to defend proceedings brought against the developing country.17
(d) The Probability of Success in WTO Dispute Settlement Proceedings There are systemic reasons why developing countries may be less likely to prevail in WTO dispute settlement proceedings than developed countries. Where proceedings are initiated against a developing country, challenging a measure taken by the developing country, it seems reasonable to assume that a developing country – with limited informational, legal, and governmental resources – is more likely to have failed to fulfill its WTO obligations than a developed country. This assumption may be especially reasonable with respect to cases initiated by developed countries against developing countries, given the apparent reluctance of the major developed countries to initiate proceedings against developing countries that might give rise to an appearance of “bullying.” Conversely, where a developing country initiates dispute settlement proceedings against a developed country, the developing country would have to overcome both the latter’s greater resources, as well as its greater sophistication and experience in implementing GATT and WTO rules, in order to establish a violation of the developed country’s WTO obligations. This is not to suggest that developed countries are less likely than developed countries to attempt to avoid or breach their WTO obligations, but simply to recognize that developed countries – which, after all, were much more involved in the drafting of the WTO agreements – may be more sophisticated at implementing the WTO agreements to their own advantage.
(e) The Benefits of the Available Remedies There is an extensive debate as to the merits of the remedies currently available under the WTO dispute settlement process. It is not the purpose of this chapter to 17
It should be noted that I consider a developing country’s decision not to initiate dispute settlement proceedings where there are strong legal grounds to do so, and its decision not to defend itself in a case brought against it where a strong legal defense is available, as equally pertinent in terms of the developing country’s access to the system. I think the discussion in this chapter applies equally to both situations. Chad Bown points out that the poorer countries are rarely challenged at the WTO, especially by the developed countries. This is true, but may be changing as disputes involving trade remedy measures account for an increasing share of total WTO disputes.
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revisit that debate.18 From a practical perspective, however, there are four main problems with the available remedies that affect the participation and representation of developing countries in the process. The first problem is that developing countries may have less interest in pursuing dispute settlement proceedings in order to uphold or clarify systemic principles of WTO law. This may apply a fortiori to developing countries and LDCs that trade extensively under preferential arrangements that constitute waivers or exceptions to the general WTO principles. For a complainant that seeks primarily to clarify a legal issue or to further a broader systemic interest, the panel or Appellate Body report itself may be a sufficient remedy; the complainant may not have brought the case to obtain any immediate commercial benefit and therefore may not be too concerned about the actual implementation of the report. Developing countries seem less likely to be able to take such a sanguine approach. The second, and perhaps most important, is the old axiom that justice delayed is often justice denied. A losing party is permitted a reasonable period of time within which to implement a WTO panel decision. This reasonable period of time can itself delay implementation sufficiently to rob the decision of any immediate practical benefit to the prevailing party. But implementation of a WTO panel decision often requires, in addition to the appellate process itself, arbitration under DSU Article 21.3(c) of the appropriate reasonable period of time to implement the ruling, proceedings under DSU Article 21.5 to determine whether the decision has been implemented (which may also involve appeals), and arbitrations under DSU Article 22.6 to determine the appropriate level of counter-measures in the event of a failure to implement properly. Each of these steps takes time, which dilutes the benefit of the remedy. For example, when a developing country successfully challenges an antidumping measure imposed by a developed country, the measure remains in effect pending the resolution of all of these steps, so that the developing country exporter must still pay additional duties to export its product. There is no effective way around this problem at present. It creates a considerable disincentive for developing countries, with scarce resources, to pursue dispute settlement proceedings. And, of course, all of the additional proceedings under DSU Articles 21 and 22 require significant additional resources, which, as discussed, simply may not be available to developing countries. The third problem with the available remedies is that the measures taken to implement a WTO decision are designed to bring the losing WTO Member into compliance with its WTO obligations. They are not designed to make commercial interests in the complaining Member whole in the same manner as normal
18
For a typically informative statement of the developing country perspective on remedy issues, see Robert E. Hudec, The Adequacy of WTO Dispute Settlement Remedies for Developing Country Complainants, in Development, Trade and the WTO: A Handbook (B. M. Hoekman, A. Mattoo, and P. English eds., 2002).
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commercial litigation. This may not discourage developed countries that have a long-term strategy to advance their systemic interests in the development of WTO rules from pursuing dispute settlement proceedings that might have no immediate commercial benefit. However, it is a powerful disincentive for developing countries, which may be required to focus their limited resources on strategies that may yield practical results rather than moral victories. The fourth main problem with the available remedies is that the ability to retaliate or impose counter-measures is hardly a desirable outcome where the complainant’s original goal was to compel the defending Member to bring a WTOinconsistent measure into compliance with its obligations. Moreover, if the use of counter-measures is necessary to enforce a favorable WTO decision, a developing country will, in practice, rarely have sufficient commercial power over a developed country to be able to use counter-measures effectively to enforce a decision. For example, in the Brazil-Canada regional aircraft disputes, Brazil was authorized to impose counter-measures against Canada. But there were no Brazilian imports of Canadian products on which sanctions could be imposed in a manner that would compel Canada to modify further its aircraft subsidies. If Brazil, among the wealthier of the developing countries, faces this problem, poorer developing countries are much more likely to do so, especially where sectors of their economy may be dependent on imports from developed countries.19 In reality, counter-measures are rarely used in WTO dispute settlement proceedings, and so it is questionable to what extent this problem really affects developing country participation.20 A practitioner advising a developing country on whether to pursue WTO dispute settlement proceedings must take these concerns fully into account. The fact that a developing country is likely to prevail, in a legal sense, in WTO dispute settlement proceedings is simply not enough to justify going ahead with the case. Careful thought must be given to whether and how the litigation strategy can be shaped to maximize the practical benefit of the eventual remedy. Although it has been suggested that shaping the litigation strategy requires economic analysis,21 in fact the decision of whether to proceed is ultimately made largely on the basis of practical and political considerations. It should be noted that these considerations do not seem to be affected by the special and differential (S&D) treatment accorded to developing countries under various provisions of several of the WTO Agreements. Many of the provisions 19
20
21
Of course, this is not simply a developing country issue. In its companion case against Brazilian aircraft subsidies, Canada was also authorized to take counter-measures against Brazil, but never did so because it could not find suitable targets among Brazilian imports into Canada. William Davey calculates that there has been a successful implementation rate of 83 percent in the first 10 years of the WTO dispute settlement system. See, Davey, supra note 2, Davey, at 47. See, Bown and Hoekman, supra note 2.
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for S&D treatment are hortatory and do not necessarily give rise to additional causes of action that are not available to developed countries. Thus, it is by no means evident that the existence of these provisions or causes of action make it any easier or more likely for developing countries to participate in WTO dispute settlement, or that they have dramatically affected the extent to which developing countries actually participate in WTO dispute settlement. For this reason, this chapter does not concern itself with the scope or interpretation of the provisions for S&D treatment. In addition, there have been some proposals in the context of reform of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the DSU) to amend the WTO dispute settlement procedures to provide S&D treatment for developing countries in the conduct of the proceedings themselves. At present, the DSU contains a few instances of special treatment for developing countries. For example, Article 4.10 provides that, during consultations, Members “should” give special attention to the particular problems and interests of developing country Members. Article 12.10 provides that the panel’s report in a case where one of the parties is a developing country “shall” explicitly indicate how the panel has taken into account any of the substantive provisions for S&D treatment that have been raised in the dispute. And Articles 21.2 and 21.7 provide for special attention to be paid to the interests of developing countries with respect to the implementation of panel and Appellate Body rulings and recommendations. Generally, these provisions have not had much effect on the conduct of dispute settlement proceedings, so that in practice, developing countries have participated in these disputes under the same rules as developed countries.22 Without pre-judging the fate of the reform proposals, it is arguable whether it is really in the interests of developing countries to tilt the playing field of dispute settlement procedures in their favor. It is notable that developing countries (or, indeed, any other WTO Members) have made little use of the various alternative dispute resolution mechanisms contained in the DSU, such as the provisions for mediation and conciliation under Article 5 or for arbitration under Article 25. Some developing country delegates have explained to me that the reason for this is that if developing countries are going to resolve a dispute through the office of the WTO, they – meaning both their governments and their public – will have greater confidence in and will be more willing to accept a decision rendered through the standard, formal panel process than through an informal or ad hoc process. In addition, any bias in the procedural rules may undermine the legitimacy of the outcome of 22
The exception to the rule is probably Article 21.2 DSU. In some arbitrations under DSU Article 21.3(c) of the reasonable period of time to implement panel and Appellate Body rulings, arbitrators have considered whether the needs of a developing country complainant should have a bearing on the reasonable period of time. See, e.g., Award of the Arbitrator, European Communities – Export Subsidies on Sugar (Recourse to Article 21.3(c) of the DSU), WT/DS265/33, WT/DS266/33, WT/DS283/14 (October 28, 2005).
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the process.23 This would suggest that faced with a choice between (i) resolving disputes under procedures tilted in their favor and (ii) participating on terms of equal resources in the resolution of disputes under balanced procedures, these developing countries would prefer the latter option.24 A more ambitious proposal would be to create a “small claims” kind of procedure at the WTO. This would be a more radical departure from existing procedures. Any such procedure would have to avoid the pitfall of becoming an ugly stepchild of the dispute settlement process, a lesser procedure for less developed countries. But a fuller discussion of the merits of these proposals must wait another day.
(f) Concluding Thoughts It would be easy to conclude from this discussion that the WTO dispute settlement system is inherently biased against developing countries. But that would be too simplistic. Most of the resource imbalances discussed above exist independently of the WTO or its dispute settlement process. Moreover, with the exception of the remedy issues, many of these problems are practical issues that might be difficult to redress by revising the WTO dispute settlement proceedings. As I have also noted, to redress these problems by granting developing countries special procedural advantages in the dispute settlement process may also prove to be counter-productive in that it might affect the perceived legitimacy of the system – thereby undermining the purpose of developed country participation in the system. The ACWL exists in large part to attempt to resolve these problems and to place developing countries on a more equal footing as litigants in WTO dispute settlement proceedings. The ACWL can redress resource imbalances relating to the availability of impartial advice on the WTO system generally and to the assistance of legal counsel in dispute settlement proceedings (and the ACWL has at least as much experience in WTO dispute settlement as most private law firms). However, it is not necessarily equipped to redress all of the educational (though that is a part of its work), informational, and other internal resource deficiencies faced by developing countries. Nor could it be. Nevertheless, in WTO dispute settlement as in everything else in life, practice makes perfect. Developing countries that are involved more frequently in dispute settlement proceedings will over time develop an internal capacity to match that of the United States or the European Communities. Brazil is an example of a WTO Member that has become an extremely effective user of the process and 23
24
See Frieder Roessler, Remarks at the Conference on Improvements and Clarifications of the WTO Dispute Settlement Understanding at the European University Institute, Florence regarding Special and Differential Treatment of Developing Countries under the WTO Dispute Settlement System, (September 13–14, 2002). This rationale would also suggest that developing countries might benefit from greater transparency in the panel process.
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has extremely capable internal legal advisors, as well as the (private) resources to obtain the assistance of private counsel as needed. India has also been a successful user of the system.25 Other WTO Members, such as Thailand, and several Latin American countries, are developing similar expertise and using the system to their advantage – the experience of Ecuador and other Latin American countries in the bananas dispute being one such example. The challenge for an organization such as the ACWL will be to ensure that this learning process continues and expands to the benefit of LDCs and other WTO Members on the next rung of the economic ladder as they become more interested and involved in the WTO dispute settlement process. The challenge for the WTO Membership – in particular for developed country Members – will be to ensure that the dispute settlement system continues to operate so as to increase developing country confidence and enhance developing country participation in the multilateral trading system generally. The extent to which developing countries participate, or more correctly do not participate, in WTO dispute settlement proceedings indicates that practical barriers to their effective participation remain high. I do not mean to suggest that participation in WTO dispute settlement would be a panacea for developing countries or that litigiousness is an end in itself. Nevertheless, the dispute settlement process is an essential component of the WTO system and is an effective means for developed countries not just to protect their rights but also to increase their ability to assume obligations under that system. As such, there ought to be neither structural nor practical reasons why the dispute settlement system ought not to be equally effective for developing countries.
25
For an analysis of Brazil’s and India’s participation in the system, see William Davey, supra note 2, at 40–45.
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CHAD P. BOWN
Comment on Niall Meagher’s “Representing Developing Countries in WTO Dispute Settlement Proceedings”
I. Introduction Niall Meagher’s paper presents a very interesting, accessible, and poignant account of some of the practical problems facing poor countries (and the individuals who advise them) in WTO dispute settlement litigation. Furthermore, it does much to describe the role of the Advisory Centre on WTO Law (ACWL), as well as some of the limitations that it confronts when providing subsidized legal assistance services to developing countries. This comment focuses on three areas related to the provision of WTO litigation assistance to poor countries. My intention is to use an economic perspective to expand on (and complement) some of the points that Meagher’s analysis touches on only briefly. I first highlight the role that economics could play, before then advocating for an increased role for the complementary and necessary services that economists should contribute to the lengthy process of WTO litigation. If the purpose of subsidized intervention on behalf of poor country governments is to inform more fully (as opposed to simply guide) the client’s consideration of the WTO litigation tool, I argue that providing poor country litigants with more economic information is extremely important. Finally, in the last section, I consider a somewhat broader perspective by discussing some of the benefits of expanding legal assistance centre services like the ACWL, relative to alternative sources that might provide basic legal services to developing countries.
II. The Role of Economics in Providing Assistance to Developing Countries in WTO Litigation Among the many questions to consider when thinking about how to effectively provide assistance to poor countries in potential and/or actual WTO litigation, A more complete discussion of a number of the points raised here is provided in Chad P. Bown &; Bernard M. Hoekman, WTO Dispute Settlement and the Missing Developing Country Cases: Engaging the Private Sector, 8(4) Journal of International Economic Law 861 (2005).
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I highlight one particular quote from Meagher’s paper, as it forms an excellent starting point for my discussion, The fact that a developing country is likely to prevail, in a legal sense, in WTO dispute settlement proceedings, is simply not enough to justify going ahead with the case. Careful thought must be given to whether and how the litigation strategy can be shaped to maximize the practical benefit of the eventual remedy.
As Meagher notes, the lawyers and legal advice provided by an institution like the ACWL is one critical component in assisting poor countries in enforcing their market access rights in WTO litigation. Nevertheless, the provision of legal advice alone is a necessary but insufficient service to poor country government officials and domestic stakeholders, given the “extended WTO litigation process”1 that is required if a complainant is to achieve an economically successful outcome to an initiated dispute.2 I argue that there is a necessary and (as yet) untapped role for economics and economists to complement the legal analysis provided by attorneys and institutions like the ACWL. In the next two sections I detail how it is important to use economics more extensively both before any WTO litigation is started (Section A) and during the actual litigation itself (Section B).
A. The Use of Economics in the Pre-Litigation Phase There have been over 330 formal disputes initiated during more than 10 years of WTO dispute settlement activity at the time of this writing. In most of these disputes, there were non-participating Members that also had a market access interest in the litigation and thus an incentive to engage as either a co-complainant or even as an interested third party. Furthermore, there are likely hundreds of other latent WTO transgressions that Members could have brought forward to litigate but of which they were not aware or which they chose not to litigate. From the perspective of this comment, the primary implication is that any WTO Member 1
2
By “extended WTO litigation process,” I refer to the idea that bookending the period of actual litigation at the DSU are critical pre- and post-litigation phases. The pre-litigation phase is where domestic governments must decide what potential WTO violations to investigate and pursue at the DSU based on legal and economic viability, and the post-litigation phase is where it is necessary to mobilize political constituencies in the (guilty) respondent country in order to generate compliance and the realization of market access benefits, potentially via politically targeted retaliatory threats. By economically successful, I refer to an outcome that results in the respondent complying with its WTO obligations, which would frequently mean the respondent increasing market access available to the complainant. For an empirical analysis, see Chad P. Bown, On the Economic Success of GATT/WTO Dispute Settlement, 86(3) The Review of Economics and Statistics 811 (2004), and Chad P. Bown Developing Countries as Plaintiffs and Defendants in GATT/WTO Trade Disputes, 27 (1) The World Economy 59 (2004).
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country is likely to face a menu of potential and/or existing disputes that it could formally engage in at any point in time. Nevertheless, all countries face financial and/or human capital constraints that limit the resources they can allocate to WTO litigation. Thus an important economic question is, where should a country focus its limited litigation resources? Despite the existence of a legal services centre such as the ACWL that can assist the poor country once it has made this decision, the issue will continue to exist simply because the ACWL cannot possibly provide the unlimited resources it would take to aid each country in every possible dispute that it might pursue. Furthermore, although one input needed to answer the resource allocation question is information on the legal merit of each potential case, other important factors to consider include the expected economic (market access) benefits of pursuing different cases, as well as even the political likelihood of generating respondent compliance should the complainant obtain a legal victory. The pre-litigation phase is thus one area in which it is arguably necessary for economists to complement the legal advice provided by institutions like the ACWL in order to inform poor country governments about which are the most economically beneficial cases to pursue. As poor countries face a menu of choices of potential disputes to litigate, there is scope for the expertise of economists knowledgeable about international trade, industrial organization, and the distortions generated by trade policy interventions to be used to provide client governments with estimates of the market access gains under various forms of potential respondent compliance with DSU rulings. Poor country client governments could then combine this economic information with the complementary information on the likelihood of a legal victory (provided by attorneys), as well as the likelihood of respondent compliance (provided by political scientists), to make a more fully informed calculation as to whether to pursue any particular piece of WTO litigation.3 It is increasingly important for advisors to work cooperatively with others outside of their area of expertise so that poor country governments receive accurate and complete information on which to base their choices in the WTO system. Furthermore, for advisors who are interested in promoting the sustainability of the WTO system, it is critical that they neither undersell nor oversell what WTO litigation is likely to accomplish in terms of market access benefits. Providing a poor country government client with unrealistic economic expectations in one particular dispute could have adverse consequences if it breeds domestic dissatisfaction with the overall WTO system once it is clear that such benefits have failed to materialize. The failure to fulfill unrealistic expectations regarding export market access 3
There is also a useful role for economics in the post-litigation phase (which may help influence client government expectations in the pre-litigation phase through backward induction), as economists can work with political scientists to identify viable retaliation threats (e.g., products exported from politically sensitive districts) so as to increase the likelihood of respondent compliance with DSU rulings.
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could trigger additional mercantilist political pressure that may force a poor country government into erecting new WTO-inconsistent import barriers of its own. The effect would be to compound the initial problem, as such an action is likely to advance only the country’s own interests by eliminating the import-side benefits to WTO membership that economists argue are equally beneficial (to exporting) via consumer access to new varieties of goods and services at lower prices. Nevertheless, despite the importance of accurate and complete economic information needed in the pre-litigation phase, an open question is how to institutionalize its provision so as to make it accessible to the poor country governments and domestic stakeholders that need it.
B. The Use of Economics During the WTO Litigation Phase As Meagher notes, the disputes of greatest interest to potential developing country complainants are those focused entirely on immediate market access (economic) benefits.4 Poor countries may also feel pressure to pursue cases with direct (and transparent) economic benefits, as winning these cases and gaining compliance could legitimize the country’s overall participation in the WTO system.5 To some extent this trend is apparent in the overall data even among the WTO membership at large, as DSU challenges to trade remedies (i.e., anti-dumping, countervailing duty and safeguard statutes, investigations, and impositions) are increasingly what members are litigating over; for example, in the last five to seven years, trade remedy challenges alone have made up roughly 50 percent of the entire DSU caseload.6 Given that poor country litigation is likely to focus disproportionately on market access disputes, such as those involving trade remedies, one implication is that there is a heightened role for technical economic analysis and economic support during the process of actual litigation. The technical economic evidence frequently at issue in trade remedy cases may include econometric and statistical estimates for the level of “injury” associated with a WTO-inconsistent measure, for the attribution of injury to imports (i.e., “causation” as in anti-dumping or safeguard investigations), for the “adverse effects” that stem from domestic subsidies, for the use of “zeroing” in dumping margin calculations, or even for estimating the 4
5
6
With a tighter resource constraint, poor countries may be less interested in pursuing cases involving “systemic” issues (i.e., cases where the removal of WTO-inconsistent policies would generate substantial positive externalities to other member countries). From this perspective such disputes may also generate positive externalities that go beyond the particular exporting firms; nevertheless, such spillover benefits in this case would remain within the complainant country. One notable exception is the United States, which only rarely chooses to challenge other WTO Members’ use of trade remedies. For a discussion and empirical investigation of what factors influence challenges to U.S.-imposed trade remedies, see Chad P. Bown, Trade Remedies and World Trade Organization Dispute Settlement: Why Are So Few Challenged?, 34(2) Journal of Legal Studies 515 (2005).
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size of damages (withdrawal of equivalent concessions) in arbitration awards.7 With the proliferation of national anti-dumping laws and impositions of administered protection around the world,8 the near-term future of the WTO caseload might increasingly focus on these types of disputes. For those groups that provide advice to developing country governments in the actual litigation of such disputes at the WTO, there is therefore a need to combine a thorough understanding of the law with the implications of economic reasoning and technical economic evidence, both in the preparation of legal briefs and in the rebuttal or assessment of evidence provided by an economist “expert” witness. For an institution like the ACWL that is likely to face repeated requests to assist in the litigation of challenges to trade remedies imposed on their clients’ exports, an important issue is how to cost effectively combine such a legal-economic service. To address the need for competent economic analysis during the litigation phase, there are at least three different models that those providing legal advice might therefore choose: (1) try to ignore the technical economics when developing briefs and arguments, (2) continually seek out and hire outside economists to work on cases via the “expert witness” model, or (3) have an economist on staff “in house” to work with the attorneys by advising on the economics of these cases not only for expert testimony but also in argument-developing and brief-writing. It should be noted that some private sector law firms with large trade remedy practice groups that litigate at the national level have gone to a business model where they now have an empirically trained M.S. or Ph.D.-level economist permanently on staff, and they only seek out external help when they need an expert (“star”) witness for testimony. Such an approach could make sense for institutions like the ACWL as well, especially if the economic expertise also can be used to provide clients with accurate economic information at other, related stages of the extended litigation process.
III. Alternatives to the ACWL Model and Implications A final consideration is a brief thought experiment motivated by the following question: what would legal assistance services to poor countries look like without 7
8
For a review and discussion of some of the technical economic techniques used in DSU cases, see World Trade Organization, Economic Analysis in WTO Dispute Settlement, in world trade report (World Trade Organization, 2005). For a discussion of how economic evidence is applied in U.S. trade remedy cases, see James P. Durling and Matthew P. McCullough, Teaching Old Laws New Tricks: The Legal Obligation of Non-Attribution and the Need for Economic Rigor in Injury Analyses under U.S. Trade Law in handbook of international trade (E. K. Choi and James Hartigan eds., 2004). The biggest users of anti-dumping are increasingly developing countries, such as India, South Africa, Brazil, Argentina, Turkey, and Mexico. For a discussion and presentation of the data, see Chad P. Bown, Global Antidumping Database, Version 1.0, World Bank Policy Research Paper No. 3737 (October 2005).
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an institution like the ACWL? Below I consider a number of different alternatives, which I hope highlights the important role played by the ACWL. One obvious alternative to an ACWL is simply that poor countries do not receive any external assistance for legal representation in WTO litigation. Suppose, for a moment, that we even abstract from concerns over equity or justice, about which economic analysis may be relatively ill suited to inform. Nevertheless, to the extent that participation in WTO litigation either enhances the public good characteristics of the system or generates positive externalities,9 the failure of an entire segment of the WTO membership (i.e., poor countries) to have their market access rights enforced raises economic efficiency concerns as well. For many reasons, this is therefore not an attractive alternative to contemplate. A second alternative to poor countries receiving representation from the ACWL would be increased representation either on a pro-bono basis by private sector law firms or by issues-based organizations, such as non-governmental organizations (NGOs). Unfortunately, this type of representation is likely to skew the distribution of cases that are litigated away from the immediate, market access cases that may be most important to the developing country client itself. Instead, this form of legal assistance may overemphasize a caseload of disputes relating to issues that may have precedent value, involve systemic issues, or might generate substantial media attention benefits for the private law firm (useful for clientbuilding purposes) or for the NGO (useful for funding purposes as they seek donors going forward). Non-issues-based, non-partisan entities like the ACWL are the best hope of providing legal assistance that is in the client government’s own economic interest. A third alternative is that poor countries finance the education of their own stock of trade litigators, who would then receive on-the-job training through use of the country’s own national trade remedy (anti-dumping, countervailing duty, and safeguard) laws. This is also unattractive as it diverts scarce human capital away from being used on more pressing domestic legal problems and resources away from more pressing development needs. As experience from other developed and developing countries would now indicate, this is a particularly socially costly way of providing lawyers such experience as it leads to additional import restrictions, which tend to persist over time. 9
The positive externalities extending beyond a particular exporting industry but remaining within a country would be if such participation increases the legitimacy of the WTO in the eyes of domestic constituencies, perhaps allowing the country to further realize economic benefits on the import side by willingly binding their trade policies under WTO disciplines and engaging in deeper multilateral market access negotiations. Alternatively, the externalities might occur across countries if the result of the dispute is increased market access benefits accruing to exporters in different countries as well.
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´ MATEO DIEGO-FERN ANDEZ
9 Compensation and Retaliation: A Developing Country’s Perspective
Note: The Mexican proposal to amend the DSU is twofold: (1) Document TN/DS/W/23 contains the concepts and explanations of the rationale behind the proposal (2). Document TN/DS/W/40 is an attempt to reflect its proposal in the text of the DSU, while at the same time incorporating improvements that resulted from the comments received when the Mexican proposal was first presented.
abstract: Retaliation is an unpopular remedy, and has often been criticised as being trade disruptive and one that affects the Member that exercises it in the first place. However, retaliation (or the threat thereof) is a key element for compliance or for reaching mutually acceptable solutions. In addition, it is the only tool for rebalancing the level of rights and obligations in the absence of compliance. Section IIdiscusses the Mexican proposal to amend the DSU. This proposal suggests four ways to solve what Mexico believes to be the central problem in the functioning of the DSU: the period of time during which a WTO-inconsistentmeasure can be in place without consequences. Section III discusses how enhancing rules on retaliation would benefit developing countries above all and elaborate on how the Mexican proposal to amend the DSU might contribute to this end. Section IV enumerates a number of remaining aspects not discussed in the previous sections, such as whether retaliation is trade disruptive and the need to develop a common understanding on how to determine the level of nullification or impairment.
Mateo Diego-Fern´andez is Deputy Permanent Representative of the Mission of Mexico to the WTO. The views expressed in this chapter are personal and do not necessarily reflect the opinion of the Mexican Government.
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I. Introduction At the time this paper is being written, my country, Mexico, is deciding what to do with its right to retaliate1 against the United States in light of the latter’s lack of compliance in the “Byrd Amendment” case. The decision is not a simple one. To begin with, it is difficult to strike the right balance between helping to induce the United States to comply while at the same time not running into domestic problems, such as shortages. In addition, Mexico’s high level of dependence on the U.S. market does not precisely give us all the leverage that we would like. Although the Mexican case might involve considerations regarding the intense social, political, and economic relationship between the two neighbouring countries, virtually all WTO Members (both developed and developing) have difficulties of this kind. Retaliation has often been regarded as an unpleasant response to non-compliance and one in which the main loser is actually the party that exercises it.2 Like any other measure, its implementation requires taking various administrative and legislative steps, its temporal nature does not provide any certainty to the sectors that could benefit from it, and the importers that are affected by it will never understand why they have to pay for someone else’s fault. This might be one of the reasons why Members have seldom sought authorisation to retaliate and have exercised this right even less.3 However, as ineffective and undesirable retaliation might be, one cannot ignore that it is the only tool that the multilateral trading system has to offer when 1
2
3
The word “retaliation” is used to describe the concept of “suspension of concessions or other obligations” as referred to in Article 22 of the Understanding on Rules and Procedures Governing the Settlement of Disputes, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, Legal Instruments – Results of the Uruguay Round, 33 I.L.M. (1994) [hereinafter DSU]. See Brendan McGivern, Seeking compliance with WTO rulings, 36 The International Lawyer 1, 152, 153 (in section entitled “Problems with retaliation,” four main problems are highlighted: first, the fact that retaliation is trade disrupting; second, the fact that it brings little or no relief to the affected industry; third, that economic costs are imposed on the consumer and the businesses of the complaining party; and fourth, there is little evidence that it actually induces compliance). See WTO Secretariat, Background note on Statistical Information on Recourse to WTO Dispute Settlement Procedures, JOB (03)/225/Rev.1. According to Table 19, both Ecuador and the United States were authorised to retaliate in the “Bananas” case; both Canada and the United States were authorised to retaliate in the “Hormones” case; Brazil and Canada obtained corresponding authorisations because of each other’s lack of compliance in the “Aircraft” cases, and the EC obtained its own authorisation in the “FSC” dispute. According to the public information available at that time, the United States did exercise its right in the “Bananas” case, but Ecuador chose not to. Both the United States and Canada exercised their right to retaliate in the “Hormones” case, and although the EC claims that it has already complied with the DSB’s recommendations and rulings, the former have not lifted the sanctions. The EC did exercise a small portion of its retaliating rights in the “FSC” case, but recently decided to refrain from applying those measures.
