Published in The Financial Express on Sunday, 7 December 2014.
Post-Bali WTO: Safeguarding LDC interests
Mustafizur Rahman and Hosna Jahan
LDCs constitute a significant group within the World Trade Organisation (WTO). Thirty four of the forty nine Least Developed Countries (LDCs) are members of the WTO, which has a total membership of 160. Eight LDCs are also in the process of accession. It is therefore important that negotiations in the WTO reflect their concerns and the decisions taken advance their cause of strengthened global integration. Securing LDC interests in the post-Bali work programme and the negotiations in Geneva is thus of critical importance to the LDCs.
It is well known that, many trade-related issues of priority interest to the LDCs have continued to remain under discussion but unaddressed over the past years, particularly in view of the non-binding nature of the Special and Differential (S&D) Treatment provisions designed for them.
The Doha Development Round (DDR) negotiations, which had been initiated with much promise and ambitious work programme, got stalled because of formidable differences among the members on a number of key issues. After five years of impasse, the Bali package, which targeted only the “low hanging fruits”, was indeed able to infuse a new life into the stalled Doha Round, and in a way helped salvage the WTO as a negotiating forum and fulcrum of the multilateral trading system.
The Bali package with its four pillars of Development and LDC issues, Trade Facilitation, Agriculture, and Cotton — concerned a number of areas where LDCs had both offensive and defensive interests. It was expected that the Work Programme agreed in Bali would be followed by subsequent negotiations in Geneva to arrive at solutions that will advance LDC interests. However, regrettably, one year after Bali, there is hardly anything to show for as regards the 10 decision points adopted in Bali.
LDC package in Bali
The LDC package focused on four issues: (a) Duty-free and Quota-Free (DF-QF) market access, (b) Preferential Rules of Origins, (c) Operationalisation of the services waiver and (d) Monitoring Mechanism on Special and Differential Treatment. LDCs expected concrete decisions in each of the areas. However, in the end, the Bali outcome failed to meet their expectations.
Duty-free and quota-free market access
DF-QF treatment of LDC goods was of critical importance to the LDCs, since it was expected to offer secured and predictable market access ‘on a lasting basis’ for all products of export originating from all LDCs. Implementation of the Hong-Kong Ministerial’s DF-QF decision through a commercially meaningful market access was a key demand of the LDCs. In spite of the various GSP schemes providing DF-QF treatment to LDC products, important LDC exportables (such as textiles) continue to face high tariffs in some of the developed country markets, most notably in the US. For Bangladesh and Asian LDCs, the issue of DF-QF is particularly important because apparels, their major export, is not covered under the US GSP scheme. In case of Bangladesh, only 0.5% of the total exports to the US is covered under the US-GSP scheme; duties imposed at import stage on apparels from Bangladesh was about US $750 million in 2013. In this background, the decision in Bali merely reiterated what was decided at the Hong Kong Ministerial: that is urging the members who have not provided 97% to improve their existing coverage by the next WTO Ministerial meeting and notify their respective DF-QF schemes for the LDCs.
In reality, the Bali decision on DF-QF delinks the original Hong-Kong decision, where members were asked to provide 100 per cent DF-QF for products originating from LDCs and 97 per cent only if members were facing difficulties. Furthermore, in Bali, the Committee on Trade and Development (CTD) was asked to continue to undertake annual review of the steps taken by members in view of the DF-QF decision. No specific and transparent timeline was mentioned regarding the progressive inclusion of the ‘three per cent exclusion list’; nor was any concrete modality spelt out for Members who said they faced difficulty in implementing the Hong-Kong decision in order to ensure that they provided ‘increasingly greater market access’ to the LDCs prior to the next WTO Ministerial.
It is to be noted that, the post-Bali work on DF-QF has been progressing in Geneva without any meaningful engagement on the part of members. The difference in the perspectives of LDCs that are beneficiaries of the African Growth and Opportunity Act (AGOA) and Asian LDCs continue to persist. The only notable development was the adoption of Chile’s DF-QF scheme for LDCs, which granted DF-QF access for 99.5 per cent of its tariff lines; however, as is known, the average tariff in Chile is already quite low. WTO’s CTD is mandated to undertake annual review of the steps taken by Members in providing DF-QF access to the LDCs. This annual review will take place at the end of November 2014.
