‘WTO and South Asia: Strategising beyond Hong Kong’

Centad and UNDP-Colombo organised a two-day regional consultation on ‘WTO and South Asia: Strategising beyond Hong Kong' in New Delhi on April 20-21, 2006 to deliberate on the current state of negotiations and to provide inputs to ensure that development is enshrined in future negotiations.

Over 100 leading South Asian trade experts, policy think tanks and civil society representatives including 50 participants from Bangladesh, Pakistan, Sri Lanka and Nepal congregated in New Delhi to voice their concerns on the current state of trade negotiations at the WTO. Delegates expressed their disappointment on negotiations in critical issues relating to agriculture, industrial market access and services. They also expressed their concern about the consultative nature of the trade negotiations.

The conference was inaugurated by Sayed Alamgir Farrouk Chowdhury, former commerce secretary, Bangladesh. The keynote address was delivered by Prof Jayati Ghosh, chairperson, Centre for Economic Studies and Planning, Jawaharlal Nehru University, India. The valedictory address was presented by Prof C P Chandrashekhar of the Centre for Economic Studies and Planning, Jawaharlal Nehru University, India.

Key issues raised in the inaugural speech:

• There is still confusion between “no deal” and exploring small incremental advantages.
• Globalisation did impact GDP and growth. Liberalisation boosted world trade from US$ 316 billion in 1970 to US$ 8400 billion in 2004. Global GDP increased from US$ 2800 billion to US$ 36000 billion in the same period. A moot question is: Where have the benefits gone?
• Developed countries with 15 percent of the world’s population account for 77 percent of GDP, 64 percent of world trade flow and more than 70 percent of FDI. Least developed countries (LDCs), with 11.5 percent of the world population account for 0.7 percent of GDP and the same in trade.
• The benefits of trade are garnered by developed and developing countries while LDCs are left behind. However, bad governance and lack of transparency have also played a role in the plight of LDCs.
• South Asia is home to 21 percent of the world’s population with per capita income of US$ 460. The total income here is about 2 percent of the world’s total income. Forty-one percent of South Asia lives on less than one dollar a day.
• On the positive side, South Asia is growing more than the rest of the world. It grew at 5.5 percent in 2002-03 compared to the world average of 2-3 percent.
• As trade negotiations proceed, one must understand that it is no longer a bipolar world. Developing countries amongst themselves have different positions on a large number of issues
• South Asia lacks a common negotiating position.
• LDCs are not only looking at markets of developed countries but also developing countries.
• LDCs are isolated from negotiations in certain areas, as for instance, services.
• The South Asian Association for Regional Cooperation (SAARC) did not organise a single trade meeting prior to negotiations.
• Divergence in interests and positions were revealed in duty free quota free (DFQF) negotiations, when select South Asian countries did not support full DFQF.

Key issues raised in the keynote address:

• A South Asian perspective is lacking since countries are negotiating purely individual positions.
• During negotiations it is necessary to reflect on the macroeconomic scenario and understand the economic background against which post Hong Kong negotiations will be occurring. We are living in a different world even compared to the 1990s. Since 2002 we are experiencing a commodity price boom and this has changed the response of a number of developing countries - even in the G20 - to developed country protectionism and subsidies. We are in a boom period but this is short-lived.
• We are also entering a period of a significant decline in manufacturing prices, largely on account of significant capacity creation in developing countries like China. A demand- supply gap will be created if the US economy slows down. This context is significant for Non-agricultural market access (NAMA) negotiations, where developing countries like India are confident that they can face global competition. We have to anticipate substantial fall in prices and then ensure that our manufacturing sector is protected.
• Another issue in the global economy is that of Regional Trade Areas (RTAs) which are seeing explosive growth. South Asia is not a part of any significant RTA. The South Asian Free Trade Area (SAFTA) has also not picked up. However, India’s important trading partners are engaged in RTAs, for example, ASEAN countries with the US and EU. These RTAs contain investment rules, competition rules and TRIPS plus rules, which are all WTO plus conditions. Once developing countries make concessions within RTAs, resistance to these issues within the WTO will decline. This is a significant concern.
• The global financial system is going through a major transition. The surpluses of developing Asia are financing US deficits. Developing countries are trying to keep exchange rates at competitive levels, and hence buying dollars. Asian governments own 42 percent of US treasury bills and are buying two-thirds of the new bills. Given that the US economy plays a major role in international trade, developing countries keep financing deficits of the US to keep exporting to the US.
• Given these changes, there are some clear constants. One being the agrarian crisis, increasing indebtedness and resultant suicides in India. India cannot afford to be complacent about agriculture, yet one clear indication of its complacency is its emerging obsession with market access instead of protection of domestic farmers. Interestingly, even when global commodity prices rise, farmers do not benefit. Due to high concentration of a few agricultural multinationals, marketing margins of transnational MNCs are high, while the state of farmers does not change
• Services represent a different issue altogether. The Indian government thinks services are the panacea for development, employment etc. Hence it is conceding a lot in services. Services may not be so development oriented. An internal brain drain is occurring where skilled people are moving towards easy income in BPOs and students want to do less of basic science or research. In a country that has still not completed its development model, this is a concern. Services have also led to conflict of interests. Developing countries no longer have a common negotiating position. Services clearly reveal that being obsessed with exports may not be a good long-term development strategy.