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compliance has not been secured and all diplomatic avenues have been explored. As long as we do not find alternative solutions that surpass retaliation in effectiveness, Members will have to live with it and try to find creative ways of making its use (and preferably lack thereof) effective. In addition, the possibility of seeking retaliation is a key element to securing the other remedies provided for in the Dispute Settlement Understanding (DSU), enumerated hereafter in order of precedence:
r a solution mutually acceptable to the parties to a dispute and consistent with the covered agreements
r the withdrawal of the measures concerned r compensation, if immediate withdrawal of the measure is impracticable4 The right to retaliate improves countries’ negotiating power and is an important means of exercising pressure aiming for the elimination of the WTOinconsistent measures. It also encourages talks on compensation when other avenues have been unproductive. Reluctance to face retaliation creates incentives for Members to comply or to strike a deal. In the eloquent words of a Panel, “Carrying a big stick is, in many cases, as effective a means to having one’s way as actually using the stick.”5 Furthermore, although this paper focuses mainly on the “inducement-tocomply-element of retaliation,” one cannot ignore that compensation and retaliation are a means of levelling the playing field of rights and obligations between parties to a dispute, where one of them has not complied with the Dispute Settlement Body’s (DSB’s) recommendations or rulings.6 This is another reason why this remedy of last resort, unpopular as it may be, is necessary. In fact, retaliation is what makes the WTO dispute settlement mechanism different from any other international adjudicating systems in the sense that it makes it relatively effective.
II. Brief Overview of the Mexican Proposal There are two ways of viewing compliance: one is the traditional, legally sound one, which is that Members should be presumed to be in compliance until proven 4
5
6
See Article 3.7 of the DSU; see also McGivern, supra, note 4, at 142 (“Article 3.7 of the DSU sets out the hierarchy of remedies in WTO dispute settlement”). Panel Report, United States – Section 301 Trade Act, WT/DS/152/R (Dec. 22, 1999), para. 7.89. Although this remark was made about the United States’ own provisions on retaliation, retaliatory measures authorized by the DSB also have the objective of inducing compliance, among other objectives. Article 22.4 of the DSU provides that “(t)he level of the suspension of concessions or other obligations authorized by the DSB shall be equivalent to the level of the nullification or impairment.” Similarly, Article 22.7 requires the arbitrator to determine “whether the level of such suspension is equivalent to the level of nullification or impairment.” This notion of equivalence has often been mentioned as contrasting the concept of “appropriate countermeasures” provided for in Article 4.10 of the Agreement on Subsidies and Countervailing Measures.
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otherwise. Another one (and one with which economists may tend to agree more) is that the obligation to comply exists ex ante (i.e., each Member is required, by virtue of Article XVI:4 of the WTO Agreement, to “ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed [Uruguay Round] Agreements”). Therefore, by simply imposing or maintaining a trade measure, a Member is objectively either complying or disregarding the rules of the WTO – it has only not been told so “officially.” Although this way of portraying rights and obligations might not necessarily play in perfect harmony to the presumption of good faith, it is a fact of life. A good reason to view things from this perspective is that in the vast majority of cases (86 percent altogether) measures brought to the DSB have resulted in violations of the WTO Agreements.7 What Mexico is proposing in the context of the DSU negotiations is precisely to address this fact of life in a way in which Members take their commitments to comply ex ante more seriously. The Mexican conceptual paper states the following: The fundamental problem of the dispute settlement system in the WTO lies in the period of time during which a WTO-inconsistent-measure can be in place without consequences.
To deal with this problem, the Mexican proposal contains four main concepts: 1. 2. 3. 4.
early determination and application of nullification or impairment retroactive determination and application of nullification or impairment preventive measures negotiable remedies
All four aspects are independent from each other, but at the same time, they are mutually supportive.
A. Early Determination and Application of Nullification or Impairment Under this proposal, Mexico intends to eliminate the requirement that a Member must wait for three and a half to four years before it can legitimately expect compliance or seek relief for the lack thereof from the losing defendant in a dispute. Article 22.1 of the DSU provides that “(c)ompensation and the suspension of concessions or other obligations are temporary measures available in the event that the recommendations and rulings are not implemented within a reasonable period of time.” (emphasis added). The concept of “reasonable period of time” enshrined in Article 21.3 of the DSU reads as follows: “If it is impracticable to comply immediately with the recommendations and rulings, the Member concerned shall have a reasonable period of time in which to do so.” The reasonable period of 7
http://www.worldtradelaw.net/dsc/database/violationlist.asp (consulted on October 29, 2004).
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time (RPT) can either be agreeable to both parties or determined through binding arbitration, in which case it should not exceed 15 months as a general rule. What this means in practise is that a Member’s measure(s) can be held to be WTO-inconsistent by a panel and subsequently by the Appellate Body and 15 months will ensue before that Member either (i) complies (ii) does nothing (iii) imposes another illegal measure The best-case scenario is compliance within the RPT. Here, the prevailing Member would have waited between 32 and 35 months on average.8 If we take Ecuador’s daily losses in the “Banana” case as a proxy, within the current system, a Member can claim a Pyrrhic victory after its exporters have lost between $537.6 and $588 million.9 The second-best scenario is where the “Member concerned” (i.e., the Member found to be in violation) freely acknowledges that it has not secured compliance within the RPT. In this case, the prevailing Member can directly request authorisation to retaliate and will only have to wait for a further 200 days needed to carry out the arbitration to determine if the authorisation requested conforms to the actual level of nullification or impairment (e.g., $US110.5 million more, using the Ecuador proxy). Scenario number 3 is where the Member concerned claims that it has complied. To disprove this claim the complainant will be required to initiate a new procedure before a panel,10 which can be preceded by consultations and followed by an appeal. The additional time losses will range from 90 to 225 days at the panel stage and from 60 to 91 days at the appellate stage (e.g., representing between $US49.7 million and $US124.3 million in additional losses). Adding together all these time frames, a Member will have waited between three and a half and four years on average before it obtains the gratuitous right to ask for compensation or can aim at suspending concessions.11 This would have represented losses of $700 to $826 million, without considering the stratospheric legal fees and the countless labour hours spent by government officials at different levels, both in the preparation and presentation of the case. 8
9
10
11
Supra, note 3, JOB (03)/225/Rev.1: Average time from request for consultations to establishment of a Panel: 198 days; from establishment of the Panel to adoption of report(s): 16 months and 9 days; average RPT between 9.98 and 11.98 months (http://www.worldtradelaw.net/ dsc/database/implementaverage.asp). The arbitrator awarded Ecuador the right to retaliate for $US201.6 million per year. This represents US$16.8 million per month or US$552,328.00 per day. According to Article 21.5 of the DSU, this procedure is not supposed to exceed 90 days, but in practice it has taken as long as 205 days, not considering the appellate procedure or the consultations. 41.7 and 49.2 months, respectively.
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Ironically, a Member that has prevailed before a Panel/Appellate Body will be much better off if the losing party is cynical enough to simply do nothing than if it unsuccessfully intends to comply. The Mexican proposal would amend Article 22.1 and 22.2 in such a way as to make compensation or retaliation available if no immediate compliance is secured. To enable the timely determination of the level of nullification or impairment (which in turn will be the basis for the DSB’s authorisation to retaliate), the Mexican proposal would allow Members either to (i) allow the arbitration to take place at the panel stage, after the provisional report has been circulated to the Parties (in which case, the award would also be subject to appeal), or (ii) carry out the arbitration at any point in time after the adoption of the report(s). Among the benefits of this proposal are the following:
r Prompt compliance: It would create incentives that would give effect to Arti-
r r r
r r r
cle 21.3, by which the Member concerned is required, as a general rule, to comply immediately or, if that was impracticable, to comply “in the shortest period possible within its legal system.” Furthermore, fewer arbitrations for the determination of the RPT would be needed. Effective compliance: The Member concerned will not have incentives to introduce questionable measures and continue granting illegal protection, because retaliation will already be in place. Negotiations: It would encourage and facilitate negotiations, because Members would be aware of the level of nullification and impairment even before the original Panel/AB report is adopted. Ease the burden on the dispute settlement system: Members might assess the real value of a case before taking it to dispute settlement and, if it turns out not to be substantial, they might be inclined to negotiate or seek alternative means, instead of litigating. More equitable allocation of benefits: The time during which an illegal measure could be maintained without consequences would be shortened greatly. Time saving: The time after the issuance of the interim panel report could be used more efficiently. Furthermore, there would be no need to look for the Members of the original panel or to appoint new ones. Better sequencing: By clearly dissolving the link between the expiry of the reasonable period of time and the window of opportunity to seek retaliation, this proposal solves the “sequencing” problem in a much smoother, more effective manner than any other proposed method.
B. Retroactive Determination of Nullification or Impairment It has to be stated that there is no legal basis in the DSU to claim that remedies are of a prospective nature in the WTO. Article 19.1 – the alleged basis for this
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notion – does not say anything to that effect.12 However, experience has shown that the WTO Members are not yet in a mindset to take steps in that direction.13 Hence, Mexico has proposed to amend Articles 22.2, 22.4, and 22.7 to make it crystal clear that the level of nullification or impairment should be counted retroactively and that compensation start either from the date of (i) imposition of the measure, (ii) request for consultations, or (iii) establishment of the Panel. As elaborated below, if provisional measures are granted the panel/arbitrator would have to subtract the equivalent to the trade impact caused by the preventive measures in determining the retroactive part of the level of nullification or impairment. By introducing the concept of retroactivity, the Mexican proposal would incorporate principles similar to the customary rules on state responsibility.14 More importantly, the introduction of “retroactivity” in the DSU would give meaning to the notion that the level of suspension needs to be equivalent to the level of nullification or impairment,15 because arbitrators will be required to take into consideration all the time that has elapsed in determining the level of nullification or impairment. The main benefit of this proposal is that a Member being complained against has an incentive to try to reach an agreement before the Panel Report is circulated and, in any case, will not be inclined to unduly lengthen the procedure before the Panel (12 months and 12 days on average).16 Another significant improvement would be that, even though the WTO rules do not require compensation to be equivalent to the level of nullification or impairment, the possibility of retaliating retroactively places the prevailing Member in a more comfortable negotiating position in discussing compensation or any other mutual arrangement, because the amount of retaliation it would be authorised to exercise absent such arrangement would be greater. Given that the DSU does not have specific procedures for lifting the authorisation to retaliate when the Member concerned has finally secured compliance,17 12
13
14
15 16 17
See Petros C. Mavroidis, Remedies in the WTO Legal System: Between a Rock and a Hard Place, 11 EJIL 763, 783, 790 (2000). (arguing that “[. . . ] recommendations can open the door to retroactive remedies” as well as arguing in favor of this kind of remedies). See WTO Secretariat, Minutes of the DSB Meeting, WT/DSB/M/75 (February 11, 2000), where Australia, Canada, Brazil, Japan, Malaysia, and the EC expressed very clear opinions against the fact that Panel Report, Australia – Automotive leather II (Recourse to Article 21.5), WT/DS126/RW (January 21, 2000), had recommended a retroactive application of the rules in favor of the United States; see also, Panel Report Guatemala – Cement III, WT/DS156/R (October 24, 2000), paras. 9.6 and 9.7, where the Panel refused to grant Mexico’s request to suggest that Guatemala bring their measure into conformity by reimbursing the AD measures that had been illegally collected. See, e.g., Statute of the Court of International Justice Article 36(2)(d), available at http://www .icj cij.org/icjwww/ibasicdocuments/ibasictext/ibasicstatute.htm. See Articles 22.4 and 22.7 of the DSU. See, supra, note 3, JOB(03)/225/Rev. 1 – Table 8. Under the current rules, a Member has to go through a normal panel procedure to determine that the retaliation imposed against it is no longer warranted; it is further required to grant
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retroactivity provides the best incentive for the prevailing Member to lift its own retaliating measures once the other one has complied. Otherwise, it might eventually have to pay retroactively for unduly maintaining these measures.
C. Preventive Measures Another aspect of the problem that the Mexican proposal addresses is the fact that Members have their hands tied for a significant amount of time, even when their exporters are in dire straits. By the time certain measure(s) have been declared WTO-inconsistent, it may already be too late for these exporters, either because they have lost their market share, were unable to fulfill their contracts, or simply because they went into bankruptcy. To tackle this problem and to secure effective proceedings under the DSU, Mexico has proposed to introduce a concept called “preventive measures,” which is similar to those found in a significant number of domestic judicial and administrative systems, as well as in international courts.18 In addition, the right to take provisional measures to address situations of urgency is well established under the WTO law.19 Under the Mexican proposal, a process would be created by which the complaining party would be required not only to demonstrate irreparable damage but also to suggest ways to stop the damage and to calculate approximately what the expected trade impact of these provisional measures would be. Under this procedure, should a panel determine that there is damage that would be difficult to repair subsequently, it would first request the defendant to stop such damage, and unless action is taken within 30 days, it would then authorise the complaining party to take one or more actions and limit the trade impact of those. Preventive measures would be limited in time, until the Appellate Body decides that there is no basis for them or until the DSB grants the prevailing party authorisation to retaliate. This proposed provision is intended to be used only in exceptional circumstances and might not be applicable in all cases. The main advantage of this proposal is that it would grant an adequate level of protection during the proceedings, thus preventing a particular exporting industry from disappearing as a consequence of another country’s measure that in turn may be subsequently declared illegal. Furthermore, it would disincentivise Members from responding
18 19
a reasonable period of time for its counterpart to stop its retaliatory measures and, if it fails to do so, can ask for its own authorisation to retaliate against the other Member’s retaliatory measures. The only example to this effect is the EC’s recent consultation requests against the United States and Canada, respectively, regarding their own retaliatory measures in the EC – Hormones case. See, e.g., supra, note 14, Article 41. See Article 6.11 of the Agreement on Textile and Clothing; Annex B to the Agreement on the Application of Sanitary and Phytosanitary Measures; Articles 2.10, 2.12, 5.7, 5.9 and Annex 3 of the Agreement on Technical Barriers to Trade; Article 31(b) and Part III, Section 3 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (hereinafter TRIPS Agreement), and Article 6 of the Agreement on Safeguards.
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to a challenged measure by imposing other WTO-inconsistent measures that may, in turn, affect third-country Members.
D. Negotiable Remedies Another proposal is the possibility for Members to “endorse” their authorisation to retaliate, so that other Members might exercise it. Under this concept, a new Article 22.7bis would be created to allow Members to transfer their right to retaliate and for the Member(s) that acquired such right to obtain authorisation from the DSB to do so. In no case would the authorisation exceed the level of nullification or impairment, as determined by the arbitrator. The advantages of this concept are many, including the following:
r It creates a market. Under the current system, Members are only allowed to negotiate with the Member concerned. With the possibility of transferring the right to retaliate to a third party, demand for obtaining this right will potentially multiply by a factor of up to 14720 and will accordingly bring better probabilities that use/transfer of this right will bring significant benefits.21 r The Member acquiring that right will presumably have a direct interest in exercising retaliation against the Member concerned, which in turn will be an important element of inducement to comply.22 r It would result in a better readjustment of concessions, because the affected Member would be able to get a tangible benefit in exchange for its right to suspend. In addition, if the Member concerned ends up “buying off” its non-compliance, it would in fact “compensate” the other party. Tangential to this concept is the proposal to eliminate the burdens on crossretaliation.23 If retaliation does not exceed the level of nullification or impairment is maintained, why should further limitations be imposed? Another tangential proposal in Mexico’s paper is a surveillance mechanism for retaliation measures – inexistent at this point – as well as the possibility of modifying an authorisation to retaliate because of a change in the level of nullification or impairment. 20
21
22
23
147 is the number of WTO Members minus one (i.e., the one that is offering the transfer of its own retaliatory measures). See, Kyle Bagwell, Petros Mavroidis and Robert W. Staiger, The Case for Auctioning Countermeasures in the WTO, NBER Working Papers No. 9920 (2003) – an exhaustive explanation of how the participation of the Member concerned in the auctioning of the rights to retaliate not only generates the greatest expectations of obtaining a revenue but also serves to act preventively). As noted above, among the 147 potential transferees of this right to retaliate is the Member against which the retaliation can be exercised, which might be interested in buying off its lack of compliance. Article 22.3 of the DSU requires Members, as a general rule, to retaliate in the same sector in which the Panel has found a violation and sets a number of procedures to follow if that Member decides otherwise. Whether these procedures have been followed appropriately or not can be decided by an arbitrator.
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III. Why Is the Mexican Proposal Good for Developing Countries? A. It Is in the Developing Countries’ Own Interest to Enhance the Remedies Part of the DSU Although the application of retaliatory measures cannot exceed the level of nullification or impairment, it is undeniable that one of its main objectives is to build political pressure on the losing defendant.24 Nevertheless, as we observed above, it is an undesirable way to go – it is a last resort.25 If the same effect – conclusion of a mutually satisfactory arrangement or withdrawal of the illegal measure – can be achieved through other means, a reasonable country will seek resort to these means, which are additionally quicker and less cumbersome.26 However, the choice of tools to achieve compliance or a satisfactory deal varies from the developed world to the developing one. Of course, this rule will not apply in all cases, but can be safely used as a proxy. In this sense, developing countries may create political pressure on other developing countries, forcing them to withdraw an illegal measure or find an arrangement. However, they will be at a disadvantage when negotiating with powerful developed Members, which possess simultaneously the largest markets in the world and are frequent users of the dispute settlement mechanism (not to mention that they are also the main non-compliers). The credibility of their seriousness can only be backed by a solid capacity to retaliate. Unfortunately, this is not the case right now. Although “carrying a big stick is, in many cases, as effective a means to having one’s way as actually using the stick,” it should also be borne in mind that not all big sticks are created equally big. This may help explain why developed countries maintain WTO-inconsistent measures until “officially” deemed inconsistent by a Panel or the Appellate Body twice as much as developing countries do.27 This may also help us understand why developed countries have been taken to compliance proceedings more often than developing countries.28 In this context, it would be developing countries, not developed ones, which need a more effective system for legal remedies. Consistent with this notion, it has been developing countries that have submitted the most far-reaching proposals 24 25 26
27
28
See Bagwell, Mavroidis and Staiger, supra, note 21 at 33–37. Article 3.7 of the DSU. See, McGivern, supra, note 2, at 153(“political pressure is invariably the sub-text that accompanies all trade disputes [. . . ]”). As of October 29, 2004, requests for consultations against developing country Members were followed by requests for the establishment of a panel 53 times. In the case of consultation requests against developed country Members, the number increased to 117 times. Brazil has been a respondent twice to Article 21.5 DSU proceedings for its non-compliance in the Brazil – Aircraft dispute (WT/DS46), and Mexico has been taken once in Mexico – Corn Syrup (WT/DS132). Japan has been taken once; the EC and Australia have both been taken twice; Canada three times; and the United States four times.
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regarding enhancement of remedies: Mexico (discussed above), Ecuador (monetary compensation), India et al. (elimination of burdens for exercising crossretaliation by developing country Members); African Group, and LDC Group (collective retaliation). On the other hand, as noted above, disputes can easily take between three and a half and four years before compensation or retaliation can be obtained. For a country to invest a great deal of resources and effort in a dispute, it requires a certain degree of certainty that the result it seeks will be accomplished. As noted above, the sad truth is that only a limited number of Members have this certainty. In this sense, time can constitute another barrier for developing country Members that do not consider themselves to be in a position to eventually achieve some remedy nor enjoy the benefits from the dispute settlement system. Enhancing remedies may play an important element in a developing country’s decision whether or not to start a dispute, instead of exploring less advantageous arrangements. Ironically, the same tool that empowers developing country Members to start disputes will serve as an inhibiting factor for potential “violators” to impose or maintain illegal measures or to maintain them if proven that their counterpart is serious about bringing them to the DSU.
B. Three Main Areas in Which the Mexican Proposal Will Serve to Enhance the Remedies Part of the DSU Under the Mexican proposal, the Members’ right to retaliate is enhanced in at least three main aspects: In time
r because the combination of an early, retroactive, and negotiable right to retaliate will constitute a strong incentive to comply at an early stage
r because the right to obtain compensation or to exercise retaliation is granted much earlier – between one and a half and two years earlier, as compared to the current system, therefore eliminating the incentives to lengthen disputes or to take as much time as possible to comply r because the existence of preventive measures may diminish the immediate harmful effect of illegal actions, therefore diminishing the incentives to impose “hit and run” measures In quantity
r because the authorisation to retaliate will take into account the time that has elapsed, therefore increasing the size of the pie
r because, by creating a market, the Member that obtained the right to retaliate has greater expectative to obtain a profit, in cases in which no compliance has been secured
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In effectiveness
r because the incentives to secure ex-ante compliance are increased by (i) the size of the retaliation to be authorised and (ii) a greater certainty that retaliation will be effectively exercised, either by the complaining Member or by other(s) because the time factor to consider when imposing a WTO-illegal measure is greatly diminished, given the possibility of facing retaliation much earlier r because the possibility of taking preventive measures allows the industry of a particular Member to obtain a timely relief r because a Member whose measure has been declared illegal will have no incentives to impose a dodgy replacement measure, because it will already be subject to retaliation r because the “Member concerned” would have an interest in either buying off the right to retaliate against itself or to negotiate a compensation in more favourable terms
IV. Remaining Aspects to be Solved (a) Whether Retaliation Induces Compliance or Not The question of inducement to comply is intimately linked with the remedies’ system as a whole. There will still be cases in which the Member concerned will make a conscious decision not to comply, preferring instead to engage in compensation or face retaliation instead of paying the domestic “political” cost of taking an unpopular measure just to comply with the WTO. The Mexican proposal is not designed to force compliance in all cases – in fact; it is difficult to think of any amendment to the DSU that would guarantee full compliance. However, implementing this proposal can place the prevailing party in a more comfortable position when it comes to discussing compensation. There will be other cases in which the decision as to whether comply or not is a question of degree. In these cases, streamlining remedies will work in favour of compliance in those cases.
(b) Whether Retaliation Is Trade Disruptive and Whether It Hurts the Complaining Party In practice, retaliation has traditionally taken the form of a tariff increase up to a prohibitive level. However, there is still much experience to be gained in this field. Take for example, Ecuador, which obtained authorisation to retaliate in the field of intellectual property because it considered that it was not practicable for it to increase its own tariffs as a response to the EC’s non-compliance in the “Bananas” case.29 More recently, in the “Byrd Amendment” case, Canada 29
Arbitration Report, European Communities – Bananas III (Recourse to Article 22.6), WT/ DS27/ARB/ECU (April 9, 1999), para. 173: the arbitrator in this case determined that Ecuador
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requested authorisation to suspend its obligation to make an injury determination in Antidumping and Countervailing Duty investigations.30 Retaliation can take many different forms, and not all of them need to be trade-disruptive. There might be situations in which retaliation might be neutral vis-`a-vis trade disruption. For example, a particular Member may suspend the obligation to follow the principles of Article XIII of the GATT when distributing quotas among countries or to negotiate with a particular Member in the context of Article XVIII of the GATT. In these cases, the trade-disruptiveness or lack thereof depends on factors that have nothing or little to do with the retaliation rights. There could be other situations in which retaliation can even be tradecreating. An example of this is lowering tariffs on an “MFN-minus-one-basis.” In these cases, the retaliating Member will have created a more open market and at the same time will have tilted against the comparative advantages of the Member against which retaliation is being exercised. In addition, regardless of whether retaliation is trade-creating or tradedistorting, many WTO-questionable measures are undertaken. One needs only to take a look at the minutes of any regular committee of the WTO to read the questions or comments on legislative regulatory or administrative measures taken by Members (not to mention the measures that do not get notified). The right to retaliate is, by definition, the right to impose a second WTO-illegal measure. In other words, retaliation actually adds to the number and expands the universe of WTO-questionable measures. An alternative to imposing a new measure is simply to obtain a “blessing” for another measure already in place. If that is the case, a Member will have legitimised (at least temporarily) an illegal measure. However, in doing so, it would have contributed to the multilateral trading system by not expanding the number of WTO-inconsistent measures.
(c) Whether Retaliation Rebalances the Level of Rights and Obligations between Members In theory, a Member that exercises retaliation for an amount up to the actual level of nullification or impairment does in fact rebalance the level of rights and obligations with its counterpart. In practice, this never happens, because the “prospective rebalancing” will have started off only after a lengthy procedure plus RPT. If the right of establishing that rebalance is granted at an early stage, there is the possibility that the rebalance will be used more effectively, be it either through compensation or through retaliation. If retroactive remedies are allowed, the rebalance will be more likely.
30
was entitled to request authorization to suspend, not only in the goods sector (the sector where the violations had been found) but also on wholesale services and in the TRIPS Agreement regarding copyrights, geographical indications, and industrial designs. Arbitration Report, United States – Offset Act (Byrd Amendment) (Recourse to Article 22.6), WT/DS234/ARB/CAN (August 31, 2004).
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One feature that still needs to evolve is the actual calculation of the level of nullification or impairment. The “counterfactual” principle, which has been followed in such cases as “Bananas” or “Hormones” have been demonstrated to have shortcomings, not to mention in such cases as US – 1916 AD Act and in the “Byrd Amendment.” Improving the way in which nullification or impairment is calculated will necessarily lead to a better rebalancing of rights and obligations between Members.
(d) Whether the Industry Affected by the WTO-Illegal Measure Can Obtain Relief through Retaliation Experience is limited in this area. There is no evidence that the retaliatory measures that Ecuador intended to impose for the EC’s lack of compliance in the “Bananas” dispute would provide any relief to its banana growers, other than the expectation that the EC would ultimately implement a WTO-consistent banana regime. The other examples neither demonstrate a clear intent to impose measures to protect the affected industries. However, it was the Members – not their industries – that had brought the cases in the first place. It was the countries’ own policy decision to privilege measures that they believed would induce compliance, rather than bringing immediate relief to the affected industries. Finally, it was the Members’ own sovereign right to even decide whether or not imposing retaliatory measures would be appropriate at a particular moment in time, considering many other factors in the trade relationships that have little or nothing to do with the affected industries. WTO Members do not only represent the interest of particular industries. This is something that industries will have to live with. The expectation that the WTO brings them is that, through political pressure, other countries will ultimately comply with the DSB rulings and recommendations. Having said that, it is also the prevailing Member’s sovereign right to decide whether or not to grant relief to the affected industry as a matter of domestic policy. In fact, retaliatory measures can support this right. A prevailing Member might impose higher (though not prohibitive) tariffs on the imports of its counterpart as a means of retaliation and subsequently distribute the income of those tariffs to the affected industry (just like the Byrd Amendment). Furthermore, nothing prevents a country from granting illegal or actionable subsidies to that particular industry and obtaining approval from the DSB to do so. Like these, other examples can and should be considered by policymakers in countries that consider retaliation.
V. Conclusion Although retaliation has many questionable features, it is the only enforcement tool that the multilateral trading system has to offer. Therefore, instead of
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criticising it, Members should be looking for creative ways of using it. The Mexican proposal is one of the many proposals that intend to address the problem of inefficient remedies in the context of the dispute settlement mechanism. It contains four main features aimed at making dispute settlement processes more expeditious, granting negotiating power to developing countries, and achieving an overall better balance of the rights and obligations by Members. It is in the interest of developing countries to streamline the rules on legal remedies in the context of the current DSU negotiations. Doing so will play to their advantage in a more effective way than most proposals dealing with the principle of special and differential treatment. Political frictions arising from enhanced retaliatory practises might be temporal (as was the friction derived from the first cases where compliance was not secured within the RPT), but with time, the political pressure on a Member wishing to exercise such rights will decrease until it becomes perfectly natural to consider these forms of retaliation as an integral part of the menu of measures to obtain compliance. The problems with retaliation are not insurmountable. There can be more creative ways of dealing with it and at the same time avoiding the negative effects identified therewith. For example, there are ways of exercising retaliation that might actually be trade-creating. In any case, developing countries are better off with a more effective system of legal remedies than the one we already have. After all, if everything fails, we will be exactly where we are now.
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Getting Compliance Just Right Comment on Mateo Diego-Fern´andez’s “Compensation and Retaliation: A Developing Country’s Perspective”
Without appropriate remedies, states may not have appropriate incentives to comply with WTO law. With remedies that exert too great an influence, states may have incentives to comply where they should not. WTO law is not like the international law proscription of genocide or aggressive war: it does not normatively demand compliance at all costs. Rather, WTO law is better understood largely as instrumental law that is only worthy of compliance to the extent that compliance makes people better off. It thus seems attractive to allow states the flexibility to “buy” their way out of at least some kinds of obligations by providing compensation to other states. Efficient breach is an attractive concept in at least some areas of trade law.1 Even if the WTO legal system is in theory and text a system of mandatory law, which is at least contestable, its mandatory nature does not extend to the power of its formal remedies: the “right” is undermined, or is less than may initially be thought, by virtue of the remedy. Again, without a compelling remedy, there is no effective “right” to actual performance even if the obligation is simply to comply. This is illustrated by the cases, such as Hormones, in which WTO law, definitively declared, has not met compliance. During the GATT period, the pre-DSU relevant text, GATT Art. XXIII:2, specified that the contracting parties could authorize the suspension of “such concessions or other obligations under [GATT] as they determine to be appropriate in the circumstances.” Thus, the reference was to “appropriate” concessions, whereas Article 22.4 of the DSU refers now to concessions “equivalent” to the level of nullification or impairment. However, in the 1952 Netherlands case, “the Working Party was instructed by the contracting parties to investigate the appropriateness of the measure which the Netherlands Government proposed to take,
1
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We must recognize that efficient breach may be more attractive to U.S. lawyers than to lawyers from the civil law tradition. See Aristides Hatzis, Civil Law and Economic Reasoning: An Unlikely Pair (Working Paper, February 6, 2005), available at http://papers.ssrn.com/ sol3/papers.cfm?abstract id=661661.
