RSS Feed for the unit Developing countries in the world trade regime

Introduction

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

This unit is from our archive and it is an adapted extract from Making the international: Viewpoints, concepts, and models in international politics and economics (DU321) which is no longer in presentation. If you wish to study formally at The Open University, you may wish to explore the courses we offer in this curriculum area.

Free trade or fair trade? This unit will help you to analyse the relationship that exists between developed and developing countries under the World Trade Organization regime of Development Round negotiations. The current world trade regime has a very mixed record in promoting growth and reducing poverty.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

Learning outcomes

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

After studying this unit you should be able to:

identify the economic issues faced by developing countries in mutilateral trade negotiations;
describe these issues from a developing country perspective;
explain how the economic power of nations impinges upon the ability of states to negotiate settlements that are beneficial to them.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

1.1 The WTO

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

The Ministerial Declaration adopted by WTO members at Doha on 14 November 2001 fails to address the most pressing needs either of the poorest countries or of the world's most vulnerable communities. This means that the people who most need a share in global prosperity are still those least likely to obtain it.
(A joint statement by Actionaid, CAFOD, Christian Aid, Oxfam, Save the Children and five other charities and non-governmental organisations, January 2002)

Underlying the WTO's trading system is the fact that freer trade boosts economic growth and supports development. In that sense, commerce and development are good for each other.
(‘Ten common misunderstandings about the WTO’, WTO website, 20 October 2002.)

In December 1999, the world's attention was focused on riots and demonstrations taking place in the streets of the American city of Seattle, where trade ministers representing more than a hundred countries were in conclave. The organisation under whose auspices this controversial meeting was held, the World Trade Organization (WTO), had come into existence barely five years earlier. It was supposed to have created a system of unanimously accepted rules governing international trade, which would lead to worldwide economic benefits, but it became evident at Seattle that not everyone shared this view.

The demonstrators who received the greatest media attention were American trade unionists protesting against job losses which they blamed on cheaper imports, and environmentalists protesting against ecological damage which they blamed on free trade. Both groups claimed that they were also speaking for poor people in developing countries. Almost drowned out in the media coverage of what came to be known as ‘the Battle in Seattle’ were the voices of the official representatives of those developing countries, who felt they were being excluded from the decision-making process. They too had serious concerns about the WTO, some of which were diametrically opposed to those of the demonstrators who were claiming to speak on their behalf. Whether because of the protests outside or inside the conference rooms, the Seattle meeting was a failure in that it ended without agreement.

View larger image

Figure 1: Seattle police use tear gas to push back WTO protesters on 30 November 1999 (left); President Clinton addresses a lunch in honour of ministers attending the WTO meeting on 1 December 1999 (right)

Ministerial meetings of the WTO are held every two years. Learning the lessons of Seattle, the next one was held in November 2001 in Doha, in the Middle Eastern state of Qatar, where strict control could be exercised on the entry and behaviour of potential demonstrators. Here the developing countries managed to extract several concessions in the final declaration, and indeed the new round of international negotiations launched at that meeting is known as the ‘Development Round’. But many developing countries remain unhappy, and as the first quotation above indicates, their unhappiness is shared by influential groups in Britain.

As stated in the introduction on page 1, this unit aims to help you to understand the concerns of developing countries under the WTO regime, and the problems they face in trying to extract a better deal from the Development Round negotiations launched at Doha. The roots of these problems lie in the Uruguay Round (UR) agreements that gave birth to the WTO, and further back in the international trading system as it evolved after the Second World War. Section 2 gives a potted history, and also introduces the major rules and principles regulating international trade. Section 3 spells out what went wrong with the UR agreements: the developing countries’ expectations that were unfulfilled, and the onerous costs they had to incur. Section 4 explores aspects of the road ahead from Doha, with particular attention to the two issues that so exercised the demonstrators at Seattle and are likely to come up again at future meetings: environmental damage and labour standards. In examining the WTO trade regime from the point of view of developing countries, I shall also establish several key themes of this first part of the book. International trade – that is, the buying and selling of goods and services between countries – has a hugely important influence on countries’ economic growth and development, and negotiated rules governing trade strongly influence who benefits most. High-profile trade negotiations among states that are formally sovereign reflect unequal power and modify the exercise of national sovereignty in practice.

What is this organisation, the WTO, to raise such passions? Misconceptions abound: in particular, that it is a kind of supranational government that imposes its policies on sovereign nations. Although there is much that is wrong with the WTO, this particular complaint is off the mark. The WTO deals with the rules governing international trade, but neither devises nor enforces them. It provides a forum for international negotiation, in which the rules are usually agreed by consensus. This is not to say that the process of arriving at the consensus is a convivial one, nor that everyone is happy with the outcome. There is hard bargaining involved, and the resulting trade regime reflects the asymmetries of a world in which countries differ widely in respect of their economic and political muscle. (A trade regime is a framework of rules and institutions governing international trade.) But there is no ‘WTO view’ that is forced on countries: in principle, the rules have been agreed by all members and ratified by their parliaments, and no country is forced to become a member.

Most WTO members are states. As the agreements concern trade policy, administrative units that govern trade policy for a particular region can also be members. For example, the European Union has free trade between its member states and a unified policy on trade with non-members, so it is a WTO member in its own right, as are its member states. Hong Kong, a founding member of the WTO in 1995, retained its membership even after reunification with China; China itself joined only in 2001 as a distinct member with a very different trade policy.