Preferential rules of origins
Preferential rules of origins (RoOs) are key to ensuring that LDCs are actually able to benefit from the market access provided as part of the DF-QF initiative. This is because, the onerous domestic content and processing requirement often makes it difficult for the LDCs to realise preferential market access opportunities. LDCs argued that the domestic value addition requirement criteria should be defined in such a manner that it takes cognisance of domestic supply-side and productive capacities of the LDCs and are easy for them to comply with.
The Bali decision contains, for the first time, a set of multilaterally agreed guidelines for the RoOs that the members should apply to their non-reciprocal preference schemes for the LDCs. This was expected to make their exports easier to qualify for preferential market access. However, the decision remains in the form of non-binding guidelines, couched in the best endeavour language of ‘should’. Members were asked to consider allowing cumulation facilities to the LDCs and the documentary requirements for compliance were to be simple and transparent. The Bali decision requires the Committee on Rules of Origin to annually review the developments as regards preferential rules of origin. This was held in October 2014. LDCs have tabled a communication outlining the challenges faced by them in complying with preferential rules of origin.
In line with the Bali decision, where members were given the freedom ‘to develop or build their individual RoO which could be in the form of ad valorem percentage criterion, change of tariff classification and specific manufacturing or processing operation (or a combination of these)’, LDCs proposed that the percentage level should be set at 15-25 per cent depending on the product categories reflecting the global value chains and adequate to the LDCs’ industrial capacity. They also requested that transport costs of input materials should be allowed to be adjusted. In this communication, LDCs have pointed out that most of these practices are already contained in some FTAs. However, LDCs need to do their homework and be more specific in identifying markets where they want a change in rules of origin requirements. Hopefully, in the upcoming discussions the submission by the LDCs will be taken cognisance of through appropriate follow-up actions.
Operationalisation of the Services Waiver
As is known, the service sector has become a key driver of growth and development in the LDCs. In 2013, share of services accounted for about 42 per cent of the LDCs’ combined GDP. However, LDCs’ export only 0.7% of global commercial services (an estimated value of US $31.5 billion), mostly in the areas of travel, communications and other services. Furthermore, GATS Mode 4 (movement of natural persons) is a key area of interest to the LDCs, and particularly Bangladesh. In 2012, LDCs received US $30.6 billion as remittance (which is 5.8% share of the global migrant remittance), almost half of which is contributed by Bangladesh. In Bali, members recalled the Waiver in Services decision of the Eighth Ministerial, which allowed a derogation from MFN obligations as a modality for special and differential treatment, and which was to be accorded to services and service suppliers from the LDCs. Members instructed the WTO council for Trade and Services (CTS) to initiate a process aimed at promoting expeditious and effective operationalisation of the LDC service waiver, with provisions for periodic review. CTS was asked to convene a high-level meeting six months after the submission of a collective request by LDCs, identifying the sectors and modes of supply in which they would like to receive preferences. Developed, and developing country members in a position to do so, were asked to indicate “sectors and modes of supply where they intend to provide preferential treatment to LDC services and service providers”. Members have also been asked to provide technical assistance and capacity building support to the LDCs to take advantage of the services waiver.
LDCs tabled their collective request in July 2014 indicating the type of preferences they would like to have and identifying the sectors and modes of supply where they have particular interests. The request makes the point that the most formidable market access as well as national treatment restrictions were associated with mode 4. The submission lists some horizontal points across all sectors, including creation of a special temporary entry visa quota for LDCs, removal of restrictions on the category of contractual service suppliers and independent professionals, residency requirements, ENT and labour market tests, conditions on local hires and other market entry barriers. As regards, services ‘non-tariff barriers’, other requests made include: preferential treatment for LDCs on licensing/work permit/visa fees, recognition of qualification of LDC professionals and accreditation of LDC institutions. However, after submission of the collective request, there has been no concrete progress. Indeed, no country has granted voluntary preference to the LDCs since the adoption of waiver in 2011. A Services Council meeting is scheduled at the end of November 2014, where LDCs are expected to present ideas as to how they would like the high-level meeting to be organized. At present, WTO Members are mute about the schedule of the high level meeting. There has been no indication on the part of developed countries as to the offers to be made by them. LDCs are pursuing that this be held in mid-January 2015.