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having regard to the equivalence to the impairment suffered by the Netherlands as a result of the United States restrictions.”2 Thus, the distance between “appropriate” and “equivalent” under GATT may not have been great. Today, we might interpret “appropriate” in GATT Art. XXIII:2 by reference to the general international law of state responsibility, as evidenced by the Articles on State Responsibility. Although neither the general international law of state responsibility, nor the Articles (which are intended to reflect that law), are themselves applicable in WTO dispute settlement, they are to be taken into account in interpretation pursuant to Article 31.3(c) of the Vienna Convention on the Law of Treaties. It appears that “equivalent” under Article 22.4 of the DSU is a less complex, less nuanced, comparator than “appropriate.”3 In the EC – Bananas III (U.S.) case, the arbitrators first sought to define “equivalence” under Art. 22.4, based on dictionary entries: We note that the ordinary meaning of the word “equivalence” is “equal in value, significance or meaning”, “having the same effect”, “having the same relative position or function”, “corresponding to”, “something equal in value or worth”, also “something tantamount or virtually identical”. Obviously, this meaning connotes a correspondence, identity or balance between two related levels, i.e. between the level of the concessions to be suspended, on the one hand, and the level of the nullification or impairment, on the other.4
This passage contains a number of ideas about the meaning of equivalence between the nullification or impairment, on the one hand, and the suspension of concessions, on the other, but it does not respond to the essential problem of interpreting this language in context. The arbitrators found that correspondence is the key meaning, without asking which value should “correspond,” and without paying attention to the dictionary language regarding “equal in value” and “having the same effect.” This language would lead to an examination of the effects of trade barriers and the reasons for valuing free trade in accordance with WTO commitments. However, without discussion, the arbitrators assumed that the U.S. level of suspension is “clear,”5 implicitly assuming that equivalence is to 2
3
4
5
Netherlands Measure of Suspension of Obligations to the United States, (Nov. 8, 1952), GATT B.I.S.D. (1st Supp.) at 62 (1953). In fact, in international investment law, “appropriate compensation” was famous as an agreed term by which states “agreed to disagree,” holding that it meant different things. See Resolution on Permanent Sovereignty over Natural Resources, G.A. Res. 1803, U.N. GAOR, 17th Sess., Supp. No. 17, at 15, U.N. Doc. A/5217 (1962). This debate obviously came after the drafting of the GATT. Decision by the Arbitrators, European Communities – Regime for the Importation, Sale and Distribution of Bananas – Recourse to Arbitration by the European Communities under Article 22.6 of the DSU, WT/DS27/ARB, (April 9, 1999), para. 4.1, citing The New Shorter Oxford English Dictionary (1993), page 843. Id., para. 4.2; see also para. 7.1.
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be determined in terms of the magnitude of the barriers, not in terms of the value of the barriers. One approach that the arbitrators did not use is to refer to the general international law meaning of the coordinate concept, as reflected in the Articles on State Responsibility. Art. 36 of the Articles provides for compensation, stating, “The compensation shall cover any financially assessable damage including loss of profits insofar as it is established.” Although it may be argued that the reference to “equivalence” in Article 22.4 is different from “compensation,” there is no reason to think that by use of the term “equivalent” the member states intended to provide for something more or less than “compensation.” Again, it would be natural under Article 31.3(c) of the Vienna Convention on the Law of Treaties for interpreters of the word “equivalent” in this context to take into account relevant rules of international law applicable in the relations between the parties. The Articles on State Responsibility are a source of such rules. Compensation might well be understood to entail equivalence. In this sense, Article 22.4 might be understood simply to invoke, with a different word, the customary international law concept of compensation reflected in the Articles. Recall also that the parties are intended to negotiate “compensation” under Article 22.2 of the DSU. It would seem likely that the drafters of the DSU expected that each side would negotiate “compensation” under Article 22.2 under the shadow of “equivalence” under Article 22.4. Thus, it would be unrealistic to expect different measures, and it is not unreasonable to use the customary international law meaning of “compensation” to inform our understanding of “equivalence.” Economic analysis of law has enhanced our understanding of contract and tort, as well as other areas of law, by focusing analysis on incentives and consequences. We thus may ask the question whether WTO law operates as a property rule or as a liability rule.6 It will be recalled that in 1972, Guido Calabresi and Douglas Melamed suggested that, although property rules might promote efficient exchange under low transaction costs,7 liability rules promote efficient exchange under high transaction costs.8 This work prompted the development of a substantial literature. As we examine remedies in the WTO, it is useful to draw on this literature to understand the incentive effects of various possible approaches to remedies. The WTO Agreement has been compared to a contract.9 Our motivation is to understand 6
7
8
9
John Jackson first raised this question in 1969. John H. Jackson, World Trade and the Law of GATT 170 (1969). This proposition has been challenged. See Louis Kaplow & Steven Shavell, Property Rules and Liability Rules: An Economic Analysis, 109 Harv. L. Rev. 713 (1996) (showing that bargaining theory does not support the Calabresi-Melamed position). But see Keith N. Hylton, Property Rules and Liability Rules, Once Again (Boston Univ. School of Law Working Paper Group, Paper No. 05–17, 2005) (partially rehabilitating the Calabresi-Melamed position). Guido Calabresi and A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089, 1090 (1972). Appellate Body Report, Japan – Alcoholic Beverages, at 15, WT/DS/8,10,11/AB/R (October 4, 1996) (adopted November 1, 1996).
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the incentives provided by the remedies available for breach of this contract and the likely consequences. In the domestic system, we distinguish between property rules and liability rules on the basis that liability rules are subject to the unilateral choice of an actor to violate the rule and incur the liability. Importantly, the liability is measured by reference to the value of the damages caused by the violation. The owner of the entitlement that is protected by a mere liability rule cannot object to the action, but must accept the payment of damages. Liability rules require, in order to operate, that courts are available to determine the value of the damages. They are therefore dependent on an appropriate institutional structure. Property rules, on the other hand, protect the entitlement unless the owner consents to its taking. We often assume that property rules are backed by injunctive or specific performance remedies. Thus, in the domestic system, we assume that a property right is absolute: if property is taken from us without our consent, a court will order that it be given back. However, the actual remedies in domestic law may be somewhat less clear than the theory supposes. The procedural requirement for specific performance or an injunction is a demonstration that damages are inadequate to right the wrong.10 In practice, the more likely outcome is an award in excess of the value of the damages. So, there are two kinds of property rights: (i) those backed by injunctive force and (ii) those backed by supra-equivalent damages. We might call these Type I and Type II property rights. From a neoclassical economics standpoint, some might assume that in the WTO context, a property rule, supported by specific performance or by enormous punitive damages, would yield greatest efficiency. That is, we do not need the parties to tell us what an efficient public welfare (as opposed to public choice) contract is – neoclassical economists can tell them. After all, there is no proposition more commonly accepted in economics than the fundamental theorem of welfare economics, which in our context argues that reduction of barriers to trade increases welfare. This argument applies most clearly to obligations in respect of tariff reduction and quota elimination.11 But WTO law today includes a wide variety of obligations, some of which are quite ambivalent from a welfare standpoint. One need only consider the requirements of the TRIPS Agreement or the restrictions on domestic regulation under the SPS and TBT Agreements. As suggested above, we should begin to discriminate among these various obligations.12 10 11
12
Emily Sherwin, Introduction: Property Rules as Remedies, 106 Yale L.J. 2083, 2085 (1997). Indeed, we might note that, with respect to tariff bindings and de jure quotas, compliance in the WTO legal system seems quite good and approximates what would result from a property rule. This may be because in connection with these clear rules, violation would entail much greater reputational consequences than might be expected in connection with more nuanced rules. There is an important argument that the WTO treaty should be understood as a single contract. Like other contracts between individuals, some components, considered alone will of course seem inefficient. However, this argument suggests that the entire contract should be enforced as entered into in order to promote efficiency of contracting. That is, it is important to efficiency that states be able to bind themselves. However, the normative argument
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We should also distinguish within the WTO context between Type I and Type II property rights. Many international lawyers see WTO law as absolute in its requirement for compliance, without the possibility for renegotiation: as a Type I property right. However, under incompleteness, it is not clear that specific performance is the efficient remedy.13 Thus an understanding of WTO law as a Type I property right would be broadly inefficient, at least in cases where the WTO rule at stake is normatively ambivalent, as it would deny the possibility of efficient breach in appropriate cases. In fact, the parties to the WTO Agreement clearly did not indicate specific performance as the remedy, but rather established the possibility for compensation and counter-measures and failed to state explicitly that continued breach, while enduring counter-measures, is not an option. Furthermore, there are specific provisions for “escape” and renegotiation in specific areas: for example, the safeguards provisions of Article XIX of GATT and the Agreement on Safeguards, as well as the renegotiation provisions of Article XXVIII. Under circumstances where specific performance is unavailable or where there are no additional penalties for non-compliance beyond equivalent compensation, there is little difference between a liability regime and a property regime, or between Type I and Type II property regimes. That is, in a world without specific performance or punitive damages, the liability rule applies as a matter of law in action. In the WTO context, a liability rule would mean as a practical and behavioral matter that a state may violate WTO law, so long as it pays the damages or accepts the suspension of concessions. On the other hand, the debate over whether states have the authority or power to “buy out” their WTO obligations could be understood as a struggle over whether non-compliance will give rise in addition to reputational sanctions. If it is understood that “international obligation” applies regardless of the authorization of retaliation or the provision of compensation, then states that follow this route will incur reputational costs. As Schwartz and Sykes point out, the normative goal of any system of contract remedies is to deter inefficient breaches – those that impose greater costs on the promisee than benefits on the promisor – and to promote efficient breaches: those that impose lower costs on the promissee than benefits on the promisor.14 Schwartz and Sykes explore the possibility that the existing WTO system of remedies is consistent with the law and economics theory of contracts that
13
14
advanced here is not inconsistent with this view: it simply suggests that as states structure their treaty, with provisions for remedies, they are able to craft remedies that will induce efficient behavior with greater consistency. It is similar to an argument that expectation damages, rather than punitive damages, on the one hand, or sub-equivalent damages on the other hand, will normally be a more efficient structure for domestic contracting. Paul G. Mahoney, Contract Remedies, in encyclopedia of law and economics, available at http://encyclo.findlaw.com/4600book.pdf. Warren F. Schwartz and Alan O. Sykes, The Economic Structure of Renegotiation and Dispute Resolution in the World Trade Organization, 31 J. Legal Stud.179, 181 (2002).
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suggests the possibility of efficient breach.15 Their approach does not follow a welfare economics approach to efficient breach, but instead uses a public choice lens to evaluate the efficiency of breach in terms of the utility functions of political operatives. They argue doctrinally that the WTO system is, and normatively that it should be, more like a liability rule than a property rule. That is, the liability rule would induce states to comply when it is “efficient” (in public choice, as opposed to welfare terms) to do so and to breach when that is “efficient.” Schwartz and Sykes suggest that the theory of efficient breach is equally applicable in the context of trade agreements, despite the inability to monetize costs and benefits.16 In fact, in standard law and economics theory, under incompleteness, an expectation measure of damages is understood to lead to efficient decisions by a promisor to perform or breach an existing contract, given a fixed level of reliance.17 Perfect expectation damages would make the obligee indifferent between performance and breach.18 “Perfect expectation damages equal the gain that the promisee who relied optimally would have obtained from performance.”19 However, there are some important conditions that must be satisfied for efficient breach to operate. Efficient breach under a liability rule20 depends on the ability of a third party, such as a court, to determine a level of damages that will approximate the level of liability that will best distinguish between efficient and inefficient breach.21 Thus, in contract theory, efficient breach is dependent on calculation of the objective value of expectations of the non-breaching party. Similarly, in trade, efficient breach is dependent on calculation of the objective value of expectations of the non-breaching state. But is it the non-breaching state or the government of the non-breaching state? Their preferences are presumed to diverge. Importantly, unless the goal is to induce compliance in all cases, public choice-based remedies, such as those assumed by Schwartz and Sykes, seem presumptively inefficient. It seems clear that the present system of remedies in the WTO has no particular claim to either public welfare or public choice efficiency. There is no reason to believe that calculation of nullification or impairment in terms of volumes of trade or amounts of subsidies approximates the incentives of
15 16
17
18 19 20
21
Id. Id. at 184. (“Although this theory of efficient performance and nonperformance has been developed with reference to private contracts, where the costs and benefits of performance may be measured in money, it applies equally to bargains such as trade agreements.”) John H. Barton, The Economic Basis of Damages for Breach of Contract, 1 J. Legal Stud. 277 (1972); Steven Shavell, Damage Measures for Breach of Contract, 11 Bell J. Econ. 466 (1980). But see Daniel Friedmann, The Efficient Breach Fallacy, 18 J. LEG. STUD. 1 (1989). Robert Cooter & Thomas Ulen, Law and Economics 226 (3d ed. 1999). Id. at 246. Efficient breach may also follow from a specific performance rule that induces bargaining toward efficient breach. However, as suggested above, specific performance suffers from the possibility of breakdown of negotiations due to bilateral monopoly. Jeffrey L. Dunoff & Joel P. Trachtman, The Law and Economics of International Law, 24 Yale J. Int’l L. 1 (1999).
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governmental operatives better than a welfarist calculation. In fact, the opposite seems true. Under circumstances of uncertainty as to the motivations of governmental operatives, it would seem better to assume congruence with welfare than to make any other assumption. At least we hope that governmental structures are somewhat accountable to the preferences of citizens in a welfare sense.
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GENE M. GROSSMAN AND ALAN O. SYKES
10 A Preference for Development: The Law and Economics of GSP
1. Introduction The WTO case brought by India in 2002 to challenge aspects of the European Communities’ Generalized System of Preferences (GSP) brings fresh scrutiny to a policy area that has received little attention in recent years – trade preferences for developing countries. The idea for such preferences emerged from the first United Nations Conference on Trade and Development (UNCTAD) in 1964. The ensuing negotiations led to Resolution 21(ii) at the second session of UNCTAD in 1968, acknowledging “unanimous agreement” in favor of the establishment of preferential arrangements.1 Tariff discrimination violates the most-favored nation (MFN) obligation of GATT Article I, however, and thus the legal authority for preferential tariff schemes had to await a GATT waiver of this obligation, which came in 1971. The waiver was to expire after 10 years, but the authority for preferences was extended by the GATT contracting parties Decision of November 28, 1979 on Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries, popularly known as the “Enabling Clause,”2 and now incorporated into the law of the WTO along with the GATT itself. Although trade discrimination favoring developing countries is the essence of any GSP scheme, India’s WTO complaint raised the question of what type of discrimination is permissible – must all developing countries be treated alike, or can preference-granting nations discriminate among them based on various sorts of criteria? The European system challenged by India afforded more generous preferences to the least-developed countries (LDCs), to developing nations that undertook certain measures to protect the environment and labor rights, and to 12 nations involved in efforts to combat drug trafficking. India originally challenged the environmental, labor, and drug-related preferences, but later limited its complaint only to the drug preferences. A WTO panel ruled in India’s favor in
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See OECD Secretary General (1983).
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GATT B.I.S.D. (26th Supp.) at 203 (1980).
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late 2003.3 The WTO Appellate Body affirmed the ruling in India’s favor in early 2004,4 although it modified the panel’s findings in a way that seemingly authorizes some differential treatment of developing countries based on their “development, financial and trade needs.” The purpose of this paper is to review the current state of the law in the WTO system and to ask whether economic analysis can offer any wisdom about the proper extent of “discrimination” through GSP measures. These issues are challenging ones, both from a legal and an economic standpoint. There are good economic reasons to be concerned about discrimination and reciprocity in GSP schemes, and there are respectable legal arguments that they should be strictly limited. GSP benefits are “gifts” of a sort, however, and tight limitations on their terms may put an end to them altogether. It is exceedingly difficult to say whether discrimination and reciprocity in GSP schemes make the trading community worse off or better off over the long haul. Section 2 provides legal and historical background, including a description of the GSP schemes currently in place in the United States and Europe and a thorough review of the recent panel and Appellate Body decisions. Section 3 evaluates the Appellate Body decision from a legal perspective and considers its possible implications for aspects of the U.S. and European GSP schemes that were not challenged by India. Section 4 examines trade preferences from an economic perspective, inquiring into the soundness of the GSP concept as a whole and asking whether some forms of discrimination are somehow better than others.
2. Legal Background Resolution 21(ii) at UNCTAD II in 1968 called for the establishment of a “generalized, non-reciprocal, non-discriminatory system of preferences in favour of the developing countries, including special measures in favour of the least advanced among the developing countries.” It further stated that such preferences had three objectives: to increase the export earnings of developing countries, to promote their industrialization, and to accelerate their rates of economic growth. From the outset of serious negotiations within UNCTAD, however, it was clear that the “non-discriminatory system of preferences” envisioned by Resolution 21(ii) would in fact embody considerable elements of discrimination. Indeed, Resolution 21(ii) on its face contemplates discrimination in favor of LDCs. Further, the theory behind GSP was that it would reduce the reliance of developing countries on exports of primary products and promote industrialization. Accordingly, it was understood that manufactured goods would be the main beneficiaries of 3
4
Panel Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/R (December 1, 2003) (hereafter “Panel Rep.”). Appellate Body Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/AB/R (April 7, 2004) (hereafter “AB Rep.”).
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preferences and that agricultural products would be treated less favorably.5 This discrimination across sectors inevitably produces a kind of de facto discrimination across beneficiaries – some beneficiaries have far greater capacity to produce the manufactured goods that are designated for preferential treatment than others. In addition to these features that were built into the conception of the system, political factors intruded heavily on the willingness of nations to grant preferences across the board. Some developing countries were seen as ideologically unacceptable recipients of preferences; many produced manufactured goods in politically sensitive import sectors, such as textiles and footwear; and the possibility of import surges was a matter of significant concern. Thus, it quickly became clear that if GSP schemes were to be politically viable in the major developed nations, they would have to contain substantial additional limitations as to product coverage and beneficiaries and be accompanied by safeguards to address politically unacceptable increases in imports. No mechanism existed for coordinating the evolution of national schemes on such matters, and thus each developed rather differently. Along the way, some preference-granting countries began to condition GSP benefits on the willingness of beneficiary nations to cooperate on various policy margins, either by rewarding cooperation with greater preferences or punishing its absence by withdrawing them. The conception of GSP as a “non-reciprocal” program thus came under considerable pressure as well.
2.1. GSP Scope and Conditionality in the United States and Europe UNCTAD reports that there are currently 16 national GSP schemes notified to the UNCTAD secretariat – Australia, Belarus, Bulgaria, Canada, the Czech Republic, the European Community, Hungary, Japan, New Zealand, Norway, Poland, the Russian Federation, the Slovak Republic, Switzerland, Turkey, and the United States.6 They differ in significant detail, and interested readers may consult the UNCTAD Web site for the particulars of various systems. Our purpose here is simply to show how the more important schemes are riddled with provisions that might be viewed as discrimination or reciprocity, and for that purpose it suffices to consider only the schemes of the United States and the European Communities. 2.1.1. GSP in the United States The GSP of the United States was first enacted in the Trade Act of 1974 and took effect in 1976. President George Bush signed legislation that reauthorized the GSP program through 2008. 5 6
See OECD Secretary General (1983). See UNCTAD Web site, http://www.unctad.org/Templates/Page.asp?intItemID=2309& lang=1 (last visited September 1, 2004).
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The statute has three sections – a general grant of authority to the President to extend preferences,7 a section on the designation of beneficiary countries,8 and a section on the designation of eligible products.9 Regarding the designation of beneficiary countries, the statute begins with a short list of developed countries that are ineligible. It next forecloses beneficiary status to eight other categories of nations: (1) “communist” countries (with exceptions), (2) countries that are parties to an “arrangement” that withholds “supplies of vital commodity resources from international trade” (aimed at OPEC); (3) countries that injure U.S. commerce by affording preferences to other developed countries; (4) countries that expropriate the property of U.S. citizens, including intellectual property, without just compensation; (5) countries that fail to enforce binding arbitral awards in favor of U.S. citizens; (6) countries that aid or abet terrorism or fail to take “steps to support the efforts of the United States to combat terrorism”; (7) countries that have not taken steps “to afford internationally recognized worker rights”; and (8) countries that fail to fulfill their “commitments to eliminate the worst forms of child labor.” The last five exclusions can be waived by the President in the “national economic interest.”10 The President has the discretion to confer beneficiary status on any nation not excluded by the above factors, and the statute provides additional factors that the President must consider in exercising this discretion.11 Along with the prospective beneficiary’s interest in the program, its level of development, and its treatment in the GSP schemes of other donor countries, the President must also consider whether the country provides “equitable and reasonable access to [its] markets and basic commodity resources” and “adequate and effective protection of intellectual property rights,” whether it has taken steps to reduce investmentdistorting practices and barriers to trade in services, and whether it takes steps to afford internationally recognized worker rights. The statute also provides for “mandatory graduation” of “high income” countries, without defining the term “high income.”12 At the low-income end of the spectrum, it also allows the President to designate least-developed beneficiary nations and to extend to them preferences that are not extended to other developing nations. Pursuant to these provisions, quite a number of nations that have become highly successful exporters, such as Hong Kong, Singapore, and Malaysia, have now been “graduated” from the U.S. scheme because of their “high-income” status. Several nations have had their GSP status suspended temporarily because of problems in their worker rights practices, including Nicaragua, Paraguay, and Chile. Some of the benefits to Argentina were suspended in 1997 over an intellectual property dispute, and some of the benefits to Pakistan were suspended at one time, but later restored in return for their cooperation in antiterrorism efforts. Beneficiary status has also been denied to a number of nations 7 9 11
19 U.S.C. §2461. 19 U.S.C. §2463. 19 U.S.C. §2462(c).
8 10 12
19 U.S.C. §2462. 19 U.S.C. §2462(b). 19 U.S.C. §2462(e).
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with whom the United States has had poor political relations (e.g., Cuba, Iran, North Korea, and Syria).13 It is assuredly possible that geopolitical considerations play a broader role sub rosa in many of the decisions regarding beneficiary status, and there is no mechanism to ensure that the various criteria are applied in a careful and even-handed fashion. We do not dwell at length here on the provisions for the designation of eligible products, as they are unlikely to be at the heart of any dispute over discrimination or reciprocity (although they might be said to cause de facto discrimination as indicated). Because these provisions are relevant to an assessment of the economic effects of the system, however, we note three important details. First, many sensitive items are excluded by statute from the GSP system, such as certain textile and apparel products, watches, electronic products, steel products, footwear and leather products, certain agricultural products, and “any other articles which the President determines to be import-sensitive.”14 Second, a product from a particular beneficiary becomes ineligible for coverage if there is no longer a “competitive need” (unless it comes from a least developed beneficiary). When imports of a product from a single beneficiary exceed a certain monetary threshold (currently $115 million), or 50 percent of all U.S. imports of the article in a calendar year, it must be removed as an eligible product unless the President executes a “waiver.”15 Third, all items are subject to rules of origin. In general, a product will not be deemed to originate in a beneficiary nation unless it meets a 35 percent valueadded test – the value of the input products produced in the beneficiary nation, plus the value of processing in that nation, must equal 35 percent of the value of the finished good.16 2.1.2. GSP in the European Communities The European approach to GSP has evolved considerably over time. The system in place through 1994 relied heavily on quantitative limits for the importation of duty-free or reduced-duty industrial and agricultural products. The arrangement challenged by India, relies to a much greater extent on “tariff modulation” and “special incentive” arrangements, coupled with provisions for country and sectoral graduation, as well as an “everything but arms” arrangement for LDCs.17 The tariff modulation arrangement classifies goods into “very-sensitive,” “sensitive,” “semi-sensitive,” and “non-sensitive” products. Roughly speaking 13
14 16 17
See generally, UNCTAD, Generalized System of Preferences: Handbook on the Scheme of the United States of America (2003); UNCTAD, Generalized System of Preferences: List of Beneficiaries (2001). 15 19 U.S.C. §2463(b). 19 U.S.C. §2463(c)–(d). 19 U.S.C. §2463(a) (2). See generally, Council Regulation, 250/2001, 2001 O.J., applying a scheme of generalized tariff preferences for the period from 1 January 2002 to 31 December 2004; UNCTAD, Generalized System of Preferences: Handbook on the Scheme of the European Community (2002).
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and with a few exceptions, beneficiary countries then receive tariff reductions of 15 percent, 30 percent, 65 percent, and 100 percent, respectively, off the usual MFN rate for goods in each category. LDCs, however, receive duty-free treatment on goods in all categories except armaments. Countries can be completely graduated from the system based on a “development index,” and individual exports from particular countries can also be graduated based on a combination of considerations relating to the development index and to the beneficiary’s market share or degree of specialization in a particular product. “Special incentive arrangements” provide additional margins of preference to nations that apply for them and prove their eligibility. The labor arrangement applies to developing countries that have adopted the substance of the standards required by several International Labor Organization Conventions relating to, inter alia, forced labor, collective bargaining rights, non-discrimination principles, and child labor. The environmental incentive arrangement applies to goods originating in countries with tropical forests that can establish their adherence to international standards regarding the sustainable management of tropical forests. The special arrangements supporting measures to combat drugs are made available to 11 South or Central American countries, plus Pakistan, that are involved in efforts to reduce drug trafficking. They too provide additional margins of preference on a range of products, essentially exempting goods from sectorspecific graduation rules that would otherwise apply to them. Finally, the scheme contains a number of “temporary withdrawal and safeguard” provisions. The most important are aimed at import surges, and they allow preferences to be suspended after an investigation of such developments. Other provisions for temporary withdrawal apply to situations in which the beneficiary country has been shown to have tolerated slavery, violated worker rights, exported goods of prison labor, failed to take appropriate means to control drug trafficking, engaged in fraud with respect to rules of origin, engaged in “unfair trade practices,” or infringed the objectives of certain fishery conventions. The policies favored by the European system differ somewhat from the policies encouraged by the United States, although there are notable similarities. Both systems certainly exhibit a significant degree of discrimination and reciprocity in their design and in their application that goes well beyond simply the more favorable treatment of LDCs that was envisioned by UNCTAD Resolution 23(ii).
2.2. India’s Complaint and Its Legal Basis As noted earlier, India’s original complaint before the WTO challenged the labor, environmental, and drug-related preferences in the European GSP scheme, but India later restricted its challenge to the drug-related preferences. Its decision to restrict the scope of its complaint has resulted in an Appellate Body decision that leaves open many questions about the permissible scope of discrimination, as we show in this chapter.
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The legal foundation for India’s challenge begins with GATT Article I, which requires that any “advantage, favour, privilege or immunity” granted by one member nation to the product of another and relating, inter alia, to “customs duties and charges of any kind,” must also be granted “immediately and unconditionally” to like products originating in other member nations. This principle is commonly termed the most-favored nation (MFN) obligation of GATT. Any GSP scheme, of course, involves tariff discrimination by the preferencegranting nation. It thus requires some derogation from the legal prohibition in Article I, which was first allowed under a 10-year waiver approved by the GATT membership in 1971. During the Tokyo Round, however, GATT members negotiated an agreement to make the authority permanent, embodied in the so-called Enabling Clause. The relevant text of the Enabling Clause provides as follows: 1. Notwithstanding the provisions of Article I of the General Agreement, contracting parties may accord differential and more favourable treatment to developing countries, without according such treatment to other contracting parties. 2. The provisions of paragraph 1 apply to the following: (a) Preferential tariff treatment accorded by developed contracting parties to products originating in developing countries in accordance with the Generalized System of Preferences . . . 3(original footnote) (d) Special treatment of the least developed among the developing countries in the context of any general or specific measures in favour of developing countries. 3. Any differential and more favourable treatment provided under this clause: (a) shall be designed to facilitate and promote the trade of developing countries and not to raise barriers to or create undue difficulties for the trade of any other contracting parties; (b) shall not constitute an impediment to the reduction or elimination of tariffs and other restrictions to trade on a most-favoured-nation basis; (c) shall in the case of such treatment accorded by developed contracting parties to developing countries be designed and, if necessary, modified, to respond positively to the development, financial and trade needs of developing countries”. 3
(original footnote) As described in the Decision of the contracting parties of 25 June 1971, relating to the establishment of “generalized, non-reciprocal and non discriminatory preferences beneficial to the developing countries.”