The WTO has a mechanism for periodically reviewing each member's compliance with the agreed rules, and another mechanism for impartially settling disputes between them, but it cannot enforce its rulings. In these respects, it is unlike the two international organisations with which it is frequently clubbed: the World Bank and the International Monetary Fund (IMF). Both these organisations have their own very definite views on economic policies, which overlap considerably in what has come to be known as ‘the Washington Consensus’. These financial institutions ensure that sovereign governments in developing countries take their advice seriously by lending them vast amounts of money, often conditional on compliance with elements of the Consensus.

The WTO does not make loans; it is an organisation set up to administer a set of international agreements governing international trade. In its ardent advocacy of freer trade between nations (as exemplified by the second quotation with which this section began), it does promote one key element of the Washington Consensus – but in principle it does so only to the extent that its members have agreed to reduce barriers to trade and subject themselves to a rule-governed trading system. That, at least, is the formal position, clearly and forcefully stated on the WTO's official website.

However, many critics (including the present author) see a definite attempt to impose policies on developing countries, not by an autonomous WTO bureaucracy, but by the richer countries. It may seem paradoxical that this can be built into a formally democratic and consensual organisation which has no teeth to enforce its rules. This unit illustrates how it has come about.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

1.2 Developing countries

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

Question

Which countries in the world are classified as ‘developing countries’?

There are various definitions of ‘developing countries’, none entirely satisfactory. The WTO allows members to classify themselves as developing, and lists some 30 of them as ‘least developed’ (poorest) members for special treatment. For the purpose of this unit, it would be simplest if you were to think of developing countries as comprising all countries other than the USA, Canada, the countries of Western Europe, Singapore, Japan, Australia and New Zealand. So of the 145 WTO members (as of 2002), over a hundred are developing countries. Their gross national incomes (GNI) per head (a crude but common measure of economic development) ranged in 2000 from around $500 a year in the least developed countries such as Sierra Leone and Tanzania to around $8000 in typical ‘upper middle income’ countries such as Malaysia. By way of comparison, the United Kingdom figure was $23,550, Japan $26,460 and the USA $34,260 (World Bank, 2002, pp. 232–3).

I shall argue in this unit that many of the benefits these developing countries were promised would follow from joining the WTO have so far proved illusory, because of loopholes in the agreements. In particular, they expected that signing on would enable them to get better access for their major exports in the markets of the developed countries, and an impartial mechanism for settling disputes with them. We shall see that things did not quite work out that way. There were also large costs in complying with the rules, some of which could have been foreseen, and others which became apparent only after the ink was dry and the developing countries were faced with implementing agreements that they perhaps did not fully comprehend. And if you are already asking why they do not just quit, the answer is that cutting themselves off from the international economy is likely to be even worse. In an unequal world, being a junior member of the gang is often better than being excluded altogether. After reading this unit, I hope you will understand why developing countries find themselves in this predicament.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

2 The road to Doha

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

The WTO was created by the eighth in a series of multilateral trade negotiations that have taken place since the signing in 1947 of the General Agreement on Tariffs and Trade (GATT). Multilateral trade negotiations take place between many countries simultaneously. (Bilateral negotiations are negotiations between pairs of countries.) The GATT was designed to prevent a repetition of the experience of the 1930s, when individual countries had tried to claw their way out of the widespread unemployment that was characteristic of the Great Depression of those years by restricting imports and subsidising their exports to other countries. For an individual country, this policy seemed to make sense, because it prevented cheaper imports from displacing workers in vulnerable industries, and promoted employment in export sectors. However, when implemented by many countries simultaneously, it amounted to a ‘beggar-thy-neighbour’ policy which only made the overall situation worse, as one country's imports are another's exports. (Think of someone standing up to get a better view at a sports event: it makes sense for the individual, but if everyone stands up, no-one gets a better view and everyone gets exhausted.)

Two kinds of import restrictions were especially prominent: tariffs (which are customs duties or taxes on imports or exports) and quantitative restrictions (quotas or limits on the amount of imports; for example, ‘not more than x tonnes of steel’). Under the GATT, contracting countries agreed to restrict their use of such policies. Tariffs were ‘bound’ at maximum levels, while quantitative restrictions and export subsidies were abolished. The tariff reductions were negotiated on the principle of reciprocity: country A agreed to reduce tariffs on particular products which it imported from country B, in exchange for B reducing its tariffs on products exported by A.

Seven ‘rounds’ of multilateral negotiations took place under the GATT between the 1940s and 1970s, resulting in a significant reduction of tariff barriers for most manufactured goods traded between the developed countries. However, although developing countries comprised a majority of the original 23 GATT signatories and their number proliferated in subsequent years, they remained suspicious of the motives of the richer countries and of the idea of free trade itself, and most did not participate fully in this process for 40 years. They neither reduced their own tariffs and quantitative restrictions, nor did they obtain reciprocal concessions from the developed countries for their major exports, notably agricultural products, textiles and clothing.

This changed in the 1980s. The economic performance of the developing countries that had gone furthest in restricting imports was disappointing, and industries shielded from foreign competition were chronically inefficient. Also influential was the ‘East Asian Miracle’, the spectacular success of countries such as South Korea, Taiwan, Hong Kong, Singapore (and later China) in achieving rapid economic growth by promoting exports. Along with pressure from the World Bank and the IMF, these experiences swung developing countries in the direction of trade liberalisation. (Trade liberalisation refers to the reduction or abolition of barriers to trade such as tariffs and quotas.)