This should lead India to rethink its negotiating strategies in the WTO. We are into clear segments of NAMA, agriculture and services and the negotiating mandates are set, resulting in developing countries being put into a box. In addition, as the individual negotiating issues become more specialised, governments compartmentalise their negotiations, but these departments don’t interact with each other and governments end up lacking a clear and holistic negotiating position.

Key issues raised in the plenary address:

• There is urgent need to assess what the previous WTO rounds delivered. The World Bank, International Monetary Fund and other international organisations used quantitative models that predicted major gains for developing countries. One needs to study whether these gains have occurred or whether developing countries have allowed the progress of an agenda that is laid by developed countries.
• In agriculture, developing countries are still caught in trivial issues such as trade distorting subsidies while allowing massive box shifting. In services, while small changes are made in the text, a completely bracketed text that is unacceptable to developing countries is allowed to pass through.
• Recent rounds have raised questions about the democratic nature of the WTO. Quite often agreement proves elusive because of differences between two members - the US and the EU. It takes fewer countries to agree to pass an agreement. The five interested parties (FIPs) of which Brazil and India are a part, was a clear act of co-option. This is justified by saying that it is better to be ‘in’ than ‘out’, as if only three countries are engaged in negotiations for the rest of the world.
• Also, to signal that the rounds were of more importance to developing countries, the US replaced Robert Portman, the US Trade Representative, with a deputy, signalling a lesser interest in its conclusion.
• In this context it is important to understand the economic background under which these negotiations occur. The country that is not competitive in trade is still the home of the world's reserve currency. The elite of the world, who are interested in ensuring that their dollar assets are safe, have a deep interest in preserving the value of the dollar. Emerging economies have also increased their dependence on the US ; 60% of India 's services exports and 60% of its manufacturing exports go to the US .
• From 1990 to 2003, 62% of India 's growth was in services, which is highly employment inelastic.
• Developing countries are making unequal agreements. Even previous experiences with liberalisation have not shown the way. Africa has liberalised and states lack capacity, Latin America liberalised facing currency and debt crisis and there is a resurgence of anti-neo-liberalism. Asia , even after the financial crisis, is still hopeful of benefiting.
• Policy positions are not open. Developing countries should question whether they are deriving any gains from the WTO. If they are not, they should rethink their engagement strategy.

Main themes

The main theme of the conference was distributed over six technical sessions: agriculture, NAMA, Services, Development Dimensions, Trade Policy Formulation, and The Road Ahead

Experts presented several papers at each session. The following is a summary of discussions held in each session.

Agriculture

The session on agriculture focused on the following key questions:

• Is the present framework and negotiations providing a level playing field for countries in South Asia?
• How can South Asia address flexibilities, special products and special safeguard mechanisms?
• What disciplines will tackle the distorting effects of both export subsidies and domestic support?
•   Will the present negotiation on market access and food aid ensure a food secure South Asia ?

The session started with a summary of the current state of negotiations and key negotiating interests of developing countries. Speakers pointed out that the subsistence nature of agriculture, sticky global prices, and the reduced ability to target non-tariff barriers (NTBs) are reasons for developing countries to continue to be defensive in agriculture. Developed countries are unwilling to give much flexibility to developing countries in special products (SP) and special safeguard mechanisms (SSM).

Some key points made in the agricultural session:

Special products and special safeguard mechanisms: Have the interests of South Asia been taken care of?

• Concerns about market access of so-called high value products and horticulture is unfounded and lacks rural connect.
• Developing countries should call for elimination of domestic support.
• Definitional issues in flexibilities, for instance that of rural development, is critical in ensuring success in special products and special safeguard mechanism.
• Lack of information is a critical handicap in the negotiating capacity of developing countries.