The Enabling Clause plainly allows nations to depart from the MFN obligation to provide more favorable tariff treatment to goods from developing
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countries and to provide even more favorable treatment for goods from the LDCs. Its text is otherwise silent on the range of goods to be covered by preferences, on the permissibility of other forms of discrimination among beneficiaries, and on the acceptability of attaching conditions (reciprocity) to preferential benefits. Footnote 3, however, states that the Generalized System of Preferences contemplated by the Enabling Clause is the system contemplated in the 1971 waiver, which in turn referred to the “generalized, non-reciprocal and non-discriminatory” system of preferences discussed under the auspices of UNCTAD. Footnote 3 raises several issues that are not addressed directly by India’s complaint. What is meant by the requirement of “generalized” preferences – does this obligation place any limits on the exclusion of particular products from GSP schemes? What does the obligation to provide “non-reciprocal” preferences imply about the imposition of conditions for the granting of preferences? India’s complaint put these issues to the side and focused instead on the requirement of non-discriminatory preferences. According to India, when a nation grants a preference on a particular product, it must extend that preference to all developing countries, subject only to the proviso that LDCs can receive greater preferences. Because the drug-related preferences in the European scheme afford special benefits to 12 enumerated beneficiaries that are not co-extensive with the set of LDCs, India contended that the preferences failed the requirement of non-discrimination under the Enabling Clause and in turn violated GATT Article I.
2.3. The European Response and the Panel Decision Before the panel, Europe’s first response was a formalistic claim that the Enabling Clause did not create an exception to Article I of GATT, but removed GSP schemes altogether from the coverage of Article I. The distinction was important, according to Europe, because India’s complaint alleged a violation of Article I but not of the Enabling Clause per se, and the panel should only adjudicate claims brought before it. The panel quickly put this issue to the side (over a dissent), however, and read the Enabling Clause as an exception to the MFN obligation of Article I – but for the exception, preferences would violate Article I, and India’s allegation of an Article I violation squarely raised the proper issue. Further, following WTO precedent on “exceptions” to primary obligations, the panel held that Europe had the burden of demonstrating that its program falls within the exception afforded by the Enabling Clause.18 Once the panel ruled that GSP preferences fall under Article I, the panel had little difficulty in concluding that India made out a prima facie case of a violation.19 The panel then turned to the question whether Europe could invoke the Enabling Clause and thereby establish its “affirmative defense.” On this front, 18
Panel Rep. ¶¶7.31–7.54.
19
Panel Rep. ¶¶7.55–7.60.
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Europe had three main arguments. First, it pointed to paragraph 3(c) of the Enabling Clause, which provides that differential treatment shall “be designed and, if necessary, modified, to respond positively to the development, financial and trade needs of developing countries.” Europe argued that different developing countries have different “development, financial and trade needs” and that this provision authorizes (and indeed requires) preferences to be modified to respond to those differing needs, inevitably producing differences in the preferences across beneficiaries. Second, Europe argued that India misinterpreted the requirement in footnote 3 that preferences be “non-discriminatory.” For Europe, “discrimination” involved arbitrary differences in the treatment of similarly situated entities – it argued that as long as differences in treatment could be justified by a legitimate objective and the differences were reasonable in pursuit of that objective, no “discrimination” should be found.20 Third, Europe argued that paragraph 2(a) of the Enabling Clause, which authorizes “preferential tariff treatment accorded by developed contracting parties to products originating in developing countries,” does not require preferencegranting nations to afford preferences to all developing countries. Had the drafters meant to require that preferences be extended to all developing countries, Europe suggested, they could have inserted the word “all” into the text. India’s response to the first and third arguments was that the term “developing countries” in paragraphs 3(c) and 2(a) should be read as all developing countries (i.e., developing countries as a group). Preferences should respond to the “development, financial and trade needs” of those countries as a group, claimed India, and should not vary in accordance with any individual needs. Paragraph 2(a) likewise provides no authority for picking and choosing among developing countries in India’s view. This proposition is reinforced by footnote 3 and its reference to non-discriminatory preferences, according to India, which should be read to require formally identical treatment subject only to the exceptions specifically contemplated by the Enabling Clause. The panel addressed each of Europe’s arguments separately, but its analysis of all three was strikingly parallel. The panel found that the relevant portions of the text of the Enabling Clause were ambiguous. Following the Vienna Convention, it then turned to the context of the treaty text, its object and purpose, and other aids to interpretation. It noted that the Enabling Clause referred back to the waiver granted in 1971, which in turn made reference to “mutually acceptable” preferences. The “mutually acceptable” preferences were apparently those negotiated under the auspices of UNCTAD and embodied in the “Agreed Conclusions”
20
Robert Howse advances another line of argument that Europe did not pursue in the case. He suggests that the “obligations” in footnote 3, particularly the obligation to afford “nondiscriminatory” preferences, were never intended to have binding legal effect but were merely aspirational. For a thorough vetting of this perspective, see Howse (2003).
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that eventually emerged from the ongoing negotiations in UNCTAD. The panel thus concluded that the Enabling Clause should be interpreted to permit the sort of preferential system contemplated by the UNCTAD negotiators, memorialized in the Agreed Conclusions and incorporated by implicit reference into the 1971 waiver. The panel then reviewed the Agreed Conclusions at some length. It found that they anticipated some limitations on product coverage – most manufactured goods would be covered, with limited exceptions, with only case-by-case coverage for agriculture. But nothing in the negotiating history seemed to contemplate discrimination among developed countries on the basis of their development or other “needs,” except for the special treatment of LDCs. The only other potential limitations on coverage addressed by the UNCTAD negotiations concerned measures to withdraw preferences or to set quantitative ceilings when exporters achieve a certain competitive level, along with safeguard measures to address import surges. On the basis of these findings, the panel accepted India’s argument that the phrase “developing countries” in paragraph 2(a) refers to all developing countries,21 and implicitly as well its suggestion that the reference to “developing countries” in paragraph 3(c) is to developing countries as a group. According to the panel, paragraph 3(c) does not authorize differences in preferences except those contemplated by the UNCTAD negotiators.22 Finally, the panel found no basis in the text or relevant negotiating history for Europe’s contention that the requirement of “non-discriminatory” preferences was satisfied as long as differences in treatment resulted from objective criteria relating to legitimate objectives. Rather, footnote 3 “requires that identical tariff preferences under GSP schemes be provided to all developing countries without differentiation,” except only for the differential treatment expressly contemplated in the Agreed Conclusions.23 Europe’s final line of defense was an effort to invoke GATT Article XX(b), which allows measures “necessary to protect human . . . health.” The panel was not persuaded, questioning whether the drug-related preferences were genuinely aimed at the protection of human health in Europe, questioning their “necessity” and whether they amounted to an arbitrary discrimination among beneficiary nations where similar conditions prevail in violation of the chapeau to Article XX.24 Europe did not appeal these findings.
2.4. The Appellate Body Decision The Appellate Body affirmed the proposition that the Enabling Clause is an exception to GATT Article I. India had the burden of raising the question whether Europe’s system was consistent with the Enabling Clause and did so; Europe then had the burden of proving its consistency. 21 23
Panel Rep. ¶7.174. Panel Rep. ¶7.161.
22 24
Panel Rep. ¶7.116. Panel Rep. ¶7.236.
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Europe did not appeal the panel’s interpretation of paragraph 3(c) of the Enabling Clause, as the panel had not made any explicit “findings” regarding the consistency of the European drug preferences with paragraph 3(c). The appeal was thus confined to the question whether the European system was consistent with paragraph 2(a) and with its footnote 3 requiring “non discriminatory” preferences. On the latter issue, the Appellate Body found that the ordinary meaning of the term “non-discriminatory” did not permit it to choose between the competing views of discrimination put forth by India and the European Communities.25 Both parties agreed that “discrimination” entails disparate treatment of those “similarly situated,” but disagreed on what it means to be “similarly situated” – an appeal to the ordinary meaning of the term “discrimination” does not resolve such a disagreement. The Appellate Body then turned to paragraph 3(c) of the Enabling Clause to provide further context for the interpretation of the non-discrimination obligation; it accepted the European argument that the absence of the word “all” before “developing countries” implies that that the text imposes no obligation to treat all developing countries alike.26 Further, both parties apparently conceded that the development needs of various countries may differ. Accordingly, the Appellate Body was “of the view that, by requiring developed countries to ‘respond positively’ to the ‘needs of developing countries’, which are varied and not homogeneous, paragraph 3(c) indicates that a GSP scheme may be ‘non-discriminatory’ even if ‘identical’ tariff treatment is not accorded to ‘all’ GSP beneficiaries.”27 It thus reversed the panel’s finding to the contrary. Likewise, the Appellate Body reversed the panel’s finding that the reference to “developing countries” in paragraph 2(a) was to all developing countries.28 It held that preference-granting countries are permitted to treat beneficiaries differently when such differences “respond positively” to varying “development, financial and trade needs.” The non-discrimination requirement is not without bite in the view of the Appellate Body, however, because it does require “that identical tariff treatment must be available to all GSP beneficiaries with the ‘development, financial [or] trade need’ to which the differential treatment is intended to respond.”29 Because there was no specific finding by the panel regarding the consistency of the European drug-related preferences with paragraph 3(c), the Appellate Body was prepared to accept arguendo that drug trafficking relates to a “development need.” Even so, the preferences would still fail the non-discrimination test unless “the European Communities proves, at a minimum, that the preferences granted under the Drug Arrangements are available to all GSP beneficiaries that are similarly affected by the drug problem.”30 The Appellate Body then held that the European Communities failed to carry the burden of proof on this issue. It emphasized that the drug-related preferences 25 27 29
AB Rep. ¶¶151–52. AB Rep. ¶165. AB Rep. ¶180.
26 28 30
AB Rep. ¶159. AB Rep. ¶¶175–76. Id.
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were available only to a “closed list” of 12 countries. The regulation creating the preferences did not set out any criteria for the selection of the countries, and it did not provide any mechanism for adding or deleting countries as their circumstances changed. Under these conditions, Europe failed to demonstrate that its preferences were non-discriminatory. Along the way, the Appellate Body contrasted the labor and environmental incentive arrangements in the European GSP scheme. Unlike the situation with the drug-related preferences, the regulation creating the labor and environmental incentives provides “detailed provisions setting out the procedure and substantive criteria that apply to a request . . . to become a beneficiary under either of those special incentive arrangements.”31 The Appellate Body thus hinted that those aspects of the European scheme might pass the non-discrimination test if challenged, but did not speak to the concurrent issue of whether the labor and environmental incentives respond to legitimate “development, financial and trade needs.”
2.5. The New European GSP Scheme In response to the decision, Europe has redesigned its GSP system. In place of the drug-related preferences, Europe proposes to provide additional GSP benefits, termed “GSP Plus,” to countries that have ratified certain key international treaties relating to labor standards, human rights, good governance, and environmental protection. The countries that are eligible initially are Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Georgia, Guatemala, Honduras, Sri Lanka, Mongolia, Nicaragua, Panama, Peru, and Venezuela. Note that India is still missing from the list, but so is Pakistan. The 11 South and Central American countries on the list are precisely the same as those that received the drug-related preferences under the prior scheme. Thus, Europe has crafted a way to continue business as usual for the most part while placating India by excluding Pakistan.
3. Legal Commentary 3.1. An Assessment of the WTO Outcome As with most hard cases, it is difficult to say which side was “right” on a purely legal basis. The case is hard because, as both the panel and the Appellate Body acknowledged, the text of the Enabling Clause is ambiguous. Even assuming that footnote 3 was intended to create a binding non-discrimination obligation, as did the parties to the case, the absence of any definition for the concept opens the door to a wide range of interpretations. Any student of civil rights law, constitutional law, or even GATT Articles I and III is well aware of the fact that “discrimination” is 31
AB Rep. ¶182.
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an extremely elastic notion. The phrase “developing countries” in paragraphs 2(a) and 3(c) is equally difficult to pin down. It is surely true, as the Appellate Body notes, that the drafters could have said “all developing countries,” but did not. Yet, it is equally true that the drafters might have said “particular” or “selected” developing countries or used some other phrasing to signify the acceptability of differential treatment, but did not. As always, inferences about the intentions of drafters from phrasings that they did not employ are questionable at best. In the face of such ambiguity, the panel relied primarily on historical context and the UNCTAD negotiations to give footnote 3 some definitive content. The 1971 waiver referenced in footnote 3 indeed contemplates “mutually acceptable” preferences, and the Agreed Conclusions from the UNCTAD negotiations may well have been a good indicator of what was “mutually acceptable.” The panel was also correct in noting that a major impetus for the UNCTAD negotiations was to back away from the historical patchwork of discriminatory preferences already in place in favor of a generalized system of preferences. From these facts the panel inferred that any discrimination had to be limited to what was expressly contemplated by the Agreed Conclusions. The panel’s approach resonates somewhat with an economic perspective on the GSP system that we develop in the and that may help clarify the object and purpose of the Enabling Clause as an aid to interpretation. An economic understanding of the MFN obligation suggests that it arises to avert certain negative externalities that would otherwise arise relating to bilateral opportunism and to erosion of the value of trade concessions. The situation prior to the UNCTAD negotiations was one in which the problems addressed by the MFN obligation had resurfaced because of a patchwork of discriminatory preferences in the trade policies of developed nations, often dating from the colonial era. The UNCTAD negotiations may be viewed as an effort to bring the attendant negative externalities under greater discipline, and the Agreed Conclusions may be seen as the embodiment of a negotiated arrangement with the following central characteristics. The developed nations agreed that they would tolerate the negative consequences for themselves associated with preferences for developing nations, at least within the agreed parameters. However, they also committed themselves to ameliorate the negative consequences of discriminatory preferences for developing nations by moving toward the “generalized, non-reciprocal and non discriminatory preferences” contemplated by the 1971 waiver. This understanding of the economic rationale for the UNCTAD negotiations lends further support to the conclusion of the panel. If developed nations are allowed to engage in whatever degree of discrimination they wish without legal constraint, an essential purpose of the UNCTAD negotiations is clearly jeopardized. And even if nations are only allowed to afford differential treatment according to their assessment of the individual “development, financial and trade needs” of beneficiary countries, the danger still arises that they will use such authority to justify discriminatory policies that benefit countries in favor, rather than for
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any legitimate purpose. For these reasons, it is entirely plausible that negotiators would want to limit discrimination to fairly narrow considerations, such as status as a LDC, and to forbid it otherwise. But an important counter-argument must be acknowledged. The parties to the UNCTAD negotiations were aware of the potential political impediments to the implementation of GSP and might well have thought that compromise on various margins, in ways not fully anticipated during the negotiations, would be mutually preferable to political impasse and the status quo ante. A 1968 OECD report, for example, embraced the principle that “preferences should be granted to any country, territory or area claiming developing status (principle of selfelection), but preference-giving countries might decline to grant such treatment to a particular country on compelling grounds” (emphasis added).32 The scope of the term “compelling grounds” was not made clear. We cannot rule out the possibility that donor countries may have been unwilling to give much of consequence had they imagined that a tight prohibition on discrimination and reciprocity would apply going forward, and developing countries may well have been willing to take what they could get. This proposition is very much in the spirit of the argument put forward elsewhere by Robert Howse (2003), who contends that the language of footnote 3 was never intended to create a binding legal obligation. It is also noteworthy that major GSP schemes put in place after UNCTAD II from the outset contained exemptions and restrictions that were not specifically contemplated in the Agreed Conclusions. The long list of factors that foreclose beneficiary status under U.S. law, for example, has remained the same in large part since the Trade Act of 1974.33 These early practices of donor countries were firmly in place at the time of the negotiations that resulted in the Enabling Clause.34 Had it been the intention of the Tokyo Round negotiators to outlaw the sort of conditionality that had emerged, for example, in the U.S. scheme devised by the Trade Act of 1974, they might well have done so more forcefully than by a somewhat oblique reference in footnote 3 to the system contemplated by the also somewhat oblique 1971 waiver. From this latter perspective, the Appellate Body might be seen to have the better of the argument. It is certainly difficult to quarrel with its conclusion that Europe’s interpretation of the phrase “developing countries” in paragraphs 2(a) and 3(c) of the Enabling Clause is a linguistically plausible one, and for the reasons noted above it is not entirely clear that the non-discrimination obligation in footnote 3 rules out any differential treatment not expressly contemplated by the Agreed Conclusions. One might even wonder whether the Appellate Body 32 33
34
See UNCTAD (1981, p. 21). The various restrictions and limitations on the early European scheme are described at some length in Borrmann, Borrmann, and Steger (1981). To be sure, some of the restrictions came under early criticism from commentators as a departure from the principles of non-discrimination and non-reciprocity. See, e.g., UNCTAD (1981, p. 39).
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goes too far in suggesting that donor countries must prove that any differential treatment is justified by reference to differences in “development, financial and trade needs.” The supporters of the 1971 waiver could have anticipated that GSP schemes would contain a wide range of other conditions and restrictions to make them politically saleable in the donor countries. In short, we concur with both the Appellate Body and the panel in their finding that the language of the Enabling Clause is ambiguous and is insufficient on its own to resolve the dispute. It is thus appropriate to resort to other aids to interpretation in accordance with the Vienna Convention, including the “context” of the treaty language and its “object and purpose.” There can be little doubt that a central “object and purpose” of the UNCTAD negotiations was to reduce discrimination in trade preferences subject to some enumerated exceptions and that both the 1971 waiver and the Enabling Clause may be said to incorporate this goal by reference. The approach of the panel surely does the most to promote this objective. But we must also bear in mind that GSP benefits are a “gift” of sorts and that donors may well have been unwilling to confer them if constrained by tight non-discrimination (and other) requirements. Developing nations may well have been aware that various forms of conditionality would be the quid pro quo, and the 1979 Enabling Clause could easily have done much more to condemn it in clear language if that was the intention of its drafters. Perhaps unfortunately, therefore, an appeal to the “object and purpose” of the Enabling Clause is also less than conclusive. One virtue of the panel’s approach, to be sure, is that it provides reasonably clear guidance for the future as to what is permissible and what is not. Except for the differential treatment expressly anticipated by the Agreed Conclusions, no discrimination is permissible. The approach advocated by Howse also admits of easy judicial administration, as he would find no binding legal obligation at all in footnote 3. The approach of the Appellate Body, by contrast, steering a middle course of sorts, leaves fundamental and potentially thorny questions unanswered, as the indicates.
3.2. Implications of the Appellate Body Decision for Other Aspects of Existing GSP Schemes The Appellate Body ruling establishes two important principles: (1) footnote 3 of the Enabling Clause is a binding legal obligation, requiring “generalized, nonreciprocal and non discriminatory preferences;” and (2) donor countries may nevertheless afford differential treatment to beneficiary nations if it is based on differences in their “development, financial and trade needs.” These principles raise a wide array of issues to which the Appellate Body has not yet spoken. Most obviously, what counts as a development, financial, or trade need? The Appellate Body did not rule on the question whether drug trafficking creates a “development need,” finding it unnecessary to address matters on which the
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panel made no finding. Yet, it seems clear that the drug-related preferences were enacted for the benefit of Europe, to reward cooperation in its efforts to reduce traffic in drugs toward Europe, rather than to assist the beneficiaries in addressing any perceived “development need” of their own. Many of the other criteria for beneficiary status found in modern GSP schemes, such as failure to aid in efforts to combat international terrorism, failure to enforce arbitral awards, or participation in a cartel such as OPEC, seem still farther removed from any “needs” of the beneficiary country. Perhaps incentive arrangements pertaining to labor rights and environmental protection can fit more comfortably into the rubric of “needs,” but its scope remains completely open at this stage. One also imagines that some constraint must exist on the magnitude of the differential treatment that is permissible to address heterogeneous development, financial, and trade needs. Even if drug-trafficking qualifies as a “need,” for example, could a donor country deny preferences altogether to nations that do not have a serious drug-trafficking problem while extending substantial preferences to those that do? If the differential treatment must be justified by different “needs,” it would seem to follow that it cannot exceed the amount required to address any need adequately. But how would one quantify that amount or otherwise place a principled limit on it? On a related issue, do donor countries have unfettered discretion to select the “needs” that they will address through differential treatment and to ignore others? Europe limits its environmental incentives in its GSP scheme to the protection of tropical forests, for example, but suppose a nation with no tropical forest can make the case that its exceptional air pollution problem poses a greater obstacle to its development than any obstacles posed by the possible loss of tropical forest elsewhere? Would a failure to afford differential treatment to assist it in addressing its air pollution problem then amount to “discrimination?” The puzzle as to what constitutes impermissible discrimination is only part of the bigger picture. The word “generalized” in footnote 3 refers not only to the universe of beneficiary nations but also to the scope of product coverage. The GSP system envisioned by the UNCTAD negotiators would provide broad coverage for manufactured and semi-manufactured items, limited only by quantitative ceilings or safeguard measures to address concerns about import surges. Can the complete exclusion of enumerated import-sensitive manufactured products, as in the U.S. statute as one example, be squared with the obligation to provide “generalized” preferences? The obligation to afford “non-reciprocal” preferences also potentially imperils much of the conditionality in modern GSP schemes. Some of those conditions, such as the U.S. requirement that beneficiaries provide support for efforts to combat terrorism and respect arbitral awards in favor of U.S. nationals, require reciprocity essentially on their face. Others can surely be characterized as requiring reciprocity, such as the special incentives on labor and environmental matters in the European scheme. If footnote 3 truly prohibits “reciprocity,” it seemingly
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poses an enormous threat to the elements of conditionality that have been present in various GSP schemes since their inception and that may be essential to their perpetuation as political matter.35 In short, the Appellate Body decision calls into question many prominent features of the U.S., European, and other GSP schemes, features that in some cases have been part of those schemes from the outset. It invites future challenges by countries that suffer trade diversion because of discrimination or reciprocity, even perhaps by developed nations. Donor countries will have the burden to prove their compliance with the Enabling Clause because it has now been ruled to be an “exception” to GATT Article I. That burden may prove a difficult one to carry. If successful challenges to GSP schemes multiply going forward, it is entirely possible that donor countries will choose to forego GSP arrangements altogether. Nothing requires donor countries to maintain schemes that are no longer palatable politically, and some (including the U.S. and European schemes) are structured to expire on their own unless the political will to renew them is present. A key question going forward, then, may be whether additional challenges will be brought as time goes on or whether instead the interested nations will conclude that it is not in their mutual interest to rock the boat.
4. Economic Analysis The legal commentary in Section 2 suggests several questions about GSP schemes and their place in the multilateral trading system. Do these schemes further the development goals for which they were designed? What effect do the schemes have on the economic welfare of countries that are not granted preferential treatment? And why might the contracting parties wish to regulate the extent of differential treatment and the conditions attached by donors when, after all, the GSP schemes are “gifts” from the developed countries to their less developed trading partners?
4.1. Economic Effects of Tariff Preferences We begin by describing the economic effects of tariff preferences both in the country or countries that receive the special treatment and in other trading partners of the preference-granting country. Suppose first that preferences are granted to a small country or to a group of countries that collectively are small. In the parlance 35
We note, in passing, another limitation on reciprocity contained in the Enabling Clause: paragraph 5 provides, in pertinent part, that “developing contracting parties shall therefore not seek, neither shall developing contracting parties be required to make, concessions that are inconsistent with the latter’s development, financial and trade needs.” Although this obligation arises in the context of “trade negotiations,” GSP conditionality might be viewed as setting up a “negotiation” of sorts, and paragraph 5 would then limit the “concessions” demanded to matters not inconsistent with development, financial and trade needs.
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price
Demand
Supply
p*
p*/(1+tMFN)
quantity Pre-GSP consumption
consumption contracts
Pre-GSP production
output expands
Figure 10.1.
of trade theory, a small country is one that cannot affect the world prices of the goods that it trades, because its imports and exports are insignificant relative to the size of world markets. When exporters in such a country face a given world price of p* and an MFN ad valorem tariff rate of tMFN they must sell their output for p*/(1+ tMFN ) to be competitive in the foreign market. This price prevails as well in the home market of the exporting country, because producers will not sell at home for less than what they can earn on world markets, nor will they able to sell for more given that they choose to export at that price in a competitive equilibrium. Figure 10.1 shows the production and consumption levels in the exporting country prior to the time it is granted tariff preferences. The preferences excuse the exporters in the small country from the generally applicable tariff. These exporters are too small to affect the internal price in the preference-granting country, which remains at p*. So, the exporters now can charge this higher amount and remain competitive in the foreign market. Figure 10.1 shows that output expands as a result of the higher sales price and that consumption in the exporting country contracts. For both reasons, exports grow. The tariff preferences provide a “terms of trade” benefit to the exporting country. Producers gain, both because their original sales fetch a higher price and because they expand output to the point where marginal cost equals p*. Some
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price
price
Demand
Import Demand
Supply
World Supply (post GSP)
p*
p* p*post-GSP
World Supply (pre GSP)
p*post-GSP
p*/(1+t MFN)
Qty.
Qty.
Market in PreferenceReceiving Country
Market in PreferenceGranting Country
Figure 10.2.
of the gain to producers comes at the expense of domestic consumers, who lose surplus because they face a higher domestic price.36 But the country enjoys a net gain in welfare equal to the trapezoidal area between the supply and the demand curves and bounded by p* and p*/(1 + tMFN ). Note that the price for exporters in countries that do not receive the preferential treatment remains at p*/(1+ tMFN ). Thus, all growth in trade due to the GSP reflects trade creation; the other (small) countries that export to the preference-granting country suffer no harm in this case. Now suppose that preferences are granted to a large country or to a group of countries that collectively is large. This situation is depicted in Figure 10.2. As before, the granting of preferences will tend to raise the internal price in the preference-receiving country, as shown on the left-hand panel. But now the impact of the export growth on the world price cannot be ignored. The right-hand panel shows that total world supply to the donor country has expanded, which means that the market-clearing price falls from p* to p*post-GSP . The preferencereceiving country still enjoys a terms-of-trade gain, but not as great as before.37
36
37
Our analysis is predicated on the assumption that the prevailing tariff in the country that receives preferential treatment is greater than the MFN tariff in the country that grants the preferences. This assumption is reasonable in most cases, as average rates of protection are much higher in developing countries than in developed countries. If the assumption is violated, the preference-receiving country would export all of its industry output at price p*, while domestic consumers would be served by imports from third countries, in which the prevailing price is p*/(1 + tMFN ) and so the tariff-inclusive import price would be less than p*. In the event, the terms-of-trade gain for the preference-receiving country is even larger than that described here, but it remains true that the preferences generate no negative externalities for third countries The computational results presented by Brown (1987, 1989) show terms-of-trade gains from U.S. and European GSP schemes for most beneficiary countries.
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Welfare rises by the (smaller) area bounded by the demand and supply curves and by the price lines p*/(1 + tMFN ) and p*post-GSP . In this case, the export growth in the preference-receiving country reflects both trade creation and trade diversion. The trade creation is reflected in the fact that the GSP reduces the internal price in the preference-granting country, so its consumption expands and its home production contracts. The reduction in its home production is (more than) made up by its imports from the preferencereceiving country. But the fall in the world price produces a terms-of-trade loss for other countries that export to the preference-granting country. These countries see their exports displaced in part by goods from the preference-receiving country. They also earn less from what they do sell, and their welfare falls. In this case, the GSP imposes a negative externality on the exporting countries that do not qualify for the preferential treatment. It is this negative externality that might explain why a country like India would object to the European GSP scheme.38
4.2. Does GSP Promote Development? The Preamble to the 1971 Waiver, which provided the initial authority for tariff preferences that would otherwise violate GATT Article I, states “ . . . that a principle aim of the contracting parties is promotion of the trade and export earnings of developing countries for the furtherance of their economic development.” To what extent can tariff preference schemes promote trade and export earnings for the furtherance of economic development? We address this question in the light of our brief analysis of the economic effects of tariff preference schemes. As our analysis has shown, the granting of tariff preferences does serve to promote trade volume and export earnings in the preference-receiving countries. The magnitude of this effect for existing GSP schemes is a matter of some debate, but a consensus view might be that the revenue gains have been modest but not trivial.39 Surely the gains could be larger but for the many product exclusions that the preference-granting countries have introduced to minimize pain to their own import-competing industries. But whatever their precise magnitude, the termsof-trade gains provide a form of development aid, inasmuch as they boost incomes for owners of export concerns and quite possibly for factors of production, such as unskilled labor, that are used intensively in export sectors in the developing countries. In this sense, the GSP schemes can be seen as serving their putative purpose. 38
39
We also duly note the fact that the drug-related preferences in the European scheme extended to Pakistan and not to India, a situation that India may have found objectionable for political reasons. Sapir and Lundberg (1984), Karsenty and Laird (1986), and MacPhee and Oguledo (1991) all find modest gains in export volume and export earnings for beneficiaries of GSP schemes. They find, however, that these gains are highly concentrated in a few, higher-income developing countries. Brown (1987, 1989) draws similar conclusions from a computable general equilibrium model.