Monitoring mechanism on special and differential treatment
A monitoring mechanism under the S&D provisions, which will assess the utilization of preference treatment by the developing countries and LDCs, is perceived to be of high interest to the LDCs. In Bali, members adopted the decision to establish a monitoring mechanism, which was to serve as ‘a focal point to analyse and review the implementation of the S&D provisions’. The mechanism may make recommendations for consideration of actions to improve implementation of the relevant S&D provision including, if necessary, launching of negotiations in the relevant WTO body. The decision does not mention any time-bound commitment regarding consideration of the mechanism’s recommendations to the relevant body. The timeline of review of the mechanism (three years after its first formal meeting) is also a rather protracted one. WTO’s CTD will have a dedicated session for monitoring mechanism on S&D treatment at the annual review meeting, which is to be held at the end of November 2014.
Trade Facilitation Agreement (TFA)
As is known, Trade Facilitation (TF) was a key new element in the Bali package. This was one of the four “Singapore issues” which was brought within the ambit of WTO negotiations for the first time. Major objectives of TF included: accelerating customs procedure, reducing costs, bringing clarity, efficiency and transparency in customs dealing, reducing bureaucracy and corruption, and promoting the use of modern tools and technology at customs clearance points. While it was true that addressing “at the border” and “behind the border” constraints could potentially benefit the LDCs, there were a number of concerns in this regard. Many LDCs and poor countries were not demandeurs in this area mostly because LDCs were apprehensive that the TF commitments would turn out to be onerous and could lock them into costly commitments. Some developing countries with weak export capabilities also feared that trade facilitation would only contribute to increasing imports, but do little to tackle supply-side constraints affecting exports, and thus, was likely to adversely affect their trade balance. Furthermore, TFA does little to reduce trade costs since other factors, such as internal transport cost, weak infrastructure, lack of institutions and weak trade governance, account for lion’s share of total trade.
The TF contains a set of landmark provisions allowing for flexibility in the implementation timeframe, and linking commitments to help build the required trade related capacity through technical assistance. Developing countries and LDCs are allowed to self-define their implementation period within three categories of implementation modalities. The text of TFA finalised in Bali have clear timeframe for ratification starting from December 2013 (no later than 31 July 2014) and ending with acceptance of the protocol by 31 July 2015. Developing countries and LDCs have been given grace periods to implement the TF ranging from two, six to eight years. However, members missed the (first) deadline for the adoption of the protocol of amendment on the TFA in July 2014 in view of the stance taken by India. Whilst the stalemate now appears to have been resolved, thanks to the understanding between the USA and India, LDCs are keen to have a clear indication as regards the quantum and the nature of Aid for Trade Facilitation and other forms of support that will be required to help them comply with their TF obligations.
Agriculture: Public stockholding for food security purposes
The Bali outcome on agriculture focused on four distinct areas: ranging from relatively uncontroversial expansion of the list of general services, tariff rate quota and export subsidies, to much more contentious issue of public stockholding for food security purposes. Over the last seven years, agriculture and food prices have been both high and volatile, often exacerbated by weather-related production shortfalls and other crises. The issue of public stockholding is important for all the LDCs as most of them are net food importing countries. In 2013, basic food items accounted for 15 per cent of the total LDC import, while agricultural raw materials and all food items accounted for one-third of the global LDC import. For many developing countries and LDCs, stock adjustments serve as a buffer for both their producers and consumers against uncertainties of price volatility in basic food products. Under the existing WTO rules, state support and expenditure incurred for stocks are considered as trade distorting. As is known, the allowed Aggregate Measure of Support (AMS) in the WTO is limited to the equivalent of 10% of country’s agricultural GDP, and its calculation has become a major point of debate. At MC-9 India argued that, price support schemes should be compatible with the “green box” and be subject to no limitations. Furthermore, WTO rules should not get in the way of Members’ right to food security. On the other side of the spectrum, developed countries (and some developing countries) expressed concern that such a proposal would affect the fundamental requirement of the green box, which includes measures that does not provide price support to producers, while others were concerned that surplus stocks built through such schemes could eventually be dumped in the world market, further exacerbating the price volatility and affecting the third countries’ producers. In Bali, Members opted for an interim solution in the form of a peace clause and committed to finding a permanent solution by the 2017.