The tide was therefore turning when the eighth round of GATT negotiations got under way in 1986 with a conference in Punta del Este in Uruguay. The Uruguay Round, as it came to be known, was in comparison with earlier rounds the most protracted (it lasted eight years), the largest (it involved many more countries), and much more far-reaching. Some 30 agreements and ‘understandings’ were signed at the conclusion of the round in 1994, one of them setting up an entirely new organisation, the WTO, to supplant the GATT as an institution.

For the first time, the developing countries made significant concessions and opened their markets, in exchange for the developed countries agreeing to bring agriculture and textiles (important developing country exports) back into the framework of rule-bound trade liberalisation. In particular:

Most developing countries agreed to reduce and bind their tariffs, to reduce their subsidies, and to refrain from using quantitative restrictions.
They agreed to integrate agriculture into the framework of reciprocal concessions, exposing their farmers to intense foreign competition.
They agreed to extend trade liberalisation, which had earlier been confined to trade in goods, to services (for example, banking, insurance and telecommunications).
They agreed to include protection of intellectual property rights (patents, copyrights, trademarks and so on) in the GATT/WTO framework.

Although similar concessions were also made by the developed countries, we shall see that their very different economic conditions, and their ability to exploit loopholes in the agreements, meant that similar concessions often entailed very different outcomes in developed and developing countries. Some elements of ‘Special and Differential Treatment’ were retained for developing countries: for example, they were given a few more years to comply with some of the agreements, allowed to make smaller tariff reductions, and the 30 or so ‘least developed’ (poorest) countries were exempted from having to reduce their subsidies. Many other provisions exhort, but do not force, the developed countries to show special consideration in enforcing the rules on developing countries. Despite all this, the impact of the agreements has been quite severe, as we shall see.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

3.1 Market access: expectations unfulfilled

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

A key objective of developing countries in trade liberalisation negotiations is access for their exports to the markets of developed countries. However, the rules have been played out by developed countries in ways that block the hoped-for rise in exports.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

3.1.1 Agriculture

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

According to the UR Agreement on Agriculture, import quotas were to be abolished, but since no country was prepared to expose its farmers abruptly to the rigours of free trade, quotas were to be replaced by ‘equivalent’ tariffs, which were to be reduced over time. However, the calculation of equivalent tariffs is subject to wide margins of error, and since it was left to each country to determine its own tariffs, most were set at extraordinarily high levels – exceeding 200 or even 300 per cent – for many products. This effectively raised the price of imports by the same percentage, making them unable to compete with home-grown produce. The European Union, Japan (which set a tariff of 550 per cent on rice!) and the USA were the worst offenders in this process, which came to be known as ‘dirty tariffication’. Reducing tariffs as agreed was quite meaningless when they were set at such high levels to begin with.

This effective denial of market access in agriculture was compounded by another loophole in the agreement. These same developed countries vastly increased the amount of money they paid their farmers in the form of subsidies, enabling them to compete against farmers in developing countries who could produce the same products more cheaply, but whose governments could not afford these levels of support. Most commentators agree that, as a result of these various circumventions of the UR agreement, there has been no significant liberalisation of trade in agriculture.

This issue was hotly debated at the 2002 Earth Summit in Johannesburg, and negotiations were under way at the WTO to reduce these subsidies, but at the time of writing it remains to be seen whether the European Union in particular will be willing to confront its politically influential farm lobby. To be fair, this issue is not one that pits all developed countries against all developing countries: some of the former, such as the USA, Canada, Australia and New Zealand, are leading the charge to open the European market for their agricultural exports, while many developing countries import rather than export food and would actually be losers if developed countries reduced their subsidies.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

3.1.2 Textiles and clothing

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

Here, the conflict is largely between developing country exporters and developed countries that were reluctant to expose their textile producers to cheaper imports. Here too the UR agreement had a proviso to soften its immediate impact, and a loophole that developing countries seem not to have anticipated. In order to enable textile producers in developed countries to adjust gradually to increased import competition, quantitative restrictions were to be phased out over ten years, starting in 1995, with 49 per cent of the restrictions to be removed only at the end of the ten-year period. This much the developing countries knew at the time of signing. What they perhaps did not expect is that developed countries would fulfil their intermediate targets by the clever expedient of including items that were not under quantitative restrictions in the first place, with the result that even by 2002 quantitative restrictions had been removed on relatively few items.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

3.1.3 Tariff escalation

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

Added to this was the fact that, although the developed countries had reduced the average level of tariffs on manufactures to low levels as part of the UR agreements, this average concealed much higher tariffs on products that were imported mainly from developing countries. Moreover, higher tariffs were retained on products involving a higher degree of processing. In the EU, for example, cigars are subjected to a higher tariff than raw tobacco, processed foods to a higher tariff than unprocessed foods, and fabrics to a higher tariff than thread. (Many finished garments remained under quantitative restrictions, which is even worse.) This ‘tariff escalation’ means that developing countries are discouraged from graduating from their traditional colonial trading pattern of exporting raw materials and simple manufactures. Even if they can produce processed products more cheaply than the developed countries, tariffs tilt the balance against them.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

3.2.1 Social disruption

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

In return for being granted enhanced market access by developed countries, which turned out to be somewhat illusory, developing countries agreed to open up their own markets. Indeed, for supporters of the UR, this was its biggest achievement. One of the central propositions of economic theory is that under certain conditions free trade is beneficial to a country – but there are inevitably winners and losers. As a country adjusts to free trade, some sectors of the economy advance, while others decline; colloquially these are referred to as sunrise and sunset sectors. Consequently, some incomes rise, some fall. Nor is this a one-time adjustment: greater openness to trade means that a country's producers will be continually buffeted by changes in technology, consumer tastes and government policies in the rest of the world.