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Arguably, however, the contracting parties had more in mind. UNCTAD Resolution 21(ii) also made reference to a desire to promote industrialization and economic growth. To the extent that tariff preferences raise producer prices in the developing countries, they do encourage greater output of the eligible goods than would take place in their absence. However, production of those goods entails an opportunity cost, and it is hardly clear that GSP arrangements encourage the expansion of the industries that will do the most to promote economic growth over the long haul. That might prove to be the case if, for example, the export activities encouraged by GSP schemes are “infant industries” subject to positive learning externalities. Given the many product exclusions and limitations in existing GSP schemes, however, it would be a fortunate coincidence if the products that are eligible happened also to be the ones that generate learning spillovers. Likewise, given the way that donor nations exclude import-sensitive items from tariff preferences and otherwise “graduate” successful industries and countries, one wonders whether the industries that offer the best opportunities for growth for developing countries are precisely the ones in which preferences will never be offered or will be withdrawn once signs of industrial success appear. Certainly, there have been no empirical studies to suggest that GSP schemes have promoted growth beyond simply conferring some rents on selected industries as described above. Moreover, the benefits of tariff preferences are diminished in practice by compliance costs.40 The available evidence suggests that many goods imported from developing countries that appear to be eligible for preferences do not receive those preferences. UNCTAD (1981) concluded, for example, that the “utilization rate” for various GSP schemes – the ratio of imports actually receiving preferential treatment to the total imports that are eligible under each scheme – was less than 50 percent for the U.S. and European programs and barely more than 50 percent for Japan. One reason given for the low ratios, though not the only reason, was the “difficulties which arise in complying with the rules of origin and other requirements of the schemes.”41 UNCTAD (1999) notes a further decline in utilization rates for some of the schemes, owing partly to an “erosion of preferences which in some cases are too low to compensate for the cost of compliance.” Even in the cases in which preferences are obtained, compliance costs reduce their value. The benefits from tariff preferences will be further diminished (or even become negative) if they lead to overinvestment in the sectors that are eligible for preferential treatment. After all, the very nature of a preference is to encourage the expansion of output to a level that would not be economical in the absence of the preference. The possibility that preferences may then distort investment decisions, rather than encouraging investment in areas in which long-term growth
40
41
Keck and Low (2004) make a similar point in the course of their broader review of special and differential treatment, and they mention several other considerations that we also note as limiting the benefits of GSP to developing countries. For a survey of the various approaches to rules of origin in GSP schemes, see Murray (1977).
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opportunities are present, has been noted elsewhere.42 One reason to be concerned about such overinvestment is that preferences have often proven to be temporary, as product coverage and rules about conditionality and graduation have changed over time (see UNCTAD, 1999). If the private sector invests on the expectation that the preferences will be long lasting, then there may be severe resource misallocation once the preferences are removed. Of course, such a misallocation of resources should not be a problem – at least for the country that is granted preferential treatment – unless the investors misjudge the likely duration of the GSP schemes, the likelihood of changes in their rules and product coverage, or the likelihood that the MFN tariff will fall (in short, an absence of “rational expectations”). But misjudgment is a real threat given all of the moving parts and the fact that GSP programs are modified quite regularly. Finally, there is some evidence in recent research that the benefits to devel¨ oping countries from GSP schemes may be limited for another reason. Ozden and Reinhardt (2003) argue that preferential tariff treatment may retard trade liberalization in beneficiary countries. This might be so because GSP preferences can reduce the incentive that export industries in developing countries have to lobby for trade liberalization at home as a means to garner market access abroad. Import liberalization by developing countries will also shift resources from import-competing to exporting sectors in the those countries and may hasten the withdrawal of the preferences as their export sectors bump up against “competitive need” and graduation provisions under GSP schemes. Export interests in developing countries may harbor mixed feelings about trade liberalization ¨ at home for this reason as well. Ozden and Reinhardt (2003) examine empirically the effect that GSP removal (as through “graduation”) has had on former beneficiaries’ trade policies and find that countries that lose their eligibility for GSP subsequently undertake greater liberalization than those that retain their eligibility. Some studies suggest, furthermore, that developing countries with more liberal trade policies achieve higher rates of growth and development than coun¨ tries that are more protectionist.43 If Ozden and Reinhardt are correct in their empirics, therefore, we have yet another reason to worry that the effects of GSP on growth and development may be less favorable than one might hope. To summarize, there are no good estimates of the aggregate benefits that developing countries derive from GSP schemes. Economic theory predicts an improvement in the terms of trade on eligible products, which may be smaller than the preference margin if the developing countries collectively are large in the markets for their exports and so depress world prices as they expand their 42
43
See, for example, Finger and Winters (1998), who write that “preferences [ . . . ] permit – perhaps encourage – producers to have costs above those in nonpreferred countries.” See, for example, Dollar (1992), Sachs and Warner (1995), Edwards (1993), and Frankel and Romer (1999). These studies are not without their critics, however, and some like Rodr´ıguez and Rodrik (2001) and Hallak and Levinsohn (2004) have questioned whether there really is evidence of a positive relationship between openness to trade and growth.
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exports. Benefits beyond the pure terms-of-trade gain are possible if the export industries happen to be ones that generate positive learning spillovers, but there is no evidence to suggest that products included in existing GSP schemes are more worthy of encouragement than others. Compliance costs associated with rules of origin and the like surely cut into the potential beneficial effects of GSP as well, and exclusions of products deemed “sensitive” in the donor countries have done so to an even greater extent. Finally, GSP schemes may have encouraged overinvestment in sectors that will prove only temporarily eligible and may have retarded the process of trade liberalization in the eligible countries. For all these reasons, the benefits generated by tariff preference schemes, although perhaps positive, are likely to be reasonably small.
4.3. Differential Treatment and Conditionality in Tariff Preference Schemes Whatever economic analysis has to say about the likely benefits of trade preferences in general, the members of the WTO evidently believe that tariff preference schemes do generate benefits for the favored countries and that these benefits are sufficient to justify a departure from the MFN principle. The question raised by India’s challenge to the European drug-related preferences is not whether the gains generated by GSP justify the distortions that it creates, but rather what sort of discrimination within GSP schemes ought to be tolerated. One might wonder why the members of the WTO would choose to regulate GSP at all. After all, such schemes represent unilateral “concessions” made by the developed countries to further the “development, financial and trade” needs of a group of developing countries. Shouldn’t a donor have the right to set the terms of his gift and specify the beneficiaries? Don’t the developing countries have the choice whether to meet the conditions or not? To address these questions, it is necessary to make some assumptions about the objectives of the WTO Agreement. Like Bagwell and Staiger (1999, 2002) and Grossman and Mavroidis (2003), we believe that the purpose of trade agreements is to limit the negative international externalities that countries create when they set their trade and industrial policies. An externality can arise when a welfaremaximizing government sets a positive tariff to improve its national terms of trade. But one need not accept that governments maximize national economic welfare as conventionally defined to conclude that agreements are meant to solve problems of international externalities. Sovereign governments can and do routinely undertake policy actions that do not promote aggregate national welfare. But their trading partners have no reason to interfere in these policy choices unless they suffer some harm as a result. Similarly, when two (or more) countries strike a bilateral (or plurilateral) agreement, non-parties to the agreement have no interest in it as long as the agreement does not adversely affect their interests. But policy choices, including decisions about trade policy, often do have external
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consequences. Without some sort of multilateral agreement encompassing all of the affected parties, countries will set their policies and conclude agreements without regard for the harm done to others, leading to an equilibrium from which a Pareto improvement is possible with the aid of multilateral rules. The law of the WTO can be understood as a mechanism to ensure that international externalities are taken into account. If the objective of international agreements is to limit negative externalities, we can see why the WTO members might wish to regulate GSP. As we have discussed, when a country affords preferential treatment to a group of countries that collectively are large in the market for some good, the effect is to lower the world price of that good and to generate a terms-of-trade loss for other countries that export the same or a similar good. A GSP scheme that targets certain countries for special treatment can bring harm to others that are not so favored. And a scheme that offers preferential treatment only when specified conditions are met can reduce welfare for those that choose not to fulfill the conditions. The arguments for limiting differential treatment in GSP schemes parallel those that have made by economists and legal scholars to justify the MFN rule in GATT Article I. Schwartz and Sykes (1997) argue that the MFN rule addresses a potential problem of concession erosion. Suppose country B receives a concession from country A in the course of a trade negotiation and that country B is not entitled to MFN treatment from country A. Then, the value of the concession could be undermined by a subsequent agreement between country A and country C that provides the latter with even better terms than were granted to country B. Anticipating this possibility, country B would offer less for the concession from country A and less trade liberalization would result. Thus, the MFN rule helps preserve the incentives for trade liberalization through international negotiation. Bagwell and Staiger (2002, 2004) point to the related concept of bilateral opportunism. Suppose countries A and B import a common good from country C and export another good to that country. Suppose further that the three countries have reached an initial agreement that is jointly efficient, in the sense that no change in tariffs can increase the welfare of one government without reducing the welfare of another.44 Then, in the absence of MFN, the governments of country A and C can always find another deal that benefits them at the expense of country B. As Bagwell and Staiger show, these countries can reduce the tariffs they apply to one another’s goods in such a way that the their multilateral (or weighted average) terms of trade do not deteriorate; the terms-of-trade loss each suffers from lowering a tariff is offset at least by the terms-of-trade gain that each enjoys from improved access to the other’s market. But the reduction of country’s C’s 44
Welfare here may be national economic welfare, if the governments are benevolent welfare maximizers, or more generally political welfare that includes other objectives in addition to conventional economic welfare.
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tariff on imports from country A induces trade diversion from competing country B and so harms that country. And the reduction of country A’s tariff on imports from C expands world demand for C’s export good, which spells a further loss for country B. Evidently, in the absence of MFN, countries A and C may be tempted to strike a deal that benefits each of them at the expense of the excluded country C. Bagwell and Staiger go on to show that an MFN rule makes it more difficult for a pair of countries to engage in bilateral opportunism. With non-discrimination, country C must offer the same concessions to country B as it offers to country A. Thus, it cannot offer to “pay for” a tariff reduction by country A with a policy change of its own that benefits country A by diverting imports to it that would otherwise come from country B. Indeed, when the MFN rule together is combined with strict adherence to the principle of reciprocity, the scope for bilateral opportunism behavior is eliminated entirely.45 Similar problems of concession erosion and bilateral opportunism can arise in a trade regime that admits differential treatment in GSP. Suppose developed country A makes a concession to developing country B in the course of a trade negotiation. If country A subsequently offers reduced tariffs to developing country C, but not to country B, this action can erode the value of the earlier concession to country B. As a consequence, country B may value the original concession less highly and so will have less incentive to open its own markets. As for bilateral opportunism, suppose that developed country A considers developing country B to be its friend and ally. By providing preferential access to its markets, country A generates economic gains for its ally while furthering its own political ends. Now if country A can do so selectively (by excluding “sensitive products”) and discriminatorily (by making developing country C ineligible), then country A can ensure that there are few political costs at home and that most of the gains to country B come at the expense of other countries, especially countries whose exports are similar to those of country B, such as developing country C. Bagwell and Staiger (2002) have argued that the provisions of international trade agreements are intended to diminish or eliminate the scope for negative international externalities and that agreements ought to be designed with this goal in mind. This perspective, with which we concur, points to a strict interpretation of footnote 3 of the Enabling Clause as a binding obligation for developed countries to treat all developing countries similarly in GSP schemes, except for the permissible special treatment of the LDCs. However, we recognize that such an interpretation might well have a chilling effect on the willingness of developed 45
Bagwell and Staiger define reciprocity in GATT as the principle that changes in trade policy should leave world prices unchanged, or else those who effect the changes in world prices must compensate those who are harmed by it. The MFN rule ensures that each country faces common terms of trade (relative price of imports compared to exports) and not different terms of trade with each partner. Thus, strict adherence to principles of MFN and reciprocity would imply that any bilateral deal between countries A and C does not change the relative prices faced by either country and so does not cause any harm to that country.
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countries to offer GSP benefits, which after all are unilateral concessions and not negotiated as part of any trade agreement. The political realist must ask whether eliminating the scope for negative externalities is worth the cost of fewer “donated” GSP schemes. Once this trade-off is recognized, it becomes difficult to say how much differential treatment should be tolerated and under what circumstances. Economic analysis can highlight the trade-off, but only empirical and political analysis can determine the magnitude of likely negative externalities on the one hand, and the likely political response to stricter regulation of GSP on the other. One other issue warrants brief mention. The externalities associated with trade policy are not the only ones from global interaction. Pollution that damages the global commons or that simply crosses borders affords another class of examples, as do the costs and benefits that arise because of interdependent utilities across nations. (Indeed, GSP itself might be seen to result from an altruistic concern for the less fortunate.) One might argue that the negative externalities associated with discriminatory GSP schemes should be tolerated if discrimination nevertheless aids in addressing these other sorts of externality problems. But there is an obvious difficulty with this line of argument. If preferential treatment is used to address alleged negative externalities, who among the WTO Member states should decide what constitutes a negative externality and how large is its magnitude? We see no principled way to discipline a process in which each nation decides for itself what “externalities” to address through discrimination or reciprocity. And absent any discipline, the danger of a return to the pre-UNCTAD days of widespread discrimination is apparent. If discrimination and reciprocity are to be permitted, therefore, we question whether they can be justified convincingly by a need to address other “externality” problems. Instead, the justification likely lies in the need to make GSP politically saleable in the donor countries, bringing us full circle to the set of trade-offs identified above.
references Bagwell, Kyle and Robert W. Staiger (1999), ‘An Economic Theory of GATT’, American Economic Review, 89: 215–248. Bagwell, Kyle and Robert W. Staiger (2002), The Economics of The World Trading System, Cambridge MA and London: The MIT Press. Bagwell, Kyle and Robert W. Staiger (2004), ‘Multilateral Trade Negotiations, Bilateral Opportunism and the Rules of GATT’, Journal of International Economics, 63: 1–29. Borrmann, Axel, Christine Borrmann, & Manfred Steger (1981), The EC’s Generalized System of Preferences, The Hague: Martinus Nijhof Publishers. Brown, Drusilla K. (1987), ‘General Equilibrium Effects of the U.S. Generalized System of Preferences’, Southern Economic Journal, 54: 27–47. Brown, Drusilla K. (1989), ‘Trade and Welfare Effects of the European Schemes of the Generalized System of Preferences’, Economic Development and Cultural Change, 37: 757– 776.
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Dollar, David (1992), ‘Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDC’s, 1976–1985’, Economic Development and Cultural Change 40: 523–44. Edwards, Sebastian (1993), ‘Openness, Trade Liberalization, ad Growth in Developing Countries’, Journal of Economic Literature, 31: 1358–1393. Finger, J. Michael and L. Alan Winters, (1988) ‘What Can the WTO Do for Developing Countries?’, in A. O. Krueger (ed.), The WTO as an International Organization. Chicago: The University of Chicago Press, pp. 365–392. Frankel, Jeffrey A. and Romer, David (1999), ‘Does Trade Cause Growth’, American Economic Review, 89: 379–399. Grossman, Gene M. and Mavroidis, Petros C. (2003), ‘United States – Imposition of Countervailing Duties on Certain Hot-Rolled Lead and Bismuth Carbon Steel Products Originating in the United Kingdom: Here Today, Gone Tomorrow? Privatization and the Injury Caused by Non-Recurring Subsidies’, in H. Horn and P. C. Mavroidis (eds.), The WTO Case Law of 2001. Cambridge: Cambridge University Press, pp. 170–200. Hallak, Juan Carlos and Levinsohn, James A. (2004), ‘Fooling Ourselves: Evaluating the Globalization and Growth Debate’, NBER Working Paper No. 10244, Cambridge MA. Howse, Robert (2003), ‘India’s WTO Challenge to Drug Enforcement Conditions in the European Community Generalized System of Preferences: A Little Known Case with Major Repercussions for “Political” Conditionality in U.S. Trade Policy’, Chicago Journal of International Law, 4: 385–405. Karsenty, Guy and Sam Laird (1986), ‘The Generalized System of Preferences: A Quantitative Assessment of the Direct Trade Effects and of Policy Options’, UNCTAD Discussion Paper 18, UNCTAD, Geneva. Keck, Alexander and Patrick Low (2004), Special and Differential Treatment in the WTO: Why, When and How?, WTO Staff Working Paper ERSD-2004–03. MacPhee, Craig R., and Victor Iwuagwu Oguledo (1991), ‘The Trade Effects of the U.S. Generalized System of Preferences,’ Atlantic Economic Journal, 19: 19–26. Murray, Tracy (1977), Trade Preferences for Developing Countries. New York: John Wiley and Sons. OECD Secretary General (1983), The Generalized System of Preferences: Review of the First Decade. Paris: Organization of Economic Cooperation and Development. ¨ Ozden, C ¸ zaglar and Eric Reinhardt (2003), ‘The Perversity of Preferences: GSP and Developing Country Trade Policies, 1976–2000’, World Bank Working Paper 2955, The World Bank. Rodr´ıguez, Francisco and Dani Rodrik (2001), ‘Trade Policy and Economic Growth: A Skeptic’s Guide to Cross-National Evidence’, NBER Macroeconomic Annual, 15: 261– 324. Sachs, Jeffrey D. and Andrew M. Warner (1995), ‘Economic Reform and the Process of Global Integration’, Brookings Papers on Economic Activity, 1: 1–95. Sapir, Andre and Lars Lundberg (1984), ‘The U.S. Generalized System of Preferences and its Impacts’, in R. E. Baldwin and A. O. Krueger (eds.), The Structure and Evolution of Recent U.S. Trade Policy. Chicago: The University of Chicago Press, pp. 195–231. Schwartz, Warren F. and Alan O. Sykes (1997), ‘The Economics of the Most Favored Nation Clause’, in J. S. Bhandani and A. O. Sykes (eds.), Economic Dimensions of International Law: Comparative and Empirical Perspectives. Cambridge: Cambridge University Press, pp. 34–79. UNCTAD (1981), Operation and Effects of the Generalized System of Preferences, Fifth Review. New York, United Nations Conference on Trade and Development.
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UNCTAD (1999), Quantifying the Benefits Obtained by Developing Countries from the Generalized System of Preferences. New York, United Nations Conference on Trade and Development. UNCTAD (2002), Generalized System of Preferences: Handbook on the Scheme of the European Community. New York, United Nations Conference on Trade and Development. UNCTAD (2003), Generalized System of Preferences: Handbook on the Scheme of the United States of America. New York, United Nations Conference on Trade and Development.
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JEFFREY L. DUNOFF
When – and Why – Do Hard Cases Make Bad Law? The GSP Dispute Comment on Grossman and Sykes’ “A Preference for Development: The Law and Economics of GSP”
Gene Grossman and Alan Sykes have provided us an insightful analysis of the GSP dispute. Their paper generates a number of conclusions, nearly all of which emphasize the difficulty of the issues raised by this dispute.1 Grossman and Sykes (G&S) argue that, as a legal matter, whether preference-granting states can discriminate among beneficiary states is a “hard” question because “the text of the Enabling Clause is ambiguous” and neither drafting history nor state practice resolves the ambiguity.2 They similarly conclude that, as an economic matter, the GSP dispute is difficult to evaluate because the gains produced by GSP programs, although disappointing, are “modest but not trivial.”3 From a policy perspective, G&S find the GSP dispute to be a hard case because, although we know that preference schemes create economic and political gains and losses, we cannot quantify the trade-offs associated with GSP programs.4 Finally, G&S state that it is difficult to know how to evaluate the Appellate Body’s imposition of disciplines on discrimination in GSP programs because we do not know whether stricter disciplines will lead developed states to grant fewer preferences.5 Hence, from whatever angle we look, the GSP dispute is a hard case. The ultimate question raised by G&S’s analysis is whether the GSP dispute is one of those hard cases that makes bad law.6 However, G&S’s paper demonstrates that neither legal, economic, nor policy analysis can answer that question. In this comment, I am less interested in challenging G&S’s conclusions than in exploring why conventional analyses cannot tell us whether the GSP report created good law. To do so, I wish to raise three questions about the GSP report. Although a full exploration of these questions is beyond the scope of this short comment, this 1
2 4 6
Gene M. Grossman & Alan O. Sykes, A Preference for Development: The Law and Economics of GSP, in Developing Countries in the WTO: The Law, the Economics & Practice. 3 Id. Id. 5 Id. Id. Sec. Co. v. United States, 193 U.S. 197, 364 (1904) (Holmes, J., dissenting) (“great cases, like hard cases, make bad law”).
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discussion suggests some reasons why legal, economic, and policy analysis of the GSP dispute are inconclusive. The first question I wish to explore is doctrinal: what is the relationship between the exceptions to GATT disciplines found in the Enabling Clause and Article XX? As I outline below, the divergent lines of jurisprudence developed under these two clauses are in significant tension with each other. The second question I wish to raise is institutional: what is the role of the Appellate Body (AB) in “hard cases” like the GSP dispute? I argue that the jurisprudence found in the AB report carves out a large role for panels and the AB in disciplining GSP programs, and I suggest some of the difficulties associated with this position. The third question I wish to explore is normative: what is the purpose of GSP programs? G&S adopt an assumption regarding the purpose of GSP programs that derives from one they make regarding the larger purpose of the international trade regime. I suggest that there are at least two different sets of assumptions we can make about the purpose of GSP programs and international trade law, if not international law in general. Moreover, I argue that, in the final analysis, the GSP dispute is a hard case precisely because it asks us to choose between two distinct and competing approaches to the trade system, and to international law in general.
I. Relationship between the Enabling Clause and Article XX The critical doctrinal question raised by India’s challenge to the EC’s preferential tariff program is whether GATT law permits the EC to treat some recipient states more favorably than other recipient states. If discrimination is permitted, it is then necessary to determine the permissible scope of – and justifications for – such distinctions. More specifically, can developed states impose conditionality on GSP preferences to further their own interests or only to further the interests of developing states? Succinctly put, when promoting the “preference for development,” whose interests count? Let’s approach this question by considering the relationship between the Enabling Clause and Article XX. Whose interests and what values does each of these exceptions seek to advance? More specifically, has the AB generated doctrine that under one exception is in tension with the interpretation of the other exception? Does one exception threaten to undermine the limits of the other? Recall that the question before the AB was whether preference-granting states can discriminate among preference-receiving states and, if so, under what conditions. I read the AB report as an effort to sharply limit the reasons that developed states can invoke to discriminate among developing states in their preference schemes. In particular, preference-granting states can only discriminate among developing state recipients when they do so in light of different economic interests of recipient states. As the AB stated, differences in “tariff preferences under GSP schemes may be ‘nondiscriminatory’ [and hence appropriate under the Enabling Clause] when the relevant tariff preferences are addressed to a particular
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‘development, financial [or] trade need’ and are made available to all beneficiaries that share that need.”7 From at least one perspective, this is a rather extraordinary discipline to impose on a state’s trade policy. The AB is, in effect, telling preference-granting states, such as the United States and EC, that, at least with respect to their GSP programs, they can distinguish among developing state recipients only to advance specific, enumerated recipient state interests or “needs.” That is, any discrimination that developed (importing) states include in their in GSP programs must be designed to further not their own interests, but rather the developing (exporting) state’s developmental interests. This discipline is presumably motivated by the desire to constrain the ability of developed states to impose their policy preferences on recipient developing states. This discipline seeks to minimize what G&S might call the “policy externality” of a developed state attempting to impose, for example, its environmental or labor preferences on developing states. Under Article XX, in contrast, trade measures that discriminate among exporting states are justified, under certain conditions, precisely because they advance importing state interests. A measure designed to advance exporting state interests is unlikely to pass muster under an Article XX analysis. Thus, for example, the GSP panel rejected the EC’s Article XX justification for the discriminatory nature of its drug preference program, in part, because it was not convinced that the program was designed to promote health within the EC: Even assuming that market access is an important component of the international strategy to combat the drug problem, there was no evidence presented before the Panel to suggest that providing improved market access is aimed at protecting human life or health in drug importing countries. Rather, all the relevant international conventions and resolutions suggest that alternative development, including improved market access, is aimed at helping the countries seriously affected by drug production and trafficking to move to sustainable development alternatives.8
So, unlike measures under the Enabling Clause – which will only be upheld if designed to advance recipient states’ (i.e., exporting states’) development, financial, or trade needs – measures under Article XX will only be upheld if they are designed to advance the interests of importing states.9 The interesting, and open, question is whether there is a tension between the logic of the AB’s interpretation 7
8
9
European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/AB/R at para. 165 (April 7, 2004) [hereinafter, AB Report]. European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, at para. 7.207, WT/DS246/R (December 1, 2003). The panel’s findings under article XX were not appealed. Moreover, in the Shrimp-Turtle dispute, the AB indicated that, in principle, importing state trade measures can be based on the importing state’s evaluation of the exporting state’s policies. United States – Import Prohibition of Certain Shrimp and Turtle Products, WT/DS58/AB/R (October 12, 1998).
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of the Enabling Clause and its Article XX jurisprudence. Does the Article XX exception permit a state to impose forms of conditionality through the “back door” that it cannot achieve through the “front door” of the Enabling Clause? An example might help clarify the argument. Suppose that the United States amended its GSP statute to add a provision conditioning certain preferential treatment on exporting states that take certain measures to protect endangered sea turtles. Imagine that this new provision was identical to the provisions at issue in the Article 21.5 proceedings in the Shrimp-Turtle dispute.10 Imagine that, under these provisions, some developing states had turtle protection programs that resulted in the receipt of more favorable tariff treatment for certain goods than other developing states receive. Finally, imagine that one of the disadvantaged states challenged the U.S. measures in WTO dispute settlement proceedings. The United States would presumably argue that the challenged measures discriminated in a manner permitted by the Enabling Clause. But it would be difficult for the United States to prevail on an argument that trade measures that discriminate among recipient states on the basis of their turtle protection efforts were a form of discrimination designed to advance the exporting states’ “development, financial [or] trade” interests. It is more likely that a WTO panel would find that the U.S. measures were designed to advance U.S. environmental policies and for this reason did not discriminate among recipient states in a manner permitted by the Enabling Clause. If the United States did not succeed on its Enabling Clause argument, it would argue that the challenged measures were justified under Article XX. The very factor that would make environmental conditionality a problem in the Enabling Clause context – the fact that the measures were designed to advance the interest of the United States, and not the developmental interests of the exporting states – would be among the factors that might save the measure in the Article XX analysis. Now, perhaps this type of inconsistency is not a major concern. Perhaps the apparent tension between these exceptions will disappear because future panels will harmonize the interpretation of the term “discrimination” as found in the Enabling Clause and the Article XX chapeau. Alternatively, we might not be troubled by the apparent inconsistency because whenever a legal regime has multiple exceptions, each will cover some fact patterns that others will not cover, and this is not typically a cause for concern. But it is rarely the case that the very factor that disqualifies a measure under one exception is a factor that makes another exception viable. Whether the exceptions found in Article XX and the Enabling Clause are truly inconsistent will only become clear as future panels clarify the scope of each exception. The limited point I wish to raise here is that, at this point in the development of WTO jurisprudence, there is at least the possibility of a serious 10
See United States – Import Prohibition of Certain Shrimp and Shrimp Products, Recourse to Article 21.5 of the DSU by Malaysia, WT/DS58/AB/RW (October 22, 2001).
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tension between the logic of Article XX and the logic of the Enabling Clause – and that this jurisprudential tension reflects a larger, unresolved tension over whose preferences count in the context of measures related to labor, environment, and other forms of conditionality.
II. Role of the Appellate Body (AB) in Hard Cases like the GSP Dispute The doctrinal issue discussed above ties into a structural, or institutional, question that the GSP dispute raises: what is the role of the AB in hard cases? At the risk of oversimplification, the AB could have adopted one of three approaches in resolving the GSP dispute.11 First, it could have granted preference-granting states wide discretion to impose conditionality on tariff preferences. For example, the AB could have ruled that the purported disciplines on GSP programs imposed by the Enabling Clause are aspirational,12 or it could have interpreted the term “discriminate” in a manner that permitted virtually any distinctions among beneficiary states. The effect of a report along either of these lines would be to produce something akin to an authorization to discriminate among beneficiaries. Presumably, preference-granting states would continue to employ various forms of discrimination in their GSP programs, and recipient states would have little incentive to bring future challenges GSP programs to WTO dispute settlement. Alternatively, the AB could have affirmed the panel’s finding that the Enabling Clause requires that “identical tariff preferences under GSP schemes be provided to all developing countries without differentiation.”13 The effect of a report along these lines would be to produce a bright line rule forbidding discrimination among beneficiaries. It is difficult to predict what would follow from such a holding. Perhaps preference-granting states would eliminate conditionality in their GSP programs. Such a development would force environmental or labor rights advocates to seek alternative means to advance their goals, perhaps through activity in developing states or in multilateral fora.14 Alternatively, 11
12
13
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Arun Venkataraman offered a similar tripartite typology of AB options in his comments on the G&S paper, and I learned much from his comments. For a more detailed discussion of the AB’s three options, see Greg Shaffer & Yvonne Apea, Institutional Choice in the GSP Case: Who Decides the Conditionality for Trade Preferences? The Law and Politics of Rights (unpublished manuscript, on file with author). The discussion that follows is indebted to Shaffer and Apea’s analysis. Robert Howse, India’s Challenge to Drug Enforcement Conditions in the European Community Generalized System of Preferences: A Little Known Case with Major Repercussions for “Political” Conditionality in US Trade Policy, 4 Chi. J. Int’l L. 385 (2003); Robert Howse, Back to Court After Shrimp/Turtle? Almost But Not Quite Yet: India’s Short Lived Challenge to Labor and Environmental Exceptions in the European Union’s Generalized System of Preferences, 18 Am U. Int’l L. Rev. 1333 (2003). European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/R at para. 7.161 (December 1, 2003). Shaffer & Apea, supra note 11.