Food security: South Asian LDC perspective

• There is no conclusion to the debate on whether reduction in subsidies will cause food bills to rise in net food importing countries like Bangladesh.
• Non-emergency food aid needs to be disciplined.
• Duty Free Quota Free access for LDC agri-products needs to be effectively ensured.
• Infrastructural investment in food production is necessary, for instance Sanitary and Phytosanitary compliance facilities, certification training and preservation facilities.
• Aid for trade in infrastructure and training is critical.

Non-Agricultural Market Access (NAMA)

The session on NAMA focused on the following key questions:

• How can South Asian countries ensure flexibility in tariff reductions in NAMA?
• How serious is the issue of preference erosion for South Asian countries? What are the solutions to this problem?
• Will the current negotiations tackle the issue of tariff escalation and tariff peaks?
• How can non-tariff barriers be tackled within the Doha round?

The NAMA session gave the state of play in negotiations and a summary of the three formulae for tariff negotiations that were on the table: the Argentina-Brazil-India (ABI) formula, the Caribbean formula and a Swiss formula with coefficients in plural.

Speakers said that developing countries should negotiate for a milder tariff reduction methodology to cut their tariffs and a stricter methodology to cut tariff rates of developed countries to tackle the problem of tariff escalation and peaks especially for products of interest to developing countries. At the same time, developing countries must have “adequate policy space’’ to use industrial tariffs for their development purposes.

The ABI approach and the Caribbean approach, which take into account the existing tariff structures of individual countries, were considered more apposite to fulfil the mandate of Paragraph 14 of the Hong Kong Declaration. However, the current state of play indicated that developing countries are not pushing for the same. One of the speakers urged staunch opposition to the pure Swiss formula with coefficients in plural and keeping the Paragraph 8 flexibilities reiterated in Hong Kong as a stand-alone provision independent of the tariff reduction formula.

NTBs were identified as the most challenging and the least discussed area in WTO. Participants felt that NTBs are not only agreement specific but also product and country specific. They felt that NTBs should not be linked to tariffs. There was consensus on the need to devise a way to classify NTBs and formulate a guiding principle for implementation. The optimal balance between NAMA and agriculture had to be achieved during negotiations.

India was accused of following a dual policy as it took milder steps in multilateral trade agreements and strong ones in WTO.

Preference erosion was recognised as vital for LDCs, in particular for Bangladesh . The estimated losses due to preference erosion for Bangladesh amounted to US$222.million. The adverse implication for LDCs in the form of preference erosion was a source of discomfort for participants. Some suggested that policy measures on preference erosion should include adjustment financing, targeted support for affected products, etc. For a solution on NAMA issues, the chair implored the LDCs to rectify the internal causes and to enhance participation of delegates from respective countries.

The key points of the presentations in the NAMA session were as follows:

Tariffs and flexibilities in NAMA and South Asia

• The strategy of developing countries should be to attain adequate policy space.
• Developing countries should negotiate for a milder tariff reduction methodology for cutting their tariffs and a stricter methodology to cut tariff rates of developed countries to tackle the problem of tariff escalation and peaks.
• Developing countries must adopt the ABI or the Caribbean formula for tariff reduction and oppose the adoption of the pure Swiss formula with coefficients in plural.
• Developing countries must keep the flexibilities a stand-alone provision.

Non-Tariff Barriers: What are the bottlenecks?

• NTBs are the most challenging area.
• The issue of NTBs is the least discussed in WTO.
• There is an urgent need to device a way to classify the NTBs, which are not only agreement specific but also product and country specific.
• The evolving nature of NTBs called for guidelines on the time of implementation.
• The suggestion of linking tariff with NTBs was not appreciated

Preference erosion and LDCs: Is it a lost cause?

• Existing GSP (General System of Preferences) schemes offered by developed countries provide a competitive edge to the products of LDCs.
• Preference erosion is vital for LDCs, particularly for Bangladesh; estimated losses due to preference erosion for Bangladesh amounted to US$222 million. Suggested policy measures on preference erosion included adjustment financing, targeted support for affected products, etc.

Services

The session on services focused on the following key questions:

• What does the services architecture mean for South Asia?
• How can the ambition difference between South Asian countries be balanced?
• What can LDCs gain from services negotiations?
• Can negotiations on GATS rules progress, particularly to strike a balance between domestic regulation and market access?

The services session described the state of play regarding services negotiations. A summary of the plurilateral requests was also presented. Speakers expressed concern about LDCs being sidelined in the services negotiations.

The key points of the presentations in the services session were as follows:

Plurilateral approach in services negotiations: What has it delivered?