There are diversity of interests between the developing countries and the LDCs. While majority of LDCs are net food importers, in 2013, food items accounted for 9% of overall exports from the LDCs. Thus, LDCs have both defensive and offensive interests in this sector. Support and subsidies beyond the AMS threshold could lead to lowering of food prices in some of the developing countries. Consequently, island LDCs and food exporting LDCs that have export interest in these countries might be adversely affected. Post-Bali, as WTO members started to work towards a permanent solution, several options were proposed. One was, allowing countries to factor in the impact of inflation in calculating price support; the other was to consider reference price based on a more recent period or alternatively consider three-year rolling average of the world prices rather than the 1986-1988 reference price. If the administered price is at or below the world market price, it should not be considered as providing price support, and hence could be considered green-box compatible. LDCs will need to examine on a continuing basis, the possible implications of an agreed solution on their offensive and defensive interests.
Cotton
The issue of cotton was of heightened interest to the four Cotton exporting African countries (C-4): Benin, Burkina Faso, Chad and Mali. The cotton initiative focused on the “coherence between trade and development aspects of the cotton issue”: while the trade component covered negotiations on trade barriers, domestic support and export subsidies, the development component covered various aspects of helping the less developed cotton producers confront market conditions and other related needs. The decision adopted in Bali recognizes that WTO was yet to deliver on the cotton initiative and decided that dedicated discussions in this area are to be held on biannual basis. Linking cotton with the broader agricultural negotiations, WTO members reaffirmed that all forms of export support and subsidies would be eliminated. It is not clear when this will start to be enforced.
Systemic concerns
The impasse in the DDR negotiations has led some Members to look for new approaches including taking resort to the Plurilateral approach. Plurilaterals Agreements (PA) essentially promote a ‘club’ approach in WTO negotiations whereby some powerful countries negotiate accelerated liberalization in particular areas and sectors. Other members are left out of the grouping with the possibility to join later. The apprehension is that PAs could result in significant preference erosion for LDCs and other low income WTO members. Furthermore, if the developed and economically powerful countries join PAs and set up the ‘rules of the games’ on the basis of their economic interests, it would be difficult for the LDCs to join these agreements. To do so, they will need to adopt onerous labour, IPR and other standards which they are not expected to comply with within the WTO framework under the various SDT provisions.
Concluding remarks
LDCs will need to undertake serious discussion with a view to narrowing down the differences within the LDC Group, particularly as regards the DF-QF market access. LDCs should pursue the services waiver issue most proactively and be engaged in the offer-request negotiations in an informed way. Identification of category-specific concerns with respect to the trade facilitation agreement and articulation of the assistance needed, particularly regarding Category C related deficits, should be given high priority. Serious work will need to be done by the LDCs to articulate their demands and concerns, especially with regard to the possible implications of Plurilaterals for their trade interests. Trade-related resource mobilisation should remain a major concern for the LDCs. During the run up to the next WTO Ministerial meeting, Aid for Trade and Aid for Trade Facilitation should receive special attention. Coalition building and partnerships will matter in advancing LDC interests in the negotiations in Geneva. In short, whilst being actively engaged in the WTO to pursue their interests, LDCs will also need to do their own homework to take advantage of the opportunities that could originate from the implementation of the various decisions already taken in the WTO.
Professor Mustafizur Rahman is executive director of the Centre for Policy Dialogue (CPD), Dhaka. He can be reached at: mustafiz@cpd.org.bd. Ms Hosna Jahan is a research associate at the CPD. She can be reached at: hosna.jahan@cantab.net