Developed countries have unemployment benefits and retraining programmes that help to cushion the effects of these changes and, as you saw above, they have generously compensated their farmers for exposing them to greater international competition. There are no doubt several deficiencies in these provisions, and retraining is seldom effective: it is hard to retrain a displaced coal miner or steelworker for a job in information technology or financial services. But at least unemployment does not threaten the very survival of the workers and their families, and the next generation is likely to be better equipped to get the new jobs in the sunrise sectors. The point is that no developing country has a system of general unemployment benefits, much less the enhanced benefits and retraining facilities given to workers and farmers whose losses are directly attributable to import competition.

In addition to this kind of social insurance for individuals, the European Union allocates generous ‘structural funds’ to its poorer regions, especially those that have been badly hit by the closure of industries. Few developing countries can afford this kind of transfer from richer to poorer citizens. Nor do most developing countries provide national health services, old age pensions, food stamps, and financial assistance to families with young children. The absence of these ‘safety nets’ means that a family can be completely devastated if its earning members lose their jobs. The prospects of the displaced workers, and even of their children, in the new sunrise activities are blighted by their lack of access to health facilities, education and nutrition.

As the Harvard economist Dani Rodrik has pointed out, greater trade liberalisation among developed countries after the Second World War went together with a substantial enhancement of social spending by their governments – which was more generous in countries that were more open to trade (Rodrik, 1997). Instead of being able to set up these safety nets, governments in developing countries are under pressure from organisations such as the IMF to cut government spending. Although the stated targets of these cuts are inflated bureaucracies and inefficient government corporations, too often the axe falls on what little these countries have been spending on health, education, anti-poverty programmes and social services.

Thus, even if trade liberalisation had been carried out even-handedly in both developed and developing countries, it would have had very different social consequences. As it happens, the massive increase in subsidies to agriculture in developed countries has not only deprived developing countries of expanding farm exports, but it has also turned the tables and allowed European and American produce to invade developing country markets, displacing millions of small farmers. Wrenching dislocations, growing economic insecurity, and widening inequalities in countries with no safety nets exacerbate social divisions and tensions within those countries. This becomes a source of concern for developed countries when it shows up in the form of political instability and extremism and in waves of desperate migrants fleeing poverty and violence in their native countries.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

3.2.2 The protection of intellectual property: the costs of TRIPS

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

Apart from the internal redistribution of income resulting from greater exposure to the world economy, the effects of one of the UR agreements in particular have achieved a certain notoriety because the agreement clearly imposes huge costs on farmers and consumers in developing countries, to the benefit of corporations in developed countries. This is the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which strengthens international rules governing patents, trademarks, copyrights, the design of integrated circuits, and certain ‘geographical indications’ (such as ‘Scotch’ or ‘Champagne’), restricting the use of these names to products produced in those regions. These are all means of establishing intellectual property rights (IPRs), that is, legal ownership of intangibles such as a new invention, a brand name, a work of literature, or the lyrics to a song. Here I explain the costs of TRIPS by concentrating on patents, which protect new products and processes from being copied without the holder's permission.

Patents serve an essential purpose. The kind of research and development that goes into the making of a new drug, for example, costs millions of pounds, takes many years, and runs the risk of not yielding a commercially viable product after all the trouble. A patent gives the pharmaceutical company monopoly rights over its new invention, to produce it itself or license the formula to other firms in exchange for the payment of royalties, thereby enabling it to recoup the costs of developing it.

This of course comes at the expense of consumers and other firms who would gain from free access to the new product or process. But if access were free, most such products would not be developed in the first place: think of computer software or a cure for AIDS or music CDs. (The last category is actually protected by copyrights rather than patents, but the idea is the same.) However, a permanent monopoly would undeservedly enrich the innovator forever and retard the spread of a valuable technology. (Imagine what would have happened if the descendants of Watt and Newcomen had retained the right to their ancestors' idea of the steam engine, or if the Fleming family had the rights to penicillin and all antibiotics derived from it.) Patent laws have always struck a balance, giving the innovator a temporary monopoly, after which the idea can be freely used by anyone.

Before the TRIPS agreement, different countries used to protect innovations for anything between five and twenty years, often discriminating between different types of products, or between patents granted to products and to processes. TRIPS commits WTO members to harmonise their laws governing IPRs, tightening them up considerably. In particular, it extends the duration of the patent monopoly to twenty years, and covers products that many countries had earlier not considered patentable: in particular, new plant varieties. Drugs and seeds are in fact the two major bones of contention between the developed and developing countries, with most of the scientific development taking place in the former, and the greatest need for easy access in the latter, where there are great deficiencies in the provision of basic health facilities and nutrition. TRIPS raises prices by preventing copying by local producers, and consequently restricts access to such products to those who can afford them. It will inevitably involve a large transfer of incomes from farmers, patients and consumers in poor countries to patent holders in richer countries, as the World Bank explains:

IPRs are generally more beneficial to industrial countries than to developing countries. Developing countries are net importers of technology, while, in general, industrial countries are the producers of technology. Industrial countries therefore reap the static benefits of higher prices resulting from the market power provided by IPRs, at the expense of developing countries. It has been estimated that the United States stands to gain $5.7 billion in net transfers from TRIPS, while Germany, Sweden and Switzerland are also expected to receive substantial net inwards transfers. In contrast, developing countries are expected to experience net outward transfers, amounting to $430 million for India, $434 million for Korea, $481 million for Mexico, and $1.7 billion for Brazil.
(World Bank, 2002, p. 147)

Furthermore, strong patent protection limits the ability of developing countries to assimilate and adapt new technology to their own needs, processes that have historically been the basis of technological change across the world.