• The outcome of the HK ministerial mirrored the low priority accorded to services in the negotiating agenda.
• Any progress in this area would be dependent on improvements in domestic regulations, governance and optimal resource allocation.
• Examples of sectoral plurilateral requests (telecommunications, financial services, construction services, environmental services, computer and related services) exhibited that the thrust was on Mode 3.
• Scheduling the service list was a complicated task.
• Skill based categorisation should be changed to function-based categorisation.
• Liberalisation of the health sector was welcomed.
• Mechanisms should be explored and more thought should be given to formulation of common norms rather than “harmonisation”.

Trade in services and LDCs: What can South Asian LDCs gain?

• LDCs are marginalised in services talks.
• LDCs may free ride or they will be bypassed.
• Mode 4 proposal needs to be developed keeping in mind skill-sets present in LDCs.
• Lack of a Mode 4 proposal reflects failure on the part of government officials and researchers.
• Subsidy negotiations should be concluded before further action is taken.
• Trade off between Mode 3 and Mode 4 is apparent.
• LDCs should protect public services.

Development Dimensions

The session on development dimensions focused on the following key questions:

• Do Duty Free Quota Free (DFQF) market access for LDCs, elimination of subsidies on cotton and ‘aid for trade’ constitute development achievements at Hong Kong?
• Does South Asia gain from DFQF market access?
• How best can Special and Differential Treatment (S&DT) provisions in the WTO be operationalised?
• How can negotiations be more development oriented?

Speakers were concerned about the development content of the current negotiations. They said that DFQF access for the products of LDCs has remained a pious wish through the four decades of marginalisation of LDCs. This shows the lack of negotiating capacity of the developing world on one hand and the insensitive nature of the developed world on the other. The US was unwilling to provide DFQF access to LDCs in Hong Kong . If the vital products of LDCs find a place in the exclusion list of 3%, the DFQF would have no meaning. A 100 percent DFQF access was suggested.

While commenting on technical assistance programmes and LDCs, one speaker expressed concern about the diminutive benefits to LDCs. He opined that such programmes benefit the donor countries more than the recipient countries. This is because the issue of capacity development of the LDCs has not been given priority by most donor countries.

The picture for Bangladesh has been static for the last one-and-a-half decades with only six items of export constituting 90 per cent of its export earnings. Similar is the case of Nepal , which has paid a heavy price for being a WTO member.

Trade Policy Formulation in South Asia

The session on trade policy formulation focused on the following key questions:

• How critical is trade policy formulation in participatory multilateral trading?
• What is the role of sub-national actors in the trade policy process?
• Are negotiators negotiating for development? Do grassroots voices go unheard?
• What role can South Asian civil society organisations play in trade policy formulation?

The first presentation stressed that while the international system is relatively well documented and understood, the complex maze of national level systems, institutions and actors, coordination and consultative mechanisms, and domestic implementation issues have not been adequately researched. Given the importance of trade policies for economic development in developing countries, it is important to reflect on domestic/internal capacities relating to institutional and consultative arrangements.

On the issue of how to build the capacity of sub-national actors in trade one speaker pointed out the need to distinguish between sub-national government and sub-national actors. Building the capacity of sub-national stakeholders would enable better compliance with international trade obligations by putting in place a mechanism for benefiting from trade defence measures. The focus areas for sub-national capacity building were categorised on the basis of sectors, responses and region. The likely list of priority sectors for capacity building comprised agriculture, marine products, textiles and clothing and SMEs. It was however pointed out that this may not be the recipe for all South Asian countries.

A speaker said that an implementation of policies at the centre revealed the “myopic” view of the government. The absence of flow of information across ministries was also seen as an area of concern.

The Road Ahead

This session marked the finale of the two-day consultation. The richness and diversity of the issues discussed over the two days was exhibited in the discussions that took place in this session.

While discussing the possibility of a collapse of the HK round, the chair cautioned participants against too readily accepting that “no deal is better than a bad deal”; one must not forget that “something is better than nothing”.

An important issue was the uneven distribution of growth within and across countries. Capacity building was crucial in this regard.

One of the participants said all South Asian countries need to be protected from the WTO, which he called the ‘Worst Threat Organisation'.

Some participants suggested that commonalities needed to be identified in order to formulate a more equalising strategy encompassing a democratic development agenda in trade negotiations.

There was consensus on some broad issues:

• The outcome of the Hong Kong Ministerial appears dubious and does not take into consideration the development focus of the round.
• It is possible to develop a “unified basket’’ of priorities for South Asian countries that will ensure a cohesive negotiation strategy.
• The change in the consultative process seen in the last decade has revealed the constructive role played by civil society actors. However, the process should be more transparent, coherent, and encompassing. In addition, consultation should feed into the policy process more formally.

(May, 2006)