The following is one of the articles from Trading Thoughts by the Shridath Ramphal Centre for International Trade Law, Policy and Services.
The rules-based multilateral trading system (MTS), institutionalised by the World Trade Organization (WTO), is confronting an existential threat. Questions about the fairness and efficacy of the WTO, the guardian of the MTS, have plagued it since its inception in 1995, but the calls for reform have reached fever pitch over the past two years. Withdrawal threats by the United States, coupled with increasing protectionism and unilateralism, threaten to chip away at the foundation of the MTS unless comprehensive, inclusive and transparent reform of the WTO is undertaken.
For small economies like ours in the Caribbean with high levels of trade openness, WTO reform is more than a moot topic, but a question of economic and developmental pertinence. Our small states have inherent structural vulnerabilities and capacity constraints which complicate their integration into the global economy and constrain their ability to respond to large countries’ unfair trading practices. These include limited exports and export partners, small populations, limited bargaining power, geographic distance from major markets, and vulnerability to financial, environmental and other shocks. It is these vulnerabilities which compel our disproportionate reliance on the certainty and predictability provided by the MTS through the WTO.
In response to the crisis at the WTO, the European Commission released a concept paper on WTO reform in September 2018. The proposals made do not necessarily reflect the European Union’s (EU) final position on the matters discussed, but are intended to serve as a basis for discussion, including with other WTO Members. The EU concept paper, which was in effect three papers in one, outlined three broad areas for WTO reform: (1) future rule-making, (2) regular work and transparency and (3) dispute settlement. The Government of Canada has also released its own proposals, which in most cases, are in sync with those made by the EU.
This present article discusses the main reform proposals regarding future rule-making at the WTO, and whether these proposed reforms would lead the WTO to better serve the development imperatives of some of the world’s smallest and most vulnerable economies.
The WTO’s rule-making function
Rule-making is one of the WTO’s most important functions. Unlike its predecessor the GATT, the WTO provides a permanent forum for its members to conduct negotiations on matters relating to global trade. The last round of negotiations – the Doha Round negotiations − were launched in 2001 with the intention to bring global trading rules into the twenty-first century through, inter alia, concentration on topics of interest to the WTO developing countries.
Unfortunately, the Doha Round is yet to be concluded, and its future hangs in the balance as WTO Members appear split on whether the current round should continue. The stalemate is in part due to the poor rule-making functions of the WTO, aggravated by the increased number of WTO members and the shift in the balance of power towards developing countries which have made reaching a unanimous decision on increasingly more complicated trade matters less straightforward.
The European Commission’s reform proposals for future rule-making fall into three main categories: (1) creating rules that rebalance the system and level the playing field; (2) establishing new rules to address barriers to services and investment, including in the field of forced technology transfer and; (3) addressing the sustainability objectives of the global community.
Creating rules to rebalance the system and level the playing field
The European Commission identified transparency and notification of subsidies as one area in which the trade rules needed to be balanced. The proposals focused primarily on industrial subsidies. However, for small states, agricultural subsidies, including fisheries subsidies, by large countries are an area of greater concern. These subsidies are trade-distorting in the sense that they alter competitive conditions in favour of industries from those countries that are able to provide them. They can negatively impact small states’ food security because subsidised imports from advanced economies could replace costlier locally produced products and thereby create an import dependence. A classic example is Jamaica’s dairy industry which was adversely affected when the Jamaican Government was forced to remove the tariff on imported powdered milk as a conditionality of a World Bank loan in the early 1990s.
Establish new rules to address barriers to services and investment, including in the field of forced technology transfer
One of the sticking points in the now defunct Doha Round was whether rules should be developed in some of the “newer” areas on the trade agenda. While developing countries have traditionally opposed expansion of the Doha trade agenda before the existing mandate has been completed, the time has come for trade rules to capture the new realities of international commerce and the global economy, including digital trade. While digital trade will bring challenges due to the technological divide and the impact on employment by replacing humans with computers, the internet could reduce traditional barriers to cross-border trade, by allowing MSMEs access to global markets without the traditional red tape and trading costs, in some cases.
The European Commission’s proposal for new rules to address barriers to services and investment is another proposal potentially beneficial to small states. The majority of Caribbean economies, for example, are service-based and are keen on further market access openings for their services providers, particularly in Mode 4 (temporary presence of natural persons). This is one of the four modes of service supply recognised under the General Agreement on Trade in Services (GATS) and is the mode of supply subject to the most restrictions in WTO members’ schedules of commitments.