Another concern that has been raised in regard to TRIPS is that of ‘biopiracy’. This refers to the appropriation, by Western corporations, of biological materials found in plant and animal species native to developing countries, and the patenting of products derived from them. This, it is feared, will convert traditional forms of knowledge (such as herbal remedies) that have been widely used for centuries in developing countries into commercially exploitable IPRs which will bring profits to the patent holder, and not to the countries from where the knowledge was appropriated. Instead, producers and consumers in those countries would henceforth have to pay the patent holder for the privilege of using knowledge that was hitherto freely available.

The alternative is to fight costly legal battles in Western countries, as India has done to prevent the patenting of products based on extracts of neem (a tree native to India) and haldi (turmeric), whose medicinal properties have been known since ancient times. Fortunately, India could present evidence that these properties had been documented in classical texts, but for many such products there may be no documentation of their traditional use by indigenous peoples, and many developing countries may not be able to afford the legal and technical expertise required to contest the patent claim.

To be sure, the picture is not entirely gloomy. The TRIPS agreement permits countries to grant compulsory licences under certain conditions. These licences compel the patent holder to share its knowledge with other firms, allowing them to produce the patented product on payment of royalties. Brazil and South Africa have used the threat of compulsory licensing to induce pharmaceutical companies to supply drugs at lower prices, and at Doha it was explicitly conceded that governments would have the right to use this provision to protect public health by facilitating the manufacture of essential drugs.

Nor are all developing countries passive consumers of knowledge developed in the West: for example, India can also benefit from stricter IPR protection of the drugs developed by some of its pharmaceutical firms, its computer software, and its ‘Bollywood’ films. But on the whole, for most developing countries (including India, as the earlier quotation shows), TRIPS entails massive payments to IPR holders in developed countries. And, incidentally, the agreement on geographical indications so far protects only the nomenclature of wines and spirits, principally those of European origin. Place names in developing countries that add value to a product (such as Darjeeling tea) have not yet been granted protection, despite the efforts of countries like India.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

3.2.3 Fighting on too many fronts

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

Although I have dwelt on the agreements relating to agriculture, textiles, and intellectual property, there are some two dozen others, each involving intricate legal and technical details. These include agreements on:

Sanitary and phytosanitary (SPS) measures: these are standards applied to imported agricultural products so as to protect plants, animals and humans in the importing country. However, these standards are often arbitrarily used to restrict imports in order to favour domestic producers. The relevant agreement regulates how such standards can be applied, although they are still abused.
Subsidies and countervailing measures: export subsidies are in most cases prohibited, but there are elaborate rules defining what constitutes a subsidy, and when and how the importing country can impose a ‘countervailing duty’ to offset it.
Trade-related investment measures: this agreement prevents countries from forcing foreign firms operating in their territories to use domestically produced components (for example, a Toyota plant in India cannot be forced to use spark plugs made in India) or to export a minimum amount of their output.

The apparently diverse agreements in this short list, like most of those discussed in greater detail earlier in this unit, all try to ensure that there should be minimum government interference with international trade. In particular, they require that domestically produced products should not be given direct or indirect protection from import competition (although of course loopholes exist).

Question

Can you think of an exception to those generalisations among the agreements discussed?

If you are wondering how the TRIPS agreement fits in, you share the puzzlement of many commentators, who believe that it had no business being part of an international trade agreement in the first place, and that the first two letters of the acronym are mere window-dressing. The fact is that the USA threatened to walk out of the negotiations (which would have doomed the Uruguay Round) unless TRIPS was included, a threat widely seen as a response to corporate pressure from large US companies in industries such as pharmaceuticals, software and biotechnology.

There is also a deeper purpose to my terse listing of some of the UR agreements (and there are many more!). If your head is spinning with all these issues, imagine the plight of producers in developing countries, having to deal with unfamiliar rules in a foreign language; rules that can affect their profits and perhaps their very existence. Imagine also the plight of governments of many of these countries, with few trained specialists, having to negotiate agreements on issues that they do not fully comprehend. It is difficult to understand the implications of getting into an agreement when it relates to a subject on which one has little experience. This might account for the loopholes that developed countries were able to retain and later exploit.

Even after agreements are concluded, each of the subjects (and the new ones listed for negotiations) is reviewed and discussed by a separate committee or working group at the WTO headquarters in Geneva. According to one calculation (Blackhurst, 1999, p. 38), the various WTO committees and working groups between them held an average of 46 meetings a week in 1996 – and the workload has only increased and proliferated since then. Each issue requires technical expertise. Several developing countries cannot afford a permanent diplomatic mission in Geneva; many others can maintain only a small embassy staffed by general-purpose diplomats who also deal with the other international organisations that have their headquarters there (for example, the International Labour Organization, the International Committee for the Red Cross, the World Health Organization …). Ranged on the other side of many of the issues are developed countries with well-staffed missions, backed by legions of economists, lawyers and technical personnel specialising in WTO-related issues in their universities, government agencies and think tanks.

Apart from bearing the economic and social impact of the agreements themselves, developing countries therefore have to incur the costs of setting up administrative institutions to comply with their requirements. They must calculate, for example, the tariff equivalent of quotas, or permissible countervailing duties. They must also retrain their customs inspectors, and set up agencies to evaluate patent applications and to check for violations of technically complex patents or sanitary standards established in other countries. Such agencies were only established in developed countries once they had attained a certain level of economic and institutional development, and these countries therefore already have a stock of the relevant expertise and experience. In many developing countries, such agencies now have to be set up from scratch to comply with the UR agreements, before these countries have reached a comparable stage of economic development. Setting up institutions characteristic of mature economies may not be the best use of their limited resources. According to one calculation, the implementation of just three agreements (on customs valuation, TRIPS and SPS) would cost each country about $150 million – an amount exceeding the entire development budget of many countries (Finger and Schuler, 2002).

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

3.3.4 Dispute settlement

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

The lack of expertise in the developing countries shows up at a subsequent stage as well. One of the undoubted plus points of the WTO, compared with its predecessor the GATT, is its streamlined mechanism for settling disputes between members – on the whole quite impartially. But although many of the larger developing countries have won cases against the most powerful members like the EU and USA, the smaller ones are hamstrung by their inability to field lawyers specialised in international trade law, and seldom bring complaints. They are further handicapped by not being able to enforce the rulings of the WTO's dispute settlement bodies, which is left to the aggrieved parties themselves: if the ‘guilty’ member does not modify its behaviour, or compensate the complainant, the latter has the right to restrict its imports from that country in order to penalise it.

This kind of retaliatory punishment can be quite comprehensive, since all but one of the UR agreements constitutes a ‘Single Undertaking’. This allows a country that does not fulfil its commitments under one agreement to be punished by suspending commitments made to it under other agreements. For example, a country that does not enforce European patents, whether deliberately or because it does not have the expertise to do so, can have its garment exports to the EU blocked by punitive tariffs. However, a small developing country would find it virtually impossible to impose this kind of punishment on a much larger WTO member: by shutting out imports (the bulk of which typically consist of essential machinery, drugs, or food) from the USA or the EU, it would only hurt itself without inflicting much pain on the offender. (Think of who would be hurt more if you alone were to boycott your local supermarket.) Of course, if the punishment is the other way around – a developed country punishing a developing one – it can be devastating to the victim at little cost to the punisher. (No prizes for guessing who would be hurt more if your supermarket decided to boycott you!)

To sum up, most developing countries are simply overwhelmed by having to implement existing agreements, negotiate new ones, and argue their cases in the dispute settlement process on such a wide range of issues, each of which is technically complex.

Question

So, if the UR agreements are so bad, why did so many developing countries sign on, why do they not quit, and why are so many more applying to join the WTO?

One reason, just argued at some length, has undoubtedly been the developing countries' lack of comprehension of what many of the agreements entailed for them, and the loopholes that limited their benefits. But the more crucial reason is trade is a key part of developing countries' strategies for growth, and whatever the pains and disappointments of being WTO members, they would certainly have been worse off had they stayed out and had their exports shut out of developed country markets altogether. Without the WTO, the kind of trade sanctions I discussed in the previous paragraph could be used quite arbitrarily by powerful countries. In an unequal world, as I ruefully admitted above, being a junior member of the gang is better than being excluded.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

4.1 Uniting the developing countries

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

Several attempts have been made to form a united front of developing countries to negotiate a better deal at the WTO. They have met with little success because there are substantial conflicts of interest between them, for example between agricultural importers and exporters, and between small countries and those larger developing countries that have been able individually to use the lure of opening their markets to get a better deal from developed countries. Conflicts of interest arise too between those inside and outside regional trade agreements or special arrangements that bring preferential access to the markets of particular developed countries. Mexican membership of the North American Free Trade Agreement and duty-free treatment of Caribbean banana exports to the EU are prominent examples. More recently, the EU has allowed free import of ‘Everything but Arms’ from the least developed countries – but that displaces the competing exports from other developing countries.

Nonetheless, developing countries have been vocal in their protests. At the Doha Ministerial meeting, they tabled more than a hundred ‘implementation’ issues: matters concerning the way rules are interpreted and implemented that they wanted discussed as a matter of priority. The Ministerial meeting itself took few decisions, but referred them to various committees with suitable exhortations. The picture that is emerging at the time of writing (early 2003) is that developed countries will agree to substantive concessions relating to the implementation of Uruguay Round agreements only if developing countries make new concessions of their own in the continuing Doha Round negotiations.

The one concrete decision, already referred to above, was the clarification that TRIPS would not prevent governments from taking measures to protect public health. However, this was a declaration rather than a legally binding agreement, and it is not clear what weight it will carry in formal dispute settlement proceedings. Besides, the facility of compulsory licensing for the manufacture of essential drugs (discussed above) will not be of use to the vast majority of developing countries who do not have the necessary manufacturing facilities – and at the time of writing, the USA has blocked an amendment that would allow them to import their requirements from other developing countries.

The developing countries did succeed, for the time being, in regard to two potentially dangerous issues – environmental and labour standards – that pressure groups in the EU and USA had been trying to insert into the WTO framework. Environmental standards were circumscribed and labour standards were kept out, but as pressure for their inclusion remains it is worth examining them further.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

4.2 Environmental and labour standards

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

Question

Look back at Section 1. Why do trade unions in rich countries take up the cause of poor environmental and working conditions in developing countries as they did at Seattle? And why are developing country governments unwilling to have these issues raised in international trade negotiations?

It may seem puzzling that developing countries’ governments were apparently so dead set against protecting the environment or improving the working conditions of their own people. My short answer is that developing countries’ governments saw these noble objectives, promoted by well-intentioned individuals and organisations, being hijacked by employers and trades unions in ‘sunset’ industries in the developed world in order to restrict imports from countries that threaten them with cheaper products. To avoid the restrictions, developing countries would have to incur the additional costs of implementing higher environmental and labour standards, making their products uncompetitive.

What is meant by ‘environmental and labour standards’? To begin with the environment, the GATT/WTO framework already allows countries to restrict imports if they pose a danger to human, animal or plant health, based on the characteristics of the product (contaminated seafood, for example). Implicitly, this concerns dangers posed to the importing country. The issue is whether this should be extended to imports produced by processes (for example, fishing techniques) that do not embody the standards of the importing country, or damage the environment in the exporting country, or that damage the ‘global commons’ (such as the atmosphere, oceans, or endangered plant or animal species).

Labour standards (often referred to in European debates as the ‘social clause’), likewise, mean many things to many people. The GATT/WTO already permits restrictions on the import of goods produced by slave or prison labour; the question is whether this should be extended to other practices that people find exploitative or abhorrent, for example child labour. Some supporters of labour standards go further and call for restrictions on the import of goods produced by workers who do not receive wages or other benefits on a par with those in developed countries.

There are both economic and moral arguments against the imposition of external standards. Consider labour standards. Low wages give developing countries an advantage in international markets in selling goods produced using unskilled labour. Imposing costly labour standards such as higher payments to labour would deny them this advantage and deny developed country consumers cheaper goods. From this perspective, to say that low wages give developing countries an ‘unfair’ advantage is no more valid than saying that workers in developed countries have an ‘unfair’ advantage because machinery is more widespread and advanced in those countries.

None of this is to condone the deplorable disregard of environmental standards and working conditions in most developing countries. But I am arguing that is a matter to be left to environmental activists and trade unions in those countries, with technical and financial assistance from sympathetic outsiders; they have nothing to do with trade policy, unless the product itself poses a threat to the importing country. Indeed labour or environmental standards, or trade sanctions used to enforce them, can end up harming the very causes they are intended to promote. For example, workers who lose their jobs with firms that cannot implement higher environmental standards may turn to other, more environmentally harmful, activities (such as chopping down trees) in order to survive. Similarly, banning the import of goods produced by child labour, without providing any alternative source of livelihood, can force children into a life of crime or prostitution. Nor will the external imposition of wage and benefit standards help adult workers whose employers cannot afford to implement them: workers may lose low paid jobs, and surely low wages are better than no wages.

Nor do I wish to belittle the genuine concern of citizens in developed countries who feel strongly about these issues. However their support for environmental and labour standards necessarily implies that they are willing to pay more in the form of higher prices for goods whose imports they wish to restrict. They would be better advised to donate the same amount to charities and activist groups working towards providing better alternatives in the developing world. They should also apply pressure on their own governments to reduce barriers to the import of agricultural products, clothing, footwear and simple processed manufactures which the world's poor can sell to them.

It is also often argued that some environmental and labour standards amount to imposing one country's social norms on another. One society might find it repugnant to kill a particular species of animal, which is a staple food or source of livelihood in another country. Landmark disputes that have come to the WTO include American restrictions on imported tuna and shrimp caught with nets that might have killed dolphins and sea turtles, respectively. One society might believe that labour standards should include workers' participation in decision making while another might regard this as anathema. However, one should not push this argument about alien norms too far, lest one end up regarding even basic human rights as culturally relative.

But again, trade restrictions are not the answer. Just as there are international agreements on human rights, there are also agreements such as the Montreal and Kyoto protocols negotiated outside the WTO framework to try to tackle activities that have environmental effects (depletion of the ozone layer and global warming, respectively) beyond a country's borders. Other international agreements regulate trade in endangered species, hazardous wastes, and genetically modified organisms. Conventions of the International Labour Organization prescribe and monitor mutually agreed labour standards, though the ILO cannot enforce them.

Beyond these global norms, it should be left to each country to set its own standards, and the degree to which it is willing to compromise on them in the interests of economic development. The West, it must be recalled, industrialised on the strength of tariff protection of its new industries, highly polluting technologies, and brutal exploitation of labour both at home and in the areas under colonial domination. Yet it now tries to impose free trade, environmental and labour standards on much poorer countries. The experience of developed countries shows that people themselves demand better standards as they become richer. Why is this privilege being denied to the world's poor?

Activity 1

I have made a strong argument about a controversial subject on which sharp disagreements abound. Look back at the arguments in the preceding paragraphs. Then think of a particular environmental or labour standard you have heard about through the media and write some brief notes as follows. Do you agree with its objectives? Who gains and who loses from the imposition of such a standard? Are there any better ways in which to meet its objectives?