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perhaps preference-granting states would reduce or eliminate their GSP programs entirely. Or, perhaps more likely, they might threaten to eliminate their GSP programs, which would likely prompt a multilateral dialogue over the shape and scope of GSP programs.15 In its report, the AB pursued yet a third strategy. Instead of adopting a rule broadly authorizing discrimination or a bright line rule forbidding discrimination, it produced a report that identifies, at a high level of generality, the circumstances under which conditionality can be imposed. G&S conclude that this “middle course” approach “leaves fundamental and potentially thorny questions unanswered.”16 This observation raises the question of who will decide these fundamental and difficult policy questions. It appears that the AB’s “middle course” effectively positions panels and the AB to be the bodies to evaluate preference programs, and hence address these fundamental policy questions, on an incremental, case-by-case basis.17 More specifically, the AB’s middle course gives panels and the AB significant authority to engage in the politically sensitive task of balancing developed and developing state interests in future challenges to GSP programs. The larger institutional question raised by the GSP report is whether it is desirable to have the AB exercise this sort of authority. I have argued elsewhere that balancing conflicting interests within highly contested areas of trade policy is precisely the sort of enterprise that a highly legalized dispute process should not engage in.18 At least in this institutional sense, I would suggest that, by carving out a continuing and primary role for the AB in the highly charged thicket of GSP politics, the AB report may have created bad law.
III. Purpose of the GSP Programs Determining the appropriate role of the AB in hard cases is a difficult task, but it is not as difficult as the final topic I want to explore. What is the GSP dispute really about, and why has it attracted so much attention?19 Why is this case so hard and GSP programs so controversial? Preliminarily, I believe that the GSP dispute’s high political salience does not derive primarily from the economic interests at stake. First, the conventional wisdom is that the value of preferential tariff treatment is decreasing because of the
15 17 18 19
16 Id. Grossman & Sykes, supra note 1, at 20. Shaffer & Apea, supra note xx. Jeffrey L. Dunoff, The Death of the Trade Regime, 10 Eur. J. Int’l L. 733 (1999). For a sampling of the literature, see Howse, supra note xx; Internet Roundtable, The Appellate Body’s GSP Decision, 3 World Trade Rev. 239 (2004); Lorand Bartels, The WTO Enabling Clause and Positive Conditionality in the European Community’s GSP Program, 6 J. Int’l Econ L. 507 (2003); Peter M. Gerhart & Archana Seema Kella, Power and Preferences: Developing Countries and the Role of the WTO Appellate Body, 30 N.C.J. Int’l L. & Com. Reg. 515 (2005).
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erosion of preferential margins as a result of MFN reductions.20 Second, many of the most important developing state exports, notably including textiles and garments, are typically not covered by preferential initiatives.21 Third, complex rules of origin and relatively high administrative costs result in significant underutilization of available preferences.22 Finally, the benefits of preferential tariffs tend to be concentrated on a few products that come from a few countries.23 As one recent study of GSP programs concluded, “Beyond some relative success stories, the picture is dismal.”24 Although such a pessimistic conclusion may be somewhat overstated, it does seem clear that the political salience of the GSP dispute is not a function of the economic interests involved. Hence, I think it necessary to look for another explanation why the GSP dispute is so politically charged. It is worth considering whether the issues raised by the GSP dispute implicate much larger questions about how to understand trade law, if not international law more generally. Under one prominent understanding, international law in general and international trade law in particular help states solve collective action problems, address externalities, and generate public goods. This is the understanding of international trade law that is captured by the language of economic analysis, rational choice, and game theory.25 From this perspective, it is quite reasonable to “assume,” as G&S do, “that the purpose of trade agreements is to limit the negative international externalities that countries create when they set their trade and industrial policies.”26 Although there is much to recommend this understanding of international law, it is hardly the only way to understand international law.27 Indeed, although many trade scholars would likely be comfortable with this approach, I suspect that many who specialize in other areas of international law adopt a very different 20
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Recent studies have begun to call this conventional wisdom into question. See, e.g., Patrick Low, et al., Multilateral Solutions to the Erosion of Non-Reciprocal Preferences in NAMA, WTO Working Paper ERSD-2005–05. See, e.g., 19 U.S.C. Sec. 2463(b)(1) (exclusion of import sensitive articles from United States’s GSP program). The classic work here remains Jan Herin, Rules of Origin and Differences between Tariff Levels in EFTA and in the EC, Occasional Paper No. 13 (Geneva: EFTA Secretariat 1986). For more recent research, see, e.g., J Anson, et al., Assessing the Costs of Rules of Origin in North-South PTAs with an Application to NAFTA, CEPR Discussion Paper 2476 (2003). UCTAD, Trade Preferences for LDCs: An Early Assessment of Benefits and Possible Improvements, UNCTAD/ITCD/TSB/2003/8. Id. at x. Of course, this form of analysis can be used outside the trade area. See, e.g., Eric A. Posner & Alan O. Sykes, Optimal War and Jus Ad Bellum, 93 Geo. L. J.993 (2005); Andrew Guzman, A Compliance-Based Theory of International Law, 90 Cal. L. Rev. 1828 (2002); Edward T. Swaine, Rational Custom, 52 Duke L.J.559 (2002). Grossman & Sykes, supra note 1, at 31. For discussions of the strengths and weaknesses of this approach to international law, see Jeffrey L. Dunoff, Some Costs and Benefits of Economic Analysis of International Law, 94 Am. Soc’y Int’l L. Proc. 185 (2000); Jeffrey L. Dunoff & Joel P. Trachtman, Economic Analysis of International Law, 24 Yale J. Int’l L.1 (1999).
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model of the nature and purpose of international law. For example, many human rights scholars would likely argue that international law is less about resolving collective action problems than it is about addressing relations between a government and its citizens. These scholars would focus less on inter-state relations, and more on relations between individuals and social groups, on the one hand, and the government officials who may or may not represent them, on the other. From a methodological perspective, liberal theories of international law best capture the alternative approach I have in mind. Liberal scholars argue that the sources of state behavior on the international plane are individual and group preferences at the domestic level. From this perspective, global problems have domestic roots.28 Whether the issue is war, environmental degradation, or economic protectionism, the source of the difficulty can be found in dysfunctionalities on the domestic plane. It follows that international law’s role has less to do with solving inter-state collective-action problems than with addressing the domestic roots of “international” problems. Under this understanding, a primary function of international law is to influence and improve the functioning of domestic institutions. For current purposes, I am less interested in determining which of these competing understandings is correct than I am in considering whether the GSP dispute pushes us toward the fault line between these two conceptions of international law. If we adopted the first conception of international law, then we might generate an analysis much like that found in the G&S paper. We might think that the GSP’s goal of advancing the development of developing states was embedded within the larger “purpose of trade agreements,” which “is to limit the negative externalities” that states create when they make trade policy. From this perspective, we would likely seek rules that limit externalities that GSP programs create for non-beneficiaries, as well as a “strict interpretation” of the Enabling Clause that sharply limits the ways that preference-granting states can discriminate among recipient states.29 But what if we adopted the alternative conception of international law? From this perspective, it might appear that development had less to do with preferential access to rich state markets than with, for example, features of the domestic domain, such as meaningful political representation, individual liberties, independent judiciaries, and the rule of law. In short, we might believe that social infrastructure was at least as important as global integration in advancing
28
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As one leading proponent of a liberal approach puts it: “We must learn to reframe every international issue, which we are accustomed to thinking about in terms of ‘state to state’ interaction, in terms of the interaction between individuals and specific government institutions.” Anne-Marie Slaughter, A Liberal Theory of International Law, 94 Proc. Am. Soc’y Int’l L. 240 (2000). Grossman & Sykes, supra note 1, at 34.
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development.30 This understanding suggests a greater openness to forms of conditionality designed to restructure recipient state policies and institutions as a means to further development and a lesser concern for the “externalities” that motivate G&S’s analysis. The above analysis suggests that, in addition to the other reasons that G&S identify, the GSP dispute is a hard case because at some level it asks us to choose between two distinct approaches to international law. The choice is hard because both approaches are plausible and attractive. Indeed, the choice between these perspectives may be the hardest international legal question of all, harder even than that of the permissible forms of discrimination in GSP programs, because it is the starkest version of the question posed by those programs.
IV. Conclusion Where does this analysis leave us? Let me offer one final thought. If on some level the GSP dispute asks us to choose between two competing visions of international law, this suggests a very different defense of the AB report. The AB’s actual holding in GSP was largely on procedural grounds. The problem was that the drug program lacked objective criteria for becoming a beneficiary or for removing a state from the list of beneficiaries; the AB contrasted this with the EC’s environmental and labor incentive program, which included “detailed provisions setting out the procedure and substantive criteria that apply to a request . . . to become a beneficiary under either of those special incentive arrangements.”31 The AB said much less about the types of conditionality that would pass muster under the Enabling Clause. But maybe a focus on process rather than substance is wise in hard cases like this one. To delve more deeply into the substance of permissible forms of conditionality might have forced the AB to at least implicitly privilege one competing vision of international law over the other. But surely whichever view prevails has to be the product of a larger political process and cannot be imposed by judicial fiat. By deciding on procedural grounds, the AB may have avoided speaking to these conflicting visions of international law. And by not opining on this issue, the AB may have minimized the extent to which the GSP dispute was a hard case that made bad law. 30
31
An influential body of political economy scholarship advances this argument. See, e.g., Dani Rodrik, et al, Institutions Rule: The Primary of Institutions Over Geography and Integration in Economic Development, 9 J. Econ. Growth (2004); Daron Acemoglu, et al., The Colonial Origins of Comparative Development: An Empirical Investigation, 91 Am Econ Rev. 1369 (2001); Robert Hall & Chad I. Jones, Why Do Some Countries Produce So Much More Output per Worker than Others, 114 Quarterly J. Econ. 83 (1999). Many of the arguments in this literature regarding the importance of domestic institutions build upon the pioneering work of Douglass North. See, e.g., Douglass C. North, Institutions, Institutional Change and Economic Performance (1990). AB report, supra note 7, at para. 182.
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JEFFREY KENNERS
The Remodeled European Community GSP+: A Positive Response to the WTO Ruling? Comment on Grossman and Sykes’ “A Preference for Development: The Law and Economics of GSP”
1. Introduction The European Community has embarked on a fundamental reform of its preferential trading arrangements with developing countries both as a necessary response to the requirement to comply with the decision of the WTO Appellate Body (AB)1 and also out of a desire to fashion a GSP that complements its evolving development policy. In a remodeled GSP+ scheme, the EC now offers special incentives to applicant countries for the purposes of encouraging “sustainable development” and “good governance” with reference to a list of international conventions. The GSP+ is open to all developing countries with “the same development needs.”2 The preamble of the EC Regulation declares that these preferences are designed to promote further economic growth and thereby to respond positively to the need for sustainable development.3 In this way the EC believes that it is able to demonstrate that it is pursuing its development policy priorities in a manner that is consistent with WTO law. This commentary begins by tracing the contested provisions of the EC GSP to the emergence in the early 1990s of a broader conception of community development policy that included the promotion of democracy and human rights, including labor rights. From this platform I evaluate the extent to which it has been possible for the EC to demonstrate that, following the AB decision, it now has an objective process for granting special trade preferences in its reformed GSP based on an integral concept of sustainable development linked to compliance with global standards. As part of this evaluation I consider how far, if at all, the
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EC-Tariff Preferences, WT/DS246/AB/R, 7 April 2004. European Commission Communication, Developing countries, international trade and sustainable development: the function of the Community’s generalised system of preferences (GSP) for the ten-year period from 2006 to 2015, COM(2004) 461 final, 7 July 2004, point 6.5. The Communication formed the basis for the adoption of Council Regulation 980/2005/EC of 27 June 2005 applying a scheme of generalised tariff preferences, OJ 2005 L169/1. Regulation 980/2005, recital 7 of the preamble.
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EC’s response addresses the outstanding questions identified by Grossman and Sykes in their legal analysis.
2. EC Development Policy and Trade Preferences – A Neat Fit? The European Community was the first to introduce a GSP in 1971, but until 1995 it organised a system that distinguished among different types of products and imposed quantitative limitations, but was otherwise conventional. The EC GSP was primarily concerned with providing an incentive to traders to import products from developing countries and to help them compete in international markets.4 By contrast with the US GSP, there was initially no social clause imposing conditionality on recipients of preferences. In the period leading up to the cyclical GSP review in 1995 the EC changed its approach to development policy. First in 1989, with the negotiation of the Fourth Lom´e Convention,5 and later in bilateral cooperation and trade agreements, the EC introduced and then mainstreamed a “human rights clause.” Article 5(1) of Lom´e IV declared that “respect for human rights is recognised as a basic factor of real development.”6 This clause amounted to no more than exhortation but, following a European Commission proposal in 1991 to integrate human rights more generally into development cooperation,7 the European Council issued a Resolution on Human Rights, Democracy and Development8 that sought not only to reward advances in good governance but also to punish grave and persistent violations of human rights or the interruption of democratic processes.9 Formal reinforcement swiftly followed later that year with the Treaty on European Union, which identified democracy and respect for human rights among the foundational principles of the EU10 and as core elements of the Common Foreign and Security Policy.11 New provisions on development cooperation provided that a 4
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See the introduction to the User’s Guide to the European Union’s System of Generalised Tariff Preferences, February 2003. Available at: http://europa.eu.int/comm./trade/issues/ global/gsp. EC Co-operation Agreement with African, Caribbean and Pacific (ACP) countries, 15 December 1989. OJ 1991 L229/1. Commission Communication to the Council, Human Rights, Democracy and Development Co-operation Policy, SEC(91) 61/6, 25 March 1991. Resolution of the Council and of the Member States of 28 November 1991, Bull. EC 11-91, p 122. For comment see Cremona, ‘Human Rights and Democracy Clauses in the EC’s Trade Agreements’ in Emiliou & O’Keeffe (eds.), The European Union and World Trade Law (Wiley, 1996) 62–77; Brandtner & Rosas, ‘Trade Preferences and Human Rights’ in Alston (ed.), The EU and Human Rights (Oxford, 1999) 699–722; Fierro, ‘Legal Basis and Scope of the Human Rights Clauses in EC Bilateral Agreements: Any Room for Positive Interpretation?’ (2001) 7 European Law Journal 41; and Riedel & Will, ‘Human Rights Clauses in External Agreements of the EC’ in Alston, supra, 723–754. 11 Art. 6 EU. Art. 11(1) EU.
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general objective of policy in this area would be “developing and consolidating democracy and the rule of law, and that of respecting human rights and fundamental freedoms.”12 Significantly, perhaps, in the light of controversy over the legality of social clauses in trade agreements under the GATT, there was no such amendment to the common commercial policy.13 Nevertheless, the European Court of Justice has recognised that provisions on development cooperation can be included in the EC’s activities under the common commercial policy without affecting the nature of the commercial agreement.14 Further justification can be found in the link between development cooperation and human rights as recognised by the Court in Portugal v Council.15 Although the link between trade and human rights is somewhat tenuous, as a legal foundation for EC competence, the mainstreaming of human rights was implemented in the form of trade and cooperation agreements with several countries in Latin America and Asia.16 More than 50 EC agreements negotiated in the 1990s contained human rights and democracy clauses as “essential elements” of the agreement. Increasingly it became standard to include non-execution and suspension clauses in cases of non-compliance by one of the parties.17 The EC did not activate these clauses, but their introduction was regarded as potentially problematic in the period leading up to the conclusion of the WTO Agreement.18 Moreover, as we see below, in the area of unilateral EC measures, GSP preferences to Burma/Myanmar have been repeatedly suspended on the basis of human rights violations. By 1999 the Council found it necessary to introduce simultaneous horizontal “Human Rights Regulations” to standardise and synchronise the requirements for implementing EC operations in development cooperation and other areas in accordance with the emerging policy consensus.19
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13 Art. 177(2) EC. Arts. 131–134 EC. Case C-45/86 Commission v Council [1987] ECR 1493, para. 17. The Court noted that the link was recognised by the UN Conference on Trade and Development (UNCTAD) and Part IV of the GATT. See Fierro, n9 above at 49. Case C-268/94 [1996] ECR I-6177. The Court held at para. 26 that adjusting co-operation policies to respect for human rights presupposes the creation of a relationship of subordination within the aims of the development provisions of the EC Treaty. For example, the Trade and Co-operation Agreements with Brazil (1992), Macao (1992), Mongolia (1993), respectively, COM(92) 209, OJ 1992 L404/26, and OJ 1993 L41/45. See Cremona, n9 above at 65–68. Following a Council Decision in May 1995 based on COM(95) 216. See Brandtner & Rosas, n10 above at 702. See Cremona, n9 above at 75. Council Regulation 975/1999/EC of 29 April 1999 concerning development co-operation operations, OJ 1999 L120/1, and Council Regulation 976/1999/EC of 29 April 1999 concerning Community operations other than development co-operation, OJ 1999 L120/8. The latter Regulation was based on the Community’s general powers in Art. 308 EC. These measures were subsequently amended by, respectively, European Parliament and Council Regulation 2240/2004/EC of 22 December 2004, OJ 2004 L390/3, and Council Regulation 2242/2004/EC of 22 December 2004, OJ 2004 L390/21. See Gatto, ‘The Integration of Social Rights Concerns
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The Commission’s proposals for the 1995 GSP promoted the notion of “positive conditionality”20 as a justification for the introduction of labour and environment incentives as “components” of sustainable development, drawing on the UN Declaration on the Right to Development of 1986 and the Rio Declaration on Environment and Development of 1992.21 The Commission was acutely aware of the need to comply with the WTO waiver and Enabling Clause.22 The new system was introduced in 1995 and further refined in 1998 and 2001.23 On the one hand, the most eye-catching feature of the reform of the EC GSP in this period was the introduction of an “Everything But Arms” (EBA) amendment extending dutyand quota-free access to all products originating in the least-developed countries (LDCs), except arms and ammunition.24 Based strictly on the UN’s list of LDCs, this initiative is designed to meet the requirements of paragraph 3(c) of the Enabling Clause for differential and more favorable treatment designed to respond positively to the development, financial, and trade needs of developing countries and can be fully reconciled with WTO’s Doha Ministerial Declaration.25 This special arrangement for the LDCs has survived fully intact in the 2005 GSP.26 On the other hand, the seeds for the dispute with India were sown with the introduction of a special arrangement to combat drug production and trafficking intended to help specified beneficiary countries in their fight against illegal drugs27 and the introduction of separate special incentive arrangements for the protection of labor rights and the environment.28 There is a long-established connection between measures to protect the environment and the promotion of sustainable development29 ; moreover, trade and environmental protection objectives are regarded as mutually supportable by the
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in the External Relations of the European Union’ in de B´ urca & de Witte (eds.), Social Rights in Europe (Oxford, 2005) 339–365. See L. Bartels, ‘The WTO Enabling Clause and Positive Conditionality in the European Community’s GSP Program’ (2003) 6 Journal of International Economic Law 507 at 523–527. See COM(94) 212. See Brandtner & Rosas, n9 above at 718. The Enabling Clause is shorthand for the GATT Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, 28 November 1979 (L/4903). For the provisions in force at the time of the EC-India dispute, see Council Regulation 2501/2001/EC of 10 December 2001, OJ 2001 L346/1. Council Regulation 416/2001/EC of 26 February 2001, OJ 2001 L60/43. Adopted on 14 November 2001, WT/MIN(01)/DEC/1. Para. 42 declares that: ‘We commit ourselves to the objective of duty-free, quota-free market access for products originating from LDCs.’ Arts. 12–13 of Regulation 980/2005. Art. 10 of Regulation 2501/2001. From 2002 this list included Pakistan, adding to geopolitical tension with India. See Harrison, ‘Incentives for Development: The EC’s Generalized System of Preferences, India’s WTO Challenge and Reform’ (2005) 42 Common Market Law Review 1663 at 1667. Art. 8 of Regulation 2501/2001. Particular emphasis was focused on compliance with international standards concerning sustainable forest management in accordance with the standards of the International Tropical Timber Convention.
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WTO.30 However, on what basis did the EC justify introducing special incentives for the observance of labor rights?31 The EC’s motivation was, at least in part, a defensive one, driven by concerns about the negative consequences of globalisation, not least a “race to the bottom” in labour standards.32 Equally important, however, was a positive ambition to promote economic and social rights drawn from international labor standards as equivalent to, and indivisible from, civil and political rights.33 The primary purpose of the GSP special incentive arrangements for labor rights was to reward developing countries that complied with Core Labor Standards that, after the adoption of the ILO Declaration of Fundamental Principles and Rights at Work in 1998,34 relate to specific ILO Conventions concerning the following: (1) freedom of association and the effective recognition of the right to collective bargaining (Convention Nos. 87 and 98) (2) elimination of all forms of forced or compulsory labor (Convention Nos. 29 and 105) (3) effective elimination of child labor (Convention Nos. 138 and 182) (4) elimination of discrimination in employment and occupation (Convention Nos. 100 and 111) This approach has several advantages. First, it recognises the functional autonomy of the ILO for setting and supervising global labor standards as endorsed by the WTO Singapore Declaration of 1996. This autonomy arises as a quid pro quo for the rejection of a social clause in the WTO Agreement, but it permits the EU to legitimately advance the “social dimension” of globalisation through its external policies. The EU can build on a relationship of cooperation and constructive dialogue with the ILO that, as Novitz observes, makes a positive and reciprocal contribution to the formulation of labor standards and their international enforcement.35 Second, it provides the EU with an opportunity to exercise its influence and power 30
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Doha Declaration at paras. 31–33. See also Shrimp/Turtle (12 October 1998, WT/DS58/AB/R) where the AB took account of the Rio Declaration. See Howse, ‘Back to the Court after Shrimp/Turtle? Almost but not quite yet: India’s short lived challenge to labor and environmental exceptions in the European Union’s Generalized System of Preferences’ (2002–2003) 18 American University International Law Review 1333. The source of this policy can be found in a Council Resolution of 6 December 1994 on certain aspects of European social policy: a contribution to economic and social convergence in the Union, OJ 1994 C368/6. Discussed further by Novitz, ‘The European Union and International Labour Standards: The Dynamics of Dialogue between the EU and the ILO’ in Alston (ed.), Labour Rights as Human Rights (Oxford, 2005) 214–241 at 229. See User’s Guide, n4 above, point 8. See Kenner, ‘Economic and Social Rights in the EU Legal Order: The Mirage of Indivisibility’ in Hervey & Kenner (eds.), Economic and Social Rights Under the EU Charter of Fundamental Rights: A Legal Perspective (Hart Publishing, 2003) 1–25. See the home page at www.ilo.org. For an excellent discussion see Alston, ‘Core Labour Standards’ and the Transformation of the International Labour Rights Regime’ (2004) 15 European Journal of International Law 457. Novitz, n31 above at 215.
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as a “global actor” that seeks to “set globalisation within a moral framework” by anchoring it in solidarity and sustainable development.36 The EU is professing an institutional vocation to help reduce the imbalance between the economic and social dimensions of global governance37 by giving a higher normative authority to labour standards, and in the exercise of its external trade powers, it aims to promote an interaction that is capable of having a transformative effect on the lives of individuals and power relationships within and between existing institutions.38 Third, by basing compliance with labor rights on internationally recognised norms it is easier for the EC to justify the labor-trade linkage39 and reconcile its approach with the trade liberalisation prerogatives of the WTO.40 Indeed, by prioritising the ILO Core Labor Standards (CLS) the EC is able to demonstrate that its actions are objective and proportionate. All ILO members are bound by the CLS even if they have not ratified each of the Conventions. This targeted approach provides an easier fit, if not a perfect match, for the conditions in the Enabling Clause of being “generalisednon-discriminatory,” and “non-reciprocal,” not least because both the EC and the ILO recognise that the CLS “should not be used for protectionist trade purposes.”41 In the context of the EC GSP the implementation of these principles in the Regulation offered, according to the AB, “detailed provisions setting out the procedure and substantive criteria” applicable to any developing country seeking to benefit. Albeit this was obiter dicta, but as Grossman and Sykes note,42 it nevertheless amounted to a clear indication that, on more detailed scrutiny, the special labour incentives might have passed the nondiscrimination test had India persisted with its original challenge. To illustrate the operation of the post-1995 GSP, the example of the temporary withdrawal of trade preferences from Burma/Myanmar is instructive. The GSP Regulation now included detailed provisions for temporary withdrawal of preferential trade arrangements.43 This process is more complex than the initial grant of preferences, but significantly, it must be founded on the supervisory determinations of the ILO that “shall serve as the point of departure for the investigation as to whether temporary withdrawal is justified.”44 This procedure was not yet formalised when the EC first decided to withdraw generalised trade preferences
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“The Laeken Declaration”, Annex I of the Presidency Conclusions of the Laeken European Council, December 2001, p 19. See European Commission, Promoting Core Labour Standards and Improving Social Governance in the Context of Globalisation, COM(2001) 416. See further, Klare, ‘The Horizons of Transformative Labour and Employment Law’ in Conaghan, Fischel and Klare (eds.), Labour Law in an Era of Globalization (Oxford, 2002) 3–29. See Cremona, n9 above at 76. See further, McCrudden & Davies, ‘A Perspective on Trade and Labor Rights’ (2000) 3 Journal of International Economic Law 43. Article 5 of the ILO Declaration, which is consistent with para. 4 of the WTO Singapore Declaration. See COM(2001) 416, para. 2.1.4. 43 Grossman & Sykes, p 16. Arts. 26–34 of Regulation 2501/2001. Art. 28(3). See Novitz, n31 above at 231.
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from Burma in 1997,45 but its decision was directly linked to the report of an ILO Commission of Inquiry investigating forced labour practices in Burma. The European and international trade union confederations made a joint complaint to the European Commission demanding action. At the ILO level this process was ultimately to lead to a decision of the International Labour Conference to impose a ban on technical cooperation with Burma and, uniquely, the implementation of an action for failure to carry out the recommendations of a Commission of Inquiry.46 On this basis the European Commission has repeatedly found that forced labour is widespread in Burma, in violation of ILO Conventions Nos. 29 and 105, now part of the CLS, and has formed the view that GSP preferences can be suspended if the country concerned is found to practice forced labour, regardless of whether or not the products exported have been produced by such labour.47 On this basis the withdrawal of preferences from Burma has been maintained and is incorporated into the 2005 Regulation.48 The withdrawal of trade preferences based on the use of forced labour may be justified under GATT Article XX either on the grounds of protecting (a) “public morals,” (b) “human life or health,” or (e) related to the products of “prison labour,” although the latter would not appear to cover forced labour in general.49 Howse has presented a persuasive case for conditionality relating to a violation of any of the ILO Conventions allied to the CLS being justified under both Article XX and the Enabling Clause,50 but even if this justification was confirmed, it would still be necessary to show under the “chapeau” to Article XX that withdrawing the preference is not “a means of arbitrary or unjustifiable discrimination between countries” or a “disguised restriction on international trade.” As Novitz concludes, the application of transparent criteria and flexibility in the implementation of conditions is important, but although the case is especially strong in relation to forced labour in general and to Burma in particular, there is evidence to show that several EU members are guilty of double standards because they are not complying with other ILO Conventions that form part of the CLS.51
3. The GSP+ – Meeting Legitimate Development Needs? In July 2004, in the immediate aftermath of the AB ruling, the European Commission published guidelines for a reformed GSP for 2006–2015.52 The Commission’s 45 46
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Council Regulation 552/97/EC of 24 March 1997, OJ 1997 L85/8. Under Art. 33 of the ILO Constitution. See further, Hepple, Labour Laws and Global Trade (Hart Publishing, 2005) pp 51–52. See Brandtner & Rosas, n9 above at 716. Brandtner and Rosas note that complaints concerning the use of forced labour were also made against Pakistan in 1997 but this did not lead to an investigation by the Commission, provoking accusations of double standards although the case was not so unequivocal. Regulation 980/2005, Art. 29 and recital 19 of the preamble. 50 See Howse, n30 above at 1373. Ibid., 1367–1375. 52 Novitz, n31 above at 234. COM(2004) 461.
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guidelines formed the basis for the Council’s GSP Regulation of June 2005, abolishing the unlawful drug arrangement and introducing a new combined special incentive arrangement for “sustainable development’ and ‘good governance,” known as GSP+, taking effect on July 1, 2005.53 According to the Commission the reformed GSP is targeted on the countries that most need to benefit and is designed to encourage regional cooperation. It is presented as “stable, predictable, objective and simple.”54 Five separate GSP arrangements are reduced to three consisting of a general arrangement granted to all beneficiary countries and territories and to two special arrangements that, drawing from the language of the AB, take into account “the various development needs of similar-situated developing countries.”55 The first special arrangement is for the LDCs on the UN list, a carryover of the previous EBA scheme that remains the most generous of the EC preferences.56 In the second special arrangement, the GSP+ establishes a single system of additional concessions for the “special development needs” of all developing countries providing they meet certain criteria and apply the main international conventions relating to social rights, environmental protection, and governance, including the fight against drugs.57 The EC may temporarily withdraw entitlements to GSP+ beneficiaries in the case of “serious and systematic” violations of the listed conventions based on the conclusion of the relevant international monitoring bodies.58 The EC’s aim, by introducing these reforms, is to comply with the requirements of the AB in respect of the operation of its GSP schemes and the criteria on which they are based while adapting them to keep pace with an ambitious and rapidly changing development policy agenda. The relaunched GSP reflects the European Consensus on Development, which was issued as a joint statement by the EU institutions and the Member states in 2005.59 Under this consensus the primary and overarching objective of EU development cooperation is the eradication of poverty in the context of sustainable development, including support for the UN Millennium Development Goals.60 There is particular emphasis on a multidimensional approach to the eradication of poverty, which is heavily influenced by Sen’s work on “capabilities,”61 such as, inter alia, consumption and food security, health, education, rights, the ability to be heard, human security, dignity, and decent work.62 In this sense, for example, opportunities for and the exercise of social rights enable individuals to convert their capabilities by extending
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Art. 30 of Regulation 980/2005, n2 above. 54 COM(2004) 461, Executive Summary. 56 Recital 5 of the Regulation. Art. 12–13. 58 COM(2004) 461, Executive Summary. Art. 16(a). European Commission DG E II, Doc. 14820/05, http://www.europa.eu.int/comm./ development/body/development policy statement/index en.htm. Ibid., para. 5. For Sen ‘a ‘capability’ [is] a kind of freedom: the substantive freedom to achieve alternative functioning combinations’. See Sen, Development as Freedom (Oxford, 1999) p. 75. European Consensus, para. 11.