The European Commission has called for reduced barriers to investment, which currently under WTO rules is covered primarily by Mode 3 (commercial presence) under the GATS. Investment is an area in which Caribbean countries have offensive interests, but the level of ambition varies by country. Although Caribbean countries are generally very open to foreign direct investment, they jealously guard their policy space in the area to ensure that they attract investment which is sustainable. There are some basic negotiation areas which are contentious, such as whether the definition of investment should include both foreign direct and portfolio investment or whether investors should be given pre-establishment rights. These would be sticking points in any negotiations on a multilateral investment agreement, and as such, should take into account the sustainable development needs and sensitivities of small states.
Addressing the sustainability objectives of the global community
A third rule-making area referred to in the European Commission’s reform proposals is to bring closer harmonisation between global trade rules and the global sustainability agenda. This is an area again which small states could support and is in keeping with the preamble to the WTO agreement which explicitly mentions sustainable development. Small states can also support the EU in its proposal to prepare a detailed analysis of the sustainable development goal (SDG) targets and identify the ways in which trade policy could contribute to achieving them.
A key grievance raised by WTO developed country members is the ability of WTO members to self-designate as developing countries, entitling them to flexibilities allowed for under the WTO’s agreements. The European Commission has noted that the current distinction between developed and developing countries lacks nuance and is no longer reflective of current realities. Indeed, can one really argue that China and India, which self-define as developing countries, possess vulnerabilities comparable to small island developing states? This argument is one of the reasons underpinning the Small Vulnerable Economies (SVEs) initiative, which argued that certain countries, the so-called SVEs, had unique circumstances which necessitated special treatment. So far the SVE category remains an informal WTO category, but Caribbean countries could use the current discussion to open the door for its formalisation.
The European Commission has proposed that there be a reformed way of implementing the concept of special and differential treatment (SDT) by moving away from “open-ended block exemptions towards a needs-driven and evidence-based approach”. Indeed, the approach taken in the Trade Facilitation Agreement, which links assistance to implementation, is one success story which could be replicated.
While the European Commission has also raised the suggestion of graduation mechanisms for SDT, clarification will be needed on the graduation criteria proposed. On the international level, GDP per capita has been the criterion used to render most CARICOM countries ineligible for most types of development assistance and fails to capture the inherent vulnerabilities previously mentioned. As such, any graduation or needs-based approach developed to determine eligibility for SDT in the WTO context must take small states’ inherent vulnerabilities into account.
Proposals to strengthen the procedural aspects of the WTO’s rulemaking activities
Although the WTO Agreement does provide for other forms of decision-making as well, most decision-making in the WTO is currently done by consensus, that is, the absence of any voiced dissent. This makes the WTO the most democratic of the multilateral institutions as every member, whether small or large, in effect, has veto power. The consensus-based model, however, does account largely for the current paralysis in the organisation’s negotiation function. In frustration, some members have pivoted away from the multilateral table and refocused their efforts on the conclusion of regional trade agreements (RTAs), including mega-regional trade agreements (MRTAs). The net result is that most rule-making on new areas of trade is currently taking place at the regional level, where many small states do not necessarily have a seat at the table.
While a complete move away from this form of decision-making is not encouraged, it is agreed that there should be a way for those more ambitious WTO members to move ahead on rule-making in areas of interest to them within the multilateral system, and not purely within RTAs. The increased use of plurilateral agreements (agreements with two or more signatories but not enough to be considered multilateral), as proposed by the European Commission, is one alternative which could be supported. The Agreement on Government Procurement and the Agreement on Trade in Civil Aircraft are examples of such agreements. This, however, is a delicate balance as these agreements should be the exception and not the default.
In summary, the current proposals on the table for reforming the rule-making and decision-making functions of the WTO are still at the nascent stage and there will be need for comprehensive, inclusive and transparent discussion of these proposals. On paper, some proposals, however, appear to be potentially beneficial to small states. Others will be dependent on their implementation. It is imperative that CARICOM formulates cogent responses to the proposals on the table, making suggestions where we believe the proposals could be tweaked and improved, and also placing our own counter proposals where needed.
Alicia Nicholls is an international trade and development consultant and contributing author for the Shridath Ramphal Centre for International Trade Law, Policy and Services which is based at the University of the West Indies, Cave Hill.