Discussion

You will have used your own example. As an illustration, think of the emotive issue of child labour. If this were to be effectively banned in developing countries, the costs of export industries (such as garment making) would rise in those countries, as employers either closed down or hired adult workers at higher wages. Firms and workers in developed countries who produce garments that compete with imports would gain; consumers in those countries would lose by having to pay more. In developing countries, the child workers would lose (if no better alternative were provided), as would those making a living from the occupations in which the displaced children would end up (typically, begging, street vending and domestic services), where competition would increase. The adults who replaced the children would gain, but they would have to be paid higher wages and the industry's sales would be reduced, so they would be fewer in number than the children they had displaced.

Rather than an outright ban, a better way to tackle the problem might be to provide funding to improve the education, health and nutrition of the children who are withdrawn from work, so as to prepare them for more productive jobs through which they could contribute to their families when they grow up. To improve these employment opportunities, it is important to dismantle the barriers that developed countries have imposed on simple manufactures exported by developing countries. Temporary financial compensation could also be provided to the families; this would not amount to large sums, as the children's cash contribution to their families is typically small.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

4.3 Asymmetry between labour and capital

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

Finally, stepping back to get a broader picture, I would like to point to the asymmetry built into the emerging institutional framework governing international economic relations, of which the WTO is one important pillar. The various WTO agreements encourage free movement of goods and certain kinds of services. Possible agreements on cross-border investment and competition policy may allow for freer international movement of capital, already encouraged by the IMF. Yet there is no move towards opening up the international movement of labour; if anything, barriers are being raised rather than dismantled.

This asymmetry is particularly evident in a Uruguay Round agreement that has not been discussed so far in this unit: the General Agreement on Trade in Services (GATS). Under the GATS, restrictions are being dismantled on cross-border provision of services such as telecommunications, banking and insurance through the setting up of branches of multinational corporations. This again is encouraging the free movement of capital mainly from developed to developing countries. Developed countries have shown far less interest in liberalising services involving the movement of people. What concessions have been made relate mainly to the temporary movement of business visitors and of managers and technicians employed by companies in the services markets dominated by Western corporations. In contrast, note that the movement of capital is not treated as temporary, that the transmission of technology has been severely restricted by the TRIPS agreement, and that no one is talking about allowing free migration of the vast army of skilled and unskilled manual workers who constitute the vast majority of the labour force in the developing world.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

5 Conclusion

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

International economic relationships are constituted in large part by international trade and investment. I have argued that the current trade regime, apparently one of voluntary adherence to negotiated rule-making, is actually systematically weighted against the needs of developing countries. This asymmetry is rooted in a context where rich countries are eager to prescribe free trade for others but reluctant to impose it on themselves and able to avoid doing so. Its consequences are exacerbated in many developing countries by the social dislocation that trade liberalisation has caused.

The current world trade regime has a mixed record in promoting growth and reducing poverty. Developing countries furthermore are being pressured to forego the right to implement policies that the developed countries used to attain their present level of affluence, and are being forced instead to set up institutions and implement standards that have historically emerged at a much later stage of development in the West.

In September 2003, the Ministerial Conference of the WTO at Cancun (Mexico), which was due to have taken the Doha agenda forward, collapsed without any agreement, largely because of determined and united opposition from developing countries. On a positive note, in an agreement that was hammered out on the eve of the conference, the USA finally agreed to allow developing countries that lack the capability to produce patented drugs to acquire cheaper emergency supplies by granting compulsory licences to manufacturers in other developing countries. But two of the issues discussed in this unit proved to be the rocks on which the conference foundered. First, the developed countries obstinately refused to make meaningful reductions in their escalating agricultural subsidies, even as they tried to get the developing countries to reduce their tariffs on agricultural products. Something that received much publicity was the observation that each cow in the EU is subsidised to the tune of over two US dollars a day, which is more than the daily earnings of over a billion poor people in developing countries. The second deal-breaker was the attempt by the EU to load new issues (notably rules governing international investment and competition policy, as mentioned briefly on page 9 of this unit) onto the agenda, against the wishes of most of the developing countries, who argued that they did not fully comprehend the implications. It is not all clear what, if anything, can be salvaged from the Cancun wreckage. Is there any wonder, then, that developing countries are less than enthusiastic about the WTO?

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

Next steps

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

After completing this unit you may wish to study another OpenLearn study unit or find out more about this topic. Here are a few suggestions:

If you wish to study formally at The Open University, you may wish to explore the courses we offer in this curriculum area:

Environment, Development and International Studies

Or find out about studying and developing your skills with The Open University:

Or you might like to:

Post a message to the unit forum, to share your thoughts about the unit or talk to other OpenLearners
Review or add to your Learning Journal
Rate this unit

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

References

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

Blackhurst, R. (1999) ‘The capacity of the WTO to fulfil its mandate’ in Krueger, A.O. (ed.) The WTO as an International Organization. New Delhi, Oxford University Press.

Finger, J.M. and Schuler, P. (2002) ‘Implementation of WTO commitments: the development challenge’ in Hoekman, B.M., English, P. and Mattoo, A. (eds) Development, Trade and the WTO: A Handbook, Washington, DC, World Bank.

Rodrik, D. (1997) Has Globalization Gone Too Far?, Washington, DC, Institute for International Economics.

World Bank (2002) World Development