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the range of choice of alternative functionings on the part of individuals.63 The term “sustainable development” is defined as including good governance, human rights, and political, economic, social, and environmental aspects.64 Delivery is to be achieved on the basis of “ownership” of development strategies by partner countries and participation by civil society.65 Hence the GSP has been repackaged as part and parcel of a transformative EC development policy that, with its emphasis on sustainable development and good governance as the basis for the GSP+, is intended to be four-square with the Doha Development Agenda – not least the WTO’s recognition that ‘the aims of upholding and safeguarding an open and non-discriminatory multilateral trading system, and acting for the environment and the promotion of sustainable development can and must be mutually supportive.”66 In this context the UN’s Johannesburg Declaration on Sustainable Development of 200267 provides a springboard for a broad interpretation of sustainable development to include labor rights and environmental protection to be delivered through partnership.68 Turning to the details of the GSP+, it is to be commended on the basis that countries have “ratified and effectively implemented” 23 of the most important international conventions relating to labor rights, the environment, good governance, and the fight against drug production and trafficking by October 31, 2005.69 Significantly all of the 16 core human and labor rights conventions in Annex III(A) have been ratified,70 whereas 4 of the 11 conventions relating to environment and governance principles, including drugs in Annex III(B), are given until the end of 2008 to be implemented.71 Furthermore, the countries applying for GSP+ must
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See Deakin & Browne, ‘Social Rights and Market Order: Adapting the Capability Approach’ in Hervey & Kenner, n33 above, 27–43 at 34. 65 European Consensus, para. 9. Ibid., paras. 14 and 18. Doha Ministerial Declaration, n25 above at para. 6. Available at: http://www.un.org/esa/sustdev/index.html. See the European Commission’s Explanatory Memorandum to the 2005 draft Regulation, COM(2004), 699, final of 20 October 2004, p. 3. Art. 9 and Annex III of Regulation 980/2005. Consisting of eight UN Conventions and eight ILO Conventions. The UN Conventions are International Covenant on Civil and Political Rights; International Covenant on Economic, Social and Cultural Rights; International Convention on the Elimination of All Forms of Racial Discrimination; Convention on the Elimination of All Forms of Discrimination Against Women; Convention Against Torture and other Cruel, Inhuman or Degrading Treatment or Punishment; Convention on the Rights of the Child; Convention on the Prevention and Punishment of the Crime of Genocide; and the International Convention on the Suppression and Punishment of the Crime of Apartheid. The listed ILO Conventions are the eight CLS’ Conventions referred to above, n34. Montreal Protocol on Substances that Deplete the Ozone Layer; Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal; Stockholm Convention on Persistent Organic Pollutants; Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES); Convention on Biological Diversity; Cartagena Protocol on Biosafety; Kyoto Protocol to the UN Framework Convention on Climate Change; UN Single Convention on Narcotic Drugs (1961); UN Convention on Psychotropic
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give an undertaking to maintain the ratification of the conventions and their implementing legislation and accept regular monitoring.72 Differentiation is justified on the basis that the GSP+ is only available to “vulnerable” countries.73 For a country to fall within this category it must not be classified by the World Bank as a high-income country during three consecutive years, the five largest sections of its GSP-covered imports to the EC must represent more than 75 percent in value of its GSP-covered imports, and those GSP-covered imports to the EC must represent less than 1 percent in value of total GSP-covered imports to the EC.74 This definition amounts to a significant tightening of the criteria for inclusion from the previous regimen. The EC is targeting and effectively reducing the number of potential beneficiaries who may apply while ostensibly maintaining an open system. Following receipt of the applications75 and examination of the findings of the relevant international organisations and agencies,76 a Commission Decision was issued on December 21, 2005. Fifteen applicant countries have qualified for GSP+, including 11 from Central and South America where the issue of combating drug production and trafficking is of particular importance.77 These countries have provided “comprehensive information” about the ratification and effective implementation of the conventions and have demonstrated that their economies are “dependent and vulnerable,”78 The EC’s remodeled GSP is impressive both in scale – EC imports under GSP totaled 40 billion compared to the U.S.’s 22 billion in 2004 – and intensity, with EBA targeting the world’s poorest 50 countries, of which 34 are sub-Saharan. The GSP+ countries are granted duty-free access to the EU for 7,200 products. The EU is now able to contend that it is the largest trading partner for the world’s poorest countries and has the most generous GSP arrangements.79 But does the reformed GSP meet legitimate development needs for WTO purposes?
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Substances (1971); UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988); and UN Convention against Corruption (Mexico). The Regulation is not specific about the four conventions that can be implemented later but in a press release of 21 December 2005 refers to the Kyoto Protocol, CITES, and the UN Convention against Corruption. Therefore, it appears that the drug-related conventions must be included in the initial ratifications. See further at: www.europa.eu.int/comm./trade/issues/ global/gsp/pr211205 en.htm. 73 Art. 9(1((d). Art. 9(1)(e). Art. 9(3). Based on data available on 1 September 2004 as an average over three consecutive years. Under Art. 10 the deadline for applications was 31 October 2005. In accordance with Art. 11(1). Under Art. 28 the Commission is assisted by a body of experts sitting as the Generalised Preferences Committee. Decision 2005/924/EC, OJ 2005 L337/50. The beneficiaries are Bolivia, Columbia, Costa Rica, Ecuador, Georgia, Guatemala, Honduras, Sri Lanka, Moldova, Mongolia, Nicaragua, Panama, Peru, El Salvador, and Venezuela. Press release, n71 above. Ibid. Moreover, the general scheme continues to provide benefits for India (17%), China (11%), and Brazil (6%) as the largest GSP exporters to the EU.
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In their assessment of EC-Tariff Preferences Grossman and Sykes have identified a number of “fundamental and potentially thorny questions” that remain unanswered. First, what counts as a development, financial, or trade need? It is noted that the AB accepted the argument that drug trafficking is related to a “development need,” but the burden rested on the EC to prove that the drug arrangements were available to “all GSP beneficiaries that are similarly affected by the drug problem.”80 Nevertheless, the AB did not rule directly on this point, leaving open the possibility that, in a prospective challenge, the EC would have to prove that drug-related trade preferences were not enacted for its benefit but were for the recipients’ own “development need.”81 Under GSP+ the drug-related incentives are subsumed within the general heading of “environment and governance principles”82 and fall within an overall framework based on promoting “sustainable development,” This linkage is not entirely convincing, but there is evidence, from the Johannesburg Declaration, that “illicit drug problems” are among the conditions that “pose severe threats” to sustainable development.83 This suggests at the very least that, providing the GSP+ is objective and available to all, it can contribute to meeting a legitimate development need of the recipient even if it is also of benefit to the EC. Second, if there is a legitimate development need, the authors raise the question of the magnitude of the differential treatment permitted.84 The inclusion of three conventions relating to illicit drugs suggests a certain bias toward this issue, but it can be argued that this is proportionate to the problem and even though several of the beneficiaries of GSP+ have serious drug trafficking problems the scheme does not deny preferences to other applicants. As Harrison notes,85 the abolition of the closed list and the application of transparent and objective criteria based on compliance with the principal related international conventions indicate a concerted attempt to meet these requirements. Third, Grossman and Sykes ask whether donor countries have unfettered discretion to select the needs they choose to address and to ignore others.86 Is it possible for the selection of needs to be discriminatory and in contravention of the Enabling Clause? In relation to the environmental standards required for GSP+, the scheme is no longer concerned merely with protection of tropical forests but is now based on a wide selection of international conventions relating to the environment. The same argument applies to the tightly drawn selection of human rights and labour rights in the Annex. In particular, as the selected labour rights correspond exactly to the Conventions in the CLS, the EC is able to demonstrate that it is acting objectively and not simply selecting those standards that replicate its own social model. Support can be drawn from the AB’s observation that
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81 Ibid., p. 15. AB Rep. para. 180. Grossman & Sykes, p. 21. See the Conventions list in Annex III(B), n72 above. 84 See n67 above, para. 19. Grossman & Sykes, p. 21. 86 Harrison, n27 above at 1679. Grossman & Sykes, p. 21.
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“broad-based recognition of a particular need, set out in . . . multilateral instruments adopted by international organisations could serve as . . . an [objective] standard” that is required to assess a development, financial, or trade need.87 Fourth, can donor countries continue to impose conditionality notwithstanding the reference to “non-reciprocal” and “non-discriminatory” preferences in footnote 3 of the Enabling Clause?88 The concept of non-reciprocity can be understood only as applying to concessions involving a reduction in barriers to market access.89 Bartels suggests that conditions unrelated to market access, such as drugs and labor and environmental conditions, must be non-reciprocal.90 Any other interpretation would pose an enormous threat to conditionality in GSP schemes.91 The AB’s decision leaves this question open. Even if the drug-related incentives fulfill a development need, is not the benefit to the donors reciprocal in the natural meaning of the term?92 By emphasising drug production and trafficking, which is unquestionably of concern to its Member states, the EC has taken a calculated risk that a narrow interpretation of reciprocity would prevail in the event of any future challenge. The EC is on stronger ground in defending conditionality under GSP+ as “non-discriminatory” under WTO law. According to the AB the duty of preferencegranting countries is “to make available identical tariff preferences to all similarlysituated beneficiaries,”93 Bartels94 suggests that the technical and economic capacity of potential recipients should be the primary criterion of whether countries are in similar situations. It can be argued that this is precisely the criterion the EC has now chosen for identifying “vulnerable” countries that can apply for GSP+.95 The AB drew upon the second recital of the preamble to the WTO Agreement, where it explicitly the need for positive efforts designed to ensure that developing countries . . . secure a share in the growth in international trade commensurate with the needs of their economic development”(emphasis added). In their judgment the word “commensurate” in this phrase “appears to leave open the possibility that developing countries may have different needs according to their levels of development and particular circumstances,”96 It is submitted that the EC has selected objective criteria that legitimately take into account the stage of economic development of those eligible to apply. Further support for the non-discriminatory nature of the EC’s new model arises from the decision to base conditionality under GSP+ entirely on 87
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AB Rep. para. 163 (emphasis in the original). For further comment see Harrison, n27 above at 1679. 89 Ibid., p. 22. Bartels, n20 above at 526. 91 Ibid. Grossman & Sykes, p. 22. According to the Concise Oxford English Dictionary reciprocity is defined as the practice of exchanging things for mutual benefit, Pearsall ed. (Oxford, 2001). 94 AB Rep. para. 154. Bartels, n20 above at 524. See recital 5 of the preamble of the Regulation, which specifically refers to the GSP+ applying only to similar-situated countries. AB Rep. para. 161. Emphasis added.
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internationally recognised binding standards that must be ratified and effectively implemented by the applicants. It follows that all potential applicants are bound by the same standards and that the basis for selection of beneficiaries is therefore neutral. Even if the countries concerned have not ratified all of the relevant ILO Conventions it is fair to assume that as ILO members they are committed to the CLS.97 Equally, if one accepts that labour conditionality is a legitimate development need, as discussed earlier, it follows that any scheme that allows countries to benefit from such conditions without observing the related Conventions would be discriminatory against those countries that are in compliance. From the discussion thus far one might conclude that the GSP+ is founded on a global consensus on the integral link between trade and sustainable development that includes such considerations as the effective realisation of internationally established standards on human and labour rights, environmental protection, and combating drug trafficking. The special incentives are targeted at broadly similar countries where such development needs exist, and preferences are granted as a positive response to applications for assistance in accordance with standards that can be verified as objective by reference to international conventions and their oversight by the relevant international organisations. This creates what the AB describes as “a sufficient nexus” between the preferential treatment and the likelihood of alleviating a relevant need, which must be effectively addressed through tariff preferences.98 Subject to one or two caveats about the continuing emphasis on drug-related preferences the reformed GSP conforms with the ruling in EC – Tariff Preferences. So much for the spin, but is there a fly in the ointment? As Cremona notes, the roles played by the EU as a global actor do not reflect neatly the differences between different EU policies and competences.99 The EU has exclusive competence over external trade,100 but its Member states retain full competence in areas of core labour law, notably the right to strike and freedom of association.101 These are the areas regulated by ILO Convention Nos. 87 and 98 and are at the heart of the CLS, and yet it is precisely in these areas, where there is no EC control, that several EU Member states have been found to be in violation, in some cases persistently,102 by the same ILO supervisory bodies whose findings are monitored for the purpose of determining compliance by “vulnerable” developing countries with the same Conventions under the rules for GSP+. This is one aspect of the 97 99
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98 Bartels, n20 above at 525. AB Rep. para. 164. Cremona, ‘The Union as a Global Actor: Roles, Models and Identity’ (2004) 41 Common Market Law Review 553 at 572. Art. 133 EC. These areas are explicitly excluded from the social policy competences in Art. 137 EC. For example, as Novitz, n31 above notes at 219, the United Kingdom has been in repeated breach of both Conventions. See Case No. 1852 (UK), 309th Report of the ILO Governing Body Committee on Freedom of Association, 1998, para. 308. Novitz also notes, at 220, that the ILO has found violations of Convention No. 87 by Austria, Spain and Greece, and concerns have been raised about laws in Belgium, Denmark, and Germany.
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discrimination issue where the EU is silent, as was the AB, and yet it is particularly insidious for developing countries who resent the fact that, as Novitz concludes, the EU uses its economic leverage to evade responsibility for implementation of international labor standards, but requires third states to do so if they wish to receive trade and aid benefits.103 The EU stands accused of double standards or even neo-colonialism. The obvious retort is that it is the duty of the Member states to comply with ILO Conventions and not the EU, but this ignores the fact that the EU’s rhetoric creates an assumption of compliance as exemplified by the proclamation of its own Charter of Fundamental Rights.104 For initiatives such as the GSP+ to succeed the EU needs to demonstrate a capacity to act consistently and, ultimately, to develop a more integrated identity in international relations.105 103 105
104 Novitz, n31 above at 241. OJ 2000 C364/1. For further discussion see Cremona, n100 above, and Wessels, ‘The Inside Looking Out: Consistency and Delimitation in EU External Relations’ (2000) 37 Common Market Law Review 1135.
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11 The GSP Fallacy: A Critique of the Appellate Body’s Ruling in the GSP Case on Legal, Economic, and Political/Systemic Grounds
abstract: The principal aim of this reflection paper is to provide a critique of the Appellate Body’s reasoning and its ultimate conclusion in the EC – Tariff Preferences dispute. Because this is a reflection paper, it briefly examines some of the problems with the Appellate Body’s ruling on legal, economic, and political/systemic grounds against the backdrop of the Seminar on WTO Law participants who presented papers on this topic specifically, and those participants who offered more general comments on the soundness of special and differential treatment for developing countries in today’s multilateral trading system. After putting forth the argument that the Appellate Body’s ruling cannot be supported on either legal and economic grounds, the reflection paper advances the argument that the decision is also untenable on broader political/ systemic grounds, primarily because it maintains the status quo and squanders an opportunity to give WTO Members the impetus to thoroughly review whether the Enabling Clause, in whole or in part, still fulfills its original mandate.
A. Introduction 1. Background to the Dispute On April 7, 2004, the Appellate Body of the World Trade Organization (WTO) issued its much anticipated report in the EC – Tariff Preferences1 dispute. The Appellate Body was called on for the first time to interpret various provisions of the 1
Appellate Body Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/AB/R, adopted 20 April 2004.
The author would like to extend his gratitude to both Professor Bermann and Professor Mavroidis for their support and guidance throughout this year’s Seminar on WTO Law. The author would also like to thank all the participants who presented their interesting and often cutting-edge papers and research during the course of the seminar as well as those who provided interesting and thought-provoking comments on these papers. Lastly, the author would like to thank all his fellow students of the seminar, whose thoughts and insights that floated around in Room 546 of Jerome Greene Hall are reflected in this reflection paper.
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so-called Enabling Clause,2 which many consider to be the central instrument providing special and differential (S&D) treatment for developing countries and least-developed countries (LDCs) in the multilateral trading system.3 India had challenged the legality of the European Communities’ (EC) Drug Arrangement scheme that granted a limited number of WTO developing country Members,4 which the EC considered were inflicted with serious socioeconomic problems arising from drug production and trafficking, even more favorable tariff preferences than other WTO developing countries included in the EC’s Generalized System of Preferences (GSP).5 India’s foremost claim in the dispute was that the EC’s Drug Arrangement tariff preferential scheme was inconsistent with the mostfavoured nation (MFN) clause of Article I:1 of GATT 1994 and not justified by the Enabling Clause because the preferences under the scheme discriminated among developing countries, since they were not granted to all developing countries. The EC defended its Drug Arrangement tariff preferential scheme on the ground that the term non-discrimination in footnote 3 to paragraph 2(a) of the Enabling Clause does not prevent preferential-granting countries from treating similarly situated developing countries that have different development needs in a different manner according to objective criteria. For all intents and purposes, the entire dispute turned on the issue of whether or not preferential-granting developed countries are required to grant the same tariff preferences to all developing countries. Specifically, the outcome of the dispute rested on the interpretation of the term non-discriminatory set out in
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Differential and More Favourable Treatment Reciprocity and Fuller Participation of Developing Countries, Decision of 28 November 1979 (L/4903). At paragraph 20 of its appellant’s submission, the EC acknowledged that the Enabling Clause is the “most concrete, comprehensive and important application of the principle of Special and Differential Treatment [ . . . ] achiev[ing] one of the fundamental objectives of the WTO Agreement.” The following countries were included in the EC Drug Arrangements: Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Pakistan, Panama, Peru, and Venezuela. Ostensibly, what impelled India, a long-time and frequent beneficiary of GSP schemes provided by the EC and other developed countries, to bring this dispute to the fore of the WTO dispute settlement system was the EC’s decision to include Pakistan, a long-standing political rival and more recently a significant competitor of exports in textiles, in its Drug Arrangements scheme. The EC’s 2001 General System of Preferences is set out in Council Regulation (EC) No. 2501/2001 [2001] OJ L346/1, which basically provided five different tariff preference arrangements, including the default general arrangements scheme for those developing countries that do not fall within one of the four more specialized arrangements that grant better tariff cuts, which also included the Drug Arrangements. Following the DSB’s recommendations and rulings in EC – Tariff Preferences, that regulation was replaced by Council Regulation (EC) No. 980/2005 of 27 June 2005, which sets out the rules for the EC’s new GSP system for 2006 until 2008. The new GSP scheme provides three types of arrangements – the General Arrangement, GSP Plus and the Special Arrangement for LDCs – the consistency of which (with the DSB’s recommendations in EC – Tariff Preferences) is not certain.
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footnote 3 to paragraph 2(a) of the Enabling Clause. Moreover, a reasonable interpretation of this somewhat elusive and ubiquitous term most probably would require an examination beyond its ordinary meaning and a look into its object, purpose, and context, as well as the 1971 Waiver Decision6 – the precursor of the Enabling Clause. The Panel found the Drug Arrangements inconsistent with the Enabling Clause on the basis that the term non-discriminatory in footnote 3 and the general obligation set out in paragraph 2(a) require GSP schemes to provide identical tariff preferences to all developing countries without differentiation, except for the implementation of a priori limitations on certain products from certain developing countries.7 Although the Appellate Body upheld the Panel’s ultimate conclusion that the EC’s Drug Arrangements were not justified under paragraph 2(a) of the Enabling Clause, it reversed the Panel’s aforementioned finding on the ground that the Enabling Clause does not preclude developed countries from granting different tariff treatment on products from different developed countries, as long as such differential treatment is available to all similarly situated developing country beneficiaries.
2. Reflection: The GSP Fallacy The text of the Enabling Clause is, in and of itself, ambiguous. The fact that developed countries are under no obligation to extend tariff preferences further compounds the problems of interpretation. An arbiter called on to adjudicate a claim based on the Enabling Clause may perceive the challenge it faces along the following dichotomy. On the one hand, one must be mindful of the voluntary character of the Enabling Clause – construing the terms of the Enabling Clause too inflexibly will theoretically dissuade developed countries from participation. On the other hand, one must be cautious not to enforce the obligations in a way that facilitates discriminatory practices – interpreting the terms too loosely can lead to trade inefficiencies, such as trade diversion and increased negative externalities. As is explored in more detail below, it would seem that the Appellate Body opted for an interpretation of the Enabling Clause closer to the pole favoring a flexible construction that is more mindful of its voluntary character. The voluntary nature of the Enabling Clause (or rather its “enabling” nature, hence the name) has led some commentators, such as Howse, to argue that the
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Decision of the contracting parties of 25 June 1971 (C/M/69), which is a waiver under Article XXV of the GATT, permitting a deviation of the MFN obligation of Article I:1 allowing donor countries to legally grant preferential treatment to developing countries and LDCs. Panel Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/R, adopted 20 April 2004, as modified by Appellate Body Report, WT/DS/246/AB/R.
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Enabling Clause is simply not justiciable.8 However, the Enabling Clause is in fact an instrument that forms part of the WTO Agreement as an “other decision of the contracting parties to GATT 1947” pursuant to paragraph 1 (b) (iv) of the GATT 1994, and therefore, it should logically produce legal effects.9 As pointed out by Kessie, the Enabling Clause was adopted at the end of the Tokyo Round by the contracting parties in order for the GSP schemes to have “a secure legal basis” in the multilateral trading system.10 As Low pointed out during the course of the seminar, trade negotiations today are in many ways still viewed through a mercantilist lens: attempting to get the most and giving up the least. Once all the rhetoric about the merits of multilateral trade liberalization is stripped to its core, international trade in many ways is still about prices.11 Accordingly, the basis of the dispute between India and the European Communities really was a dispute between India and Pakistan: by granting Pakistan more favorable tariffs rates for its exports (especially textiles) into the sought-after European Union market, India’s exports into the same market would possibly be undercut by the lower prices of Pakistan’s exports,12 thus artificially affecting the conditions of competition between both competitors.13 Although the multilateral trading system is mired with a whole range of exceptions that stray away from some of the foundational precepts of trade, the EC Drug Arrangements and other similar GSP schemes that differentiate among developing countries, large and small, allow preference-granting countries to decide for
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Robert Howse, India’s WTO Challenge to Drug Enforcement Conditions in the European Community Generalized System of Preferences: A Little Known Case with Major Repercussions for ‘Political’ Conditionality in U.S.Trade Policy, Chicago Journal of International Law, 4: 385– 405 (2003). Accordingly, the Appellate Body confirmed that the Enabling Clause “has become part of the GATT 1994.” See Appellate Body Report, European Communities – Tariff Preferences, WT/DS246/AB/R, para. 143. Edwini Kessie, The Legal Status of Special and Differential Treatment Provisions under the WTO Agreement (2005), p. 6, in this volume of columbia studies in WTO law and policy. See, also, Patrick Low, Is the WTO Doing Enough for Developing Countries?, in this volume of columbia studies in WTO law and policy. As alluded to in infra note 13, there was no evidence in the record that the Drug Arrangements were causing or would have necessarily caused the prices of India’s exports into the EU market to otherwise increase in comparison to Pakistan’s exports. Although there was no evidence that the Drug Arrangements were in fact displacing Indian exports to the EU market to a significant extent vis-`a-vis Pakistani exports or from other developing countries included in the specialized scheme, WTO panels and the Appellate Body seemingly continue to follow jurisprudence that stands for the proposition that the effects or the intent behind a measure need not always be established by the complainant in order to find that the challenged measure is WTO-inconsistent. See, e.g., United States – Taxes on Petroleum and Certain Imported Substances, adopted 17 June 1987, BISD34S/136; Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996. In other words, it is uncertain whether the volume of Pakistan’s exports to the EU market was significant enough to influence prices.
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themselves what externalities to advance through discrimination and “perverse” reciprocity,14 as well as compounding trade diversion.15 The central thrust of this reflection paper is to provide a critique of the Appellate Body’s reasoning and its ultimate conclusion in EC – Tariff Preferences. As this is a reflection paper, it briefly examines some of the problems with the Appellate Body’s ruling on legal, economic, and political/systemic grounds against the backdrop of the seminar participants who presented papers on this topic specifically and those participants who offered more general comments on the soundness of S&D treatment for developing countries in today’s multilateral trading system. After putting forth the argument that the Appellate Body’s ruling cannot be supported on either legal and economic grounds, this paper goes on to assert that the decision cannot even be sustained on broader political/systemic grounds, to the extent that it maintains the status quo and squanders an opportunity to give WTO Members the impetus to thoroughly review whether the Enabling Clause, in whole or in part, still fulfills its original mandate. As noted earlier, international trade (as well as preferential tariff preferences) is still very much about prices. In this respect, the title of this reflection paper – The GSP Fallacy – draws its inspiration, so to speak, from another famous decision about prices rendered 50 years ago by another “supreme” court; namely, the 1956 U.S. Supreme Court decision in United States v. E. I. du Pont de Nemours & Co.16 In this seminal anti-trust case, the U.S. Supreme Court was called on to decide whether the relevant product market should be defined narrowly as “cellophane,” in which case the defendant’s market share would be 75 percent, or whether it should be defined as “flexible wrapping paper,” in which case its share would be only 25 percent. In holding for the latter definition, the Supreme Court relied on the relatively high cross-price elasticity between cellophane and other types of flexible packaging material as the basis for concluding that these products were all part of the relevant market, because at current market prices many products were considered substitutes for cellophane in light of apparent robust competition. However, the Supreme Court failed to take into account the monopoly power that the defendant already possessed in the cellophane market, which would enable it to charge a monopoly price. In other words, the cross-elasticity of demand appeared artificially high because the defendant was already charging a monopoly price. Hence, this case came to be known as the Cellophane Fallacy because the Supreme Court looked at current prices charged by a monopolist, instead of 14
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As mentioned below, this term (“perverse non-reciprocity”) is employed to refer to the situation where donors extend their GSP schemes on the express condition that beneficiaries comply with certain trade-related and non-trade matters. See Gene M. Grossman and Alan O. Sykes (2005), A Preference for Development: The Law and Economics of GSP, in this volume of columbia studies in WTO law and policy, as well as Kyle Bagwell and Robert W. Staiger, the economics of the world trading system, Cambridge and London, MIT Press (2002). U.S.v. E. I. du Pont de Nemours & Co., 351 U.S. 377 (1956).
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probing whether the products would have been substitutable and thus in the same relevant market if the defendant would have been charging a more competitive (marginal cost) price.
B. Critique of the Appellate Body’s Ruling 1. Legal Grounds For our purposes, the two relevant issues in the EC – Tariff Preferences case before the Appellate Body were whether the Panel had erred in concluding that the European Communities (EC) failed to prove that the Drug Arrangements were justified under paragraph 2 (a) of the Enabling Clause based on its findings (1) that the term non-discriminatory in footnote 3 to paragraph 2 (a) requires “identical tariff preferences without differentiation, except as regards the implementation of a priori limitations and (2) the term “developing countries” in paragraph 2 (a) of the Enabling Clause means “all developing countries.” The EC maintained that the term non-discriminatory does not require identical treatment and allows for different treatment for situations that are objectively different. India contended that non-discriminatory in terms of tariff protection requires formally equal treatment. For the Appellate Body, it was “clear” that the ordinary meaning of non-discriminatory requires donors to grant identical tariff preferences to “all similarly-situated beneficiaries.”17 As previously mentioned, it is safe to say that the Enabling Clause is by no means a model of clarity. Political realties have defined in many ways the manner in which GSP schemes have been set up and administered. The unchallenged subsequent practice18 of major donors for over 25 years has also exacerbated the problem of interpretation insofar as it has entrenched into practice what otherwise might possibly have been schemes that were prima facie inconsistent with the terms of the Enabling Clause. The Panel was of the view that a proper interpretation of the paragraph 2 (a) and, in particular, the term non-discriminatory in footnote 3 of that paragraph depended on a “proper understanding” of paragraph 3(c) as relevant context in determining whether different tariff treatment is permissible among developing countries.19 However, despite the ambiguous nature of the terms set out in the Enabling Clause, the Appellate Body, unlike the Panel, inexplicably did not seek guidance either in an instrument to the treaty that was made between the parties in connection with the conclusion of the treaty or even accepted by the other parties as an instrument related to the treaty as context 17
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See Appellate Body Report, European Communities – Tariff Preferences, WT/DS246/AB/R, para. 154. The term “subsequent practice” is not used here in the sense of the meaning of Article 31(3) (b) of the Vienna Convention on the Law of Treaties. See Panel Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/R, para. 7.65.
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under Article 31(2) of the Vienna Convention of the Law of Treaties or the travaux pr´eparatoires (i.e., preparatory work) of the Enabling Clause as it is authorized to do so pursuant to Article 3220 ; rather, it chose to rely solely on the context, object, and purpose of the text in light of the “WTO Agreement and the Enabling Clause.”21 Although there are many good reasons not to overly rely on the negotiating history as a means of interpretation (hence, the fact it is supplementary), if there ever was a case where recourse to supplementary means of interpretation through the negotiating history was justified in light of its ambiguous terms, coupled with the relative importance of the WTO instrument at issue, it is difficult to say this was not the one. Nonetheless, the Appellate Body in this particular case surprisingly eschewed the negotiating history, whether as context or as a supplementary means of interpretation, despite the fact the Panel had examined it exhaustively.22 As Grossman and Sykes point out in Chapter 10, “nothing in the negotiating history seemed to contemplate discrimination among developing countries on 20
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It is important to emphasize that after finding that Resolution 21 (II) and the Agreed Conclusions were both considered preparatory work for the Enabling Clause as well as for its precursor, the 1971 Waiver Decision, the Panel found that these documents were both at the same time context pursuant to Article 31 of the Vienna Convention as well as supplementary means of interpretation under Article 32, either to confirm the meaning after applying Article 31 or to actually determine the meaning when the application of Article 31 leaves the meaning ambiguous. See Panel Report, European Communities – Tariff Preferences, WT/DS246/AB/R, para. 7.88. See Appellate Body Report, European Communities – Tariff Preferences, WT/DS246/AB/R, para. 173. The Appellate Body did briefly look at the preamble to the 1971 Waiver Decision, which refers to the agreement at the second UNCTAD to establish a “generalized, nonreciprocal and non-discriminatory” system of preferences, in ascertaining the “object and purpose” of the Enabling Clause (see para. 144 of the Panel Report). It is worth noting that the Appellate Body has recently shown its willingness to move away from strict reliance on a textual approach to interpretation, or in the parlance of the Vienna Convention, the “ordinary meaning.” Accordingly, exactly a year to the day after the Report of the Appellate Body in ECTariff Preferences was issued, the Appellate Body in US – Gambling seemed to have signaled that it was freeing itself from an inflexible textual approach by stating, “[ . . . ] to the extent that the Panel’s reasoning simply equates the ‘ordinary meaning’ with the meaning of words as defined in dictionaries, this is, in our view, too mechanical an approach.” See Appellate Body Report, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R, adopted 20 April 2005, para. 166. The demarcation line between whether agreements or other instruments are to be considered as context or drafting/negotiation history is admittedly not clear cut and is more gray than black-and-white, as evidenced by the different treatment given to two documents (i.e., “Services Classification List” and the “1993 Scheduling Guidelines”) by the Panel and the Appellate Body in US – Gambling; whereas the Panel considered the two documents to be context per Article 31 (2) of the Vienna Convention, the Appellate Body reversed the Panel, concluding that they were supplementary means of interpretation under Article 32. See Appellate Body Report, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R, paras. 171–195. However, it is important to note that the different categorization of these two documents did not have a bearing on the ultimate conclusion by both that “gambling and betting services” was indeed part of the U.S. schedule of commitments.
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the basis of their development or other ‘needs,’ except for the special treatment of least-developed countries.”23 The Appellate Body emphasized the fact that the negotiators could have employed the term “all” as a qualifier to developing countries, but as Grossman and Sykes succinctly point out, the reverse is also valid. However, it would seem that the drafters did in fact make an explicit distinction between developed countries and LDCs at paragraph 2(d) to which the Appellate Body only seemingly paid “lip service.” At the very least, the distinction between both groups tends to suggest that contextually speaking, if the drafters had wanted to distinguish among developing countries, they would have explicitly done so in the same way as they distinguished between developing countries and LDCs.24 Ostensibly, one could make the argument that the drafters of the Enabling Clause and the 1971 Waiver Decision had already determined that developing countries as a group as opposed to LDCs contemplated in paragraph 2(d) were in fact “similarly-situated.” If the original purpose of the Enabling Clause was to reduce discrimination in trade preferences that had existed and characterized the period leading up to the 1971 Waiver Decision, why would the developing countries have agreed at the time to further discrimination among themselves? Although the Appellate Body was not called on by either party to determine whether the Drug Arrangements were consistent with paragraphs 3 (a) and 3 (c) of the Enabling Clause, it nonetheless examined those paragraphs (especially the latter) as context in its interpretation of non-discriminatory. The Appellate Body interpreted paragraph 3 (c) as permitting donor countries to “respond positively” to the “needs” of developing countries that are not necessarily common or similar to all developing countries.25 The Appellate Body seems to have overemphasized the significance of Article 3 (c) of the Enabling Clause. The Appellate Body determined that paragraphs 3(a) and 3(c) of the Enabling Clause “impose specific conditions” and obligations on the granting of different tariff preferences
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See Grossman and Sykes, supra note 15. It worth noting that the WTO General Council adopted the Decision on Waiver of 13 June 1999 (WT/L/304), which enables developing country Members to provide preferential tariff treatment to products originating from LDCs, without extending the same treatment to like products of any other Member, whether it be from developed or developing Members. This 1999 Decision waives Article I:1 of GATT until 30 June 2009. This 10-year term is not unlike the 1971 Waiver Decision that similarly granted a waiver from the provisions of Article I:1 of GATT for the same period ostensibly for developed countries vis-`a-vis developing countries. As noted, in 1979 the Enabling Clause replaced the 1971 Waiver Decision prior to its expiration. If they choose to grant tariff preferences, developing country Members must provide treatment on a “generalized, non-reciprocal and non-discriminatory basis and the preference margins to be accorded.” Although the last paragraph provides that the 1999 Decision in no way affects the rights of Members pursuant to the Enabling Clause, it nevertheless seems to suggest ex post facto that the Enabling Clause envisaged the granting of tariff preferences to developing countries qua developing countries under paragraph 2 (a) and to LDCs qua LDCs under paragraph 2(d). See Appellate Body Report, European Communities – Tariff Preferences, WT/DS246/AB/R, para. 63.
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among beneficiaries.26 The Appellate Body emphasized the word “shall” as indicating an obligation for donors to “respond positively” to the “needs of developing countries.”27 The Appellate Body overlooked the possibility that paragraph 3 merely provides general principles that serve to guide donors in designing their GSP schemes. For instance, how is one to interpret the term “shall be designed to facilitate and promote the trade of developing countries and not to raise barriers to or create undue difficulties for the trade of any other contracting parties” in subparagraph 3(a) other than in a hortatory manner? It is unlikely that a complainant can point to this paragraph as a basis to condemn a GSP scheme. It would seem the fact that the parties, as well as the Panel and the Appellate Body, looked at paragraph 3(c) as context only serves to reinforce the point that its significance is just that, context. This is not to suggest that Howse’s argument that the Enabling Clause is not justiciable is correct; rather, the sub-paragraphs of paragraph 3 seem to be merely indicators of how donors should comprehensively design their tariff preference schemes. It would seem that, even on a pure textual reading of paragraph 3 (c) in light of the context of the Enabling Clause, its purpose was simply to provide parameters that developed countries could follow in designing and adapting their tariff preference schemes so as to make these arrangements effective and consistent with the needs of the developing countries initially and as time went on. The Appellate Body thought no more of the Panel’s finding (following a thorough review of the negotiating history by the Panel) that the purpose of paragraph 3 (c) was to ensure that GSP schemes include a wide array of product coverage and significant tariff cuts that would respond positively to the different interests of developing countries as a group, other than to say in a brief sentence that “we see no basis for such a conclusion in the text of paragraph 3 (c).”28 It is difficult to understand how the Appellate Body could read paragraph 3 (c) in such a textual, matter-of-fact manner to mean that responding to the “needs of developing countries” entails treating developing countries differently, when a reasonable interpretation of the paragraph coupled with negotiating history strongly suggests otherwise. How justifiable is the argument sanctioning a priori discrimination on the basis that developing countries hampered by drug problems should be entitled to be given more preferential tariff treatment due to their particular circumstances?
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See Appellate Body Report, European Communities – Tariff Preferences, WT/DS246/AB/R, para. 156. It is interesting to note that although the Appellate Body was of the view that paragraph 3 (c) imposed “specific obligations” on donor countries, it only examined this paragraph as “context” in interpreting the term non-discriminatory in footnote 3 to paragraph 2 (a) because neither party had raised this issue on appeal as to whether the Drug Arrangements were consistent with paragraph 3(c). See Appellate Body Report, European Communities – Tariff Preferences, WT/DS246/AB/R, para. 159.
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How are these countries any different from those developing countries that are plagued with other serious problems, such as, AIDS, malnutrition, or poverty? In other words, the Appellate Body’s interpretation of the Enabling Clause essentially sanctions the pitting of miseries against each other, and developing countries are better off, in terms of tariff preferences, if they have the “good fortune” of being plagued with one of the severe problems on which a donor country has decided to base its tariff preferences. If we exclude LDCs for the moment, there is nothing in the negotiation history of the Enabling Clause that suggests that developing countries had, or would have, agreed to condone discrimination based on their development needs or other similar requirements. In light of the negotiating history, it is a leap of faith to suggest that developing countries had implicitly agreed that the non-discriminatory requirement would be satisfied, provided that differential treatment among a group of developing countries was based on “objective criteria.” What exactly does the term “similarly situated” mean and what purpose does it serve? In EC – Tariff Preferences, those developing countries that had the “misfortune” of not having the preferred social infliction (i.e., drug production and trafficking) lost out on the additional tariff preferences under the Drug Arrangements, even if they were inflicted with other serious ills. Accordingly, there is an initial arbitrariness imposed even before looking at the “objective standard” purportedly justifying the arrangement under the Enabling Clause, to the extent that the donor countries can ex ante choose which condition or social ill to target. Even if the Appellate Body had upheld the Drug Arrangements on the account that all similarly situated developing countries were included in the scheme, it is difficult to understand how tariff preferences would respond positively to the particular “development, financial, and trade needs” of these beneficiaries vis-`avis all other developing countries without similar drug problems, but with other comparable serious ills. It is logical to assume that paragraph 3 (c) was not meant as a means to allow donor countries to discriminate among “similarly situated” countries because developing countries, whether for good or bad reasons, have generally been treated as a homogeneous group in the GATT and continue to be treated this way presently in the WTO.29
2. Economic Grounds In many ways, the primary “institutional” exceptions30 to the MFN principle belie the economic theory underpinning the multilateral trading system. As Bagwell 29
30
See Low, supra note 11, where he criticizes categorizing developing countries as a homogeneous group because they are different in fundamental ways as reflected by their diverse priorities and interests. For a detailed elucidation of the different types of ‘institutional exceptions,’ see, Petros C. Mavroidis, the general agreement on tariffs and trade: a commentary, Oxford University Press (2005).
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and Staiger point out, the MFN principle among trading partners diminishes the risk of excluding others through trade diversion and reduces the potentiality of terms-of-trade deterioration.31 Preferential Trade Agreements under Article XXIV of GATT 1994, tariff preference schemes under the Enabling Clause, and waivers under Article IX:3 of the Marrakesh Agreement Establishing the WTO are the main institutional exceptions to the MFN principle. Moreover, within the Enabling Clause itself, there is a further explicit derogation to the MFN principle, as further special preferential treatment can be extended to LDCs in relation to those preferences granted to developing countries. If that was not enough however, the Appellate Body eroded the MFN principle even further by sanctioning yet another deviation to the deviation, so to speak, of the MFN principle, in paving the way for preference-granting countries to extend more favorable preferential treatment among developing countries if such treatment is available to “all similarly-situated” developing country beneficiaries. Moreover, extending the Appellate Body’s reasoning to its logical conclusion, donors would also be able to differentiate tariff preferences among LDCs under paragraph 2(d) if the GSP scheme is made available to “all similarly-situated” LDC beneficiaries. As explained above, the Enabling Clause and the GSP schemes that it authorizes evidently deviate from the MFN principle to the extent that between developed countries, developing countries, and LDCs, it sanctions trade diversion and deterioration of multilateral terms of trade. However, the impact of trade diversion is potentially less harmful, and for whatever reasons, the drafters of the 1971 Waiver Decision and its progeny probably believed that the benefits of extended tariff preferences to developing countries and LDCs would outweigh the costs of erosion of the underlying rationale behind MFN. Ostensibly, one rationale that may have been influencing developed countries at the time the Agreed Conclusions were being discussed and negotiated at the second UNCTAD, and subsequently when the 1971 Waiver Decision was being adopted, is that most contracting parties were not overly concerned with the deterioration of the overall terms of trade that the granting of tariff preferences to developing countries would cause – the economic impact was probably seen as negligible because the export potential of even large developing countries such as India and Brazil was not what it is today. Most, if not all developing countries at that time were largely price-takers, and consequently, their relative lower volume of trade vis-`a-vis developed countries meant that they would not have a significant impact on world prices of a given product.32 Furthermore, for those products in 31 32
See Bagwell and Staiger, supra note 15. For a detailed discussion on the impact that smaller countries have on influencing the world price of a product and the terms of trade externality, see Bagwell and Staiger, supra note 15 and Kyle Bagwell, Petros C. Mavroidis and Robert W. Staiger, It’s a Question of Market Access, American Journal of International Law 56 (2002). According to Bagwell and Staiger, unilateral free trade is the optimal trade policy in terms of efficiency for small countries, if these governments are national income-maximizers. Accordingly, there is no terms-of-trade
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which developing countries have a comparative advantage, developed countries were able to exclude or restrict such “sensitive” and “semi-sensitive” products from their respective GSP arrangements as a priori limitations, as well as through “graduation”33 and safeguard measures. Although many developing countries initially benefited from some aspects of tariff preference arrangements, the appropriate counterfactual to determine whether they have benefited in the long term and in the aggregate would be to examine whether, in the absence of these preferences, they would have been able to effectively obtain more favorable market access for those products (sometimes called “sensitive and semi-sensitive” products) that are of particular interest to them that are either included in lists of a priori limitations or otherwise outright excluded from particular GSP schemes. Accordingly, one could argue that today tariff preferential schemes should be primarily aimed at LDCs, which can only marginally affect terms of trade and have an insignificant impact on trade diversion. In many ways, some LDCs of today are similar to the budding developing countries of the late 1960s and 1970s, albeit at incipient stages. In this respect, the Brazils, Chinas, and Indias of today can have more than a marginal impact on terms of trade and trade diversion, whereas the impact on these indicators is negligible in the case of the Bangladeshes, Laoses, and other LDCs. Ostensibly, negative externalities created by GSP schemes are more acceptable if the purpose of tariff preferences is to promote the export opportunities of developing countries and LDCs, as reflected in the preamble of the 1971 Waiver Decision. If tariff preferences are displacing exports from developed countries, then the negative externalities that the preferences produce would be seen as legitimate diversion because they are an acceptable (or agreed-on) consequence of the Enabling Clause and GSP schemes. However, when tariff preference arrangements differentiate among developing countries on potential arbitrary grounds cloaked in “objective criteria,” these negative externalities are less acceptable because they further erode the MFN principle among this largest subset of the WTO Membership. A GSP scheme that further erodes the MFN principle among developing countries is harder to justify in light of Bagwell and Staiger’s thesis. As Grossman and Sykes emphasize, a GSP scheme that extends more favorable tariff treatment to a select group of developing countries reduces welfare for those excluded, and the negative externalities generated can harm those excluded
33
externality in small countries because the (benefits and) costs of the entire tariff are borne by the consumer and therefore exporters are not affected. This term can refer to the situation where a GSP beneficiary is discontinued from benefiting from a tariff preference on a given product that it originally enjoyed, when it has attained a certain competitive level for which the donor deems that the tariff preference is no longer justified. On a more broader level (and in conjunction with the notion of “self-election”), “graduation” can also refer to the situation whereby a developing country has reached a stage in its overall development that it would be no longer be appropriate to consider itself a “developing country.”
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as well.34 Therefore, if one agrees with Bagwell and Staiger that the purpose of trade agreements is to limit negative externalities that inevitably arise when countries implement their trade policies, then, it is difficult to disagree with the assertion of Grossman and Sykes that the term non-discrimination in the context of the Enabling Clause should be construed along the lines of the Panel’s reasoning and not that of the Appellate Body.35 As Grossman and Sykes put it in Chapter 10, “The political realist must ask whether eliminating the scope for negative externalities is worth the cost of fewer ‘donated’ GSP schemes.”36
3. Political/Systemic Grounds If the Appellate Body’s ruling and underlying rationale are difficult to reconcile on either legal or economic grounds, then one possible explanation is to justify them on broader systemic or policy considerations. In other words, the term nondiscrimination should not be interpreted restrictively in line with an economic perspective, but rather it should be construed flexibly in light of the systemic implications that otherwise may materialize and discourage donors from continuing to extend these tariff preferential arrangements to developing countries. The theory goes something like this: if developed countries are under no obligation to grant preferential treatment, then imposing burdensome and inflexible obligations on them might ultimately lead to the collapse of the Enabling Clause – the trumpeted cornerstone of S&D treatment in the multilateral trading system. Unfortunately, the Appellate Body’s decision also fails on political/systemic grounds on two counts: (1) it is not up to either a panel or the Appellate Body to determine what the appropriate policy regarding tariff preferences and S&D treatment should be, as those issues are best dealt with (and are within the competence of) the WTO membership, and (2) even if WTO adjudicatory bodies should be allowed the leeway to examine policy considerations in interpreting the legal texts of the WTO Agreement, the Appellate Body’s ruling can nevertheless be criticized for maintaining the status quo. India’s main argument that a developed country that has decided to grant preferences under the Enabling Clause must extend the preferences for that product to all developing countries (not including LDCs) may seem too stringent at first blush. However, according to the Panel, following a comprehensive analysis of the negotiating history of the Enabling Clause, this was the correct interpretation both on a legal and economic37 standpoint. One may advance the counter-argument that the result of the Panel’s findings may lead to disastrous consequences in the sense that developed countries may be disincentivized from extending tariff 34 35 37
See Grossman and Sykes, supra note 15, p. 32. 36 Id., p. 34. Id., p. 35. The Panel’s approach, according to Grossman and Sykes, supra note 15, p. 17, was to some extent (whether unintentional or not) consistent with an economic point of view.
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preferences through GSP schemes in the future. Even if this were correct, it should not be the place of either a panel or the Appellate Body to substitute its own policy judgment for that of the WTO Members – the decision makers of the WTO. In this respect, Article 3.2 of the Dispute Settlement Understanding (DSU) essentially circumscribes the role and authority of WTO adjudicatory bodies in the dispute settlement system.38 The Appellate Body has previously stated that the role of a panel or itself in dispute settlement is not to adopt authoritative interpretations of the covered agreements nor is it to amend the text of the agreements through rulings and interpretations, the authority of which lies exclusively within the domain of the WTO Members.39 Accordingly, if the Panel’s findings result in unexpected consequences, then it can be viewed positively to the extent to which WTO Members may be provided with the impetus to rethink the Enabling Clause and debate its underlying objectives and possibly clarify some of its more ambiguous terms through either the adoption of an authoritative interpretation or amendment pursuant to Articles IX:2 and X, respectively, of the Marrakesh Agreement Establishing the WTO.40 Moreover, how does one reconcile the EC’s acknowledgment that the Enabling Clause is a “fundamental objective[s] of the WTO Agreement”41 with the Appellate Body’s underlying concern that making the terms of the Enabling Clause too onerous might dissuade donors from granting preferential treatment in the first place?42 In other words, is it not reasonable to assume that the Enabling Clause is one of the instruments that is part of the balance of rights and obligations 38
Article 3.2 of the DSU reads as follows: The dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system. The Members recognize that it serves to preserve the rights and obligations of the Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law. Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements.
39
40
41 42
See, Appellate Body Report, United States – Import Measures on Certain Products from the European Communities, WT/DS165/AB/R, adopted 10 January 2001, para. 92. However, it is important to emphasize here that any criticism levied against the Appellate Body for perhaps going beyond the mandate circumscribed for WTO adjudicatory bodies under Article 3.2 of the DSU must be tempered by the relative institutional weakness of the decision-making power of the WTO. Unlike domestic courts in constitutional democracies, the institutional structure of the WTO does not make it conducive for the Appellate Body to benefit from a comparable “dialogue” of sorts between the judiciary and the legislative branches, whereby the legislature modifies laws, regulations, or practices in the aftermath and in accordance with a court ruling. In this “dialogue,” courts will be less inclined to “legislate” because they are reasonably assured that the legislative branch will act accordingly. In this regard, to my knowledge, since 1995 there has yet to be an adopted official authoritative interpretation or an adopted amendment to any of the multilateral agreements annexed to the WTO Agreement. For a discussion on the problems of institutional structure of the WTO, see, e.g., John H. Jackson, The Changing Fundamentals of International Law and Ten Years of the WTO, Journal of International Economic Law 8 3:15 (2005). See, supra note 3. See Appellate Body Report, European Communities – Tariff Preferences, WT/DS246/AB/R, para. 114, for a case in point of the Appellate Body’s concern.
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struck between developed and developing countries, and in its absence, developing countries would presumably not have agreed to (and currently agree to) other agreements struck during the Tokyo Round, Uruguay Round, and the ongoing Doha Development Round?43 As alluded to above, it would seem that the subsequent practice of the donor countries might have influenced the Appellate Body’s ruling. As Grossman and Sykes also point out, developed countries from the start wasted little time conditioning preferences to their respective political ends by dangling the proverbially “carrot and stick” in front of developing countries: no tariff preferences for uncooperative developing countries and tariff preferences for “team players.” The manner in which preference-granting countries have designed their respective GSP schemes ever since the 1971 Waiver Decision was formally adopted by the contracting parties and how these GSP schemes have evolved over time cannot be ignored. It is more than likely that the Appellate Body was influenced by the subsequent practice of preference-granting countries of conditioning their tariff preference schemes not only for political ends and non-trade matters but also with respect to the scope of product coverage as well as the exclusion/inclusion of beneficiaries in their arrangements. Unlike the Panel, which did not seem to pay any attention to the manner in which GSP schemes were spawned since their inception, the Appellate Body seemed to have accepted the evolution of the tariff preference arrangements to what they are today. It is hard to imagine that the developing countries, who were the proponents of differential tariff preferences from the initial discussions in the second UNCTAD, envisioned the system that has evolved today. In other words, in addressing the issue of whether the EC Drug Arrangements are consistent with the provisions of the Enabling Clause, the Appellate Body in principle started its analysis from the perspective that the design of GSP schemes as they exist today is a fait accompli. The subsequent practice of tariff preferences and the way they have evolved and crystallized as fait accompli within the multilateral trading system (this, is assuming of course, that most of the GSP schemes may be inconsistent with the terms of the Enabling Clause – which is what is assumed here) are not unlike the practice that has evolved with respect to preferential trading agreement under Article XXIV of the GATT 1994. Also, it would not be precise to argue that developing countries were complicit by turning a “blind eye” to the de facto practice of GSP schemes by not challenging them sooner, because it is only 43
Interestingly, the Appellate Body dismissed the Panel’s assumption and concern that sanctioning schemes such as the Drug Arrangements would lead to the GSP system’s demise as it would revert back to the specialized preferences favoring selected developing countries that marked special and differential treatment prior to the 1971 Waiver Decision (see para. 156 of the Report). Contrastingly, it seems that the Appellate Body was more concerned with the demise of the system if some differential treatment based on objective criteria was not allowed.
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recently that the larger developing countries, like Brazil and India, have begun to assert their rights more aggressively, especially during this current round. A major concern that must have been in the back of the minds of the Appellate Body judges deciding the dispute was the purported systemic implications of upholding the Panel’s finding that the term non-discriminatory required GSP schemes to provide identical tariff preferences to all developing countries without differentiation (except for the implementation of a priori limitations), as it related to the thorny issues of “self-election” and “graduation.” If “developing countries” meant “all developing countries,” then China, Korea, and other similar developing countries that have the power to affect significantly the terms of trade, create trade diversion, and compete head-on with developed countries would in principle also receive tariff preferences. Even if these considerations influenced the Appellate Body’s decision, a sound interpretation based on appropriate legal grounds as well as sound economic theory would have (it is hoped) provided the necessary impetus for WTO Members to review the Enabling Clause in a serious and comprehensive manner, rather than just accepting the status quo. In this regard, as mentioned above, Low emphasizes the fallacy of treating developing countries as a homogeneous group.44 The problem of treating developing countries as a homogeneous group and the related quandary of “graduation” suggest that this issue must be addressed in the foreseeable future in order to acknowledge formally what everyone already knows: there are different stages of development, and developing countries are not homogeneous. However, this in no way suggests that “similarly situated” developing countries inflicted with a specific socioeconomic problems that produce harmful effects should be treated differently from those countries hampered with other types of serious social ills and categorized into a subcategory of developing countries based on “objective criteria.” Ostensibly, the Appellate Body may have foreclosed an opportune debate on these issues for the time being. Although many developing countries understandably would be reluctant to change the status quo for various practical and legitimate politically sensitive reasons, this concern will likely change as the margin of preferences continues to erode with the conclusion of another trade negotiation round. Whatever the original intent was for Enabling Clause and its precursor, today GSP schemes are not generalized in terms of product coverage of interest to developing countries, as a priori limitations seem to have become a main component of the major donors’ schemes. Non-reciprocity has crystallized into a perverse form of reciprocity in the sense that developed countries have conditioned preferences in exchange for compliance with non-trade matters; in addition, it has undermined developing countries’ ability to negotiate on a level playing field with developed countries on products that are of particular interest to them by disincentivizing 44
See Low, supra note 11, pp. 7–8.
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them from participating actively in (past) trade reduction negotiations. Finally, non-discriminatory, as a principle of GSP, has been watered down to the point that deviation among developing countries is permitted under certain conditions. Trade economists, lawyers, and policy analysts alike have also criticized the Enabling Clause and preferential tariff treatment in general. For instance, Kessie states that the notion of non-reciprocity for developing countries has essentially legitimized the practice of “free-riding,” and he also points out that some commentators have questioned whether the Enabling Clause should remain, as it has failed to integrate most developing countries within the multilateral trading system.45 Lim˜ao and Olarreaga have proposed a novel approach whereby tariff preferences would be replaced by a fixed import subsidy, thereby addressing the problem of the continuous erosion of the margin of preference on products exported by developing countries as WTO Members negotiate further MFN tariff reductions.46 Grossman and Sykes argue that the overall benefits produced by GSP schemes have been relatively insignificant because of the costs associated with rules of origin compliance, a priori exclusions of products deemed “sensitive” by donor countries, and the overinvestment in product sectors that are temporarily eligible under GSP schemes, which in turn, hinder trade liberalization in those eligible countries once they have reached a competitive level and then see themselves “graduated” out of the schemes.47 Like Grossman and Sykes, Marchetti in Chapter 4 illustrates how, in the case of trade in services, developing countries that choose to open up their economies benefit from higher rates of economic growth in comparison to those countries that choose to be more protectionist.48
C. Conclusion The Appellate Body’s ruling in EC – Tariff Preferences is difficult to justify on legal grounds as tariff preferences that discriminate among “similarly situated” developing countries are not supported either by a reasonable interpretation of the text of the Enabling Clause nor are they tenable in light of its negotiating history. The decision is also difficult to defend on economic grounds as it disregards the potential harm that is caused by trade diversion and the negative externalities that are produced for those developing countries excluded from the specialized arrangement. Essentially, the Appellate Body’s ruling on the facts of the case can be viewed as a political compromise of sorts: on the one hand, it did not prevent the EC and other donor countries from granting different tariff 45 46
47 48
See Kessie, supra note 10, pp. 7–8. See Nuno Lim˜ao and Marcelo Olarreaga, Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization, in this volume of columbia studies in WTO law and policy. See Grossman and Sykes, supra note 15, pp. 29–31. See Juan A. Marchetti, Developing Countries in the WTOServices Negotiations: Doing Enough? in this volume of Columbia Studies in Law and Policy.
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rates on products from different developing countries, provided such differential treatment is available to all similarly situated developing country beneficiaries, and on the other hand, it found the EC’s Drug Arrangements to be inconsistent with the Enabling Clause because they were not made available to all similarly situated developing countries. Ultimately, however, the Appellate Body ruling also fails on political/systemic grounds. Even if the practical effect of this decision might make it harder for preference- granting countries to justify their GSP schemes that treat developing countries differently, the Appellate Body’s ruling nevertheless has done relatively little to provide predictability to the GSP system or, more important, provide the much-needed impetus for WTO Members and, in particular, developing countries to question whether today the Enabling Clause still fulfills its original mandate.
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PATRICK LOW
12 Is the WTO Doing Enough for Developing Countries?
I. Introduction In a fundamental sense, the answer to the question in the title of this paper is doubtless negative. But an adequate analysis of why this is so and what might be done about it is impossible without asking another question: are developing countries doing enough for themselves in the WTO? The assigned title of the paper implicitly assumes that the contribution of the WTO to developing countries – whether negative or positive – is in the hands of others. The additional question posed here presupposes that developing countries can also influence the contribution that the WTO makes to their growth and development. Both questions inform the analysis in this paper. Some commentators and writers on developing country issues in the WTO tend toward the misleading assumption that developing countries can be treated as a homogeneous group. It has become increasingly obvious that important differences in interests and priorities exist among developing country WTO Members. This may be less true for the least-developed country (LDC) group, identified on the basis of a series of economic and social indicators by the United Nations. But even among LDCs, priorities are not always the same. Some have suggested that emphasizing differences among developing countries is a modern variant of a divide-and-rule strategy. But in reality developing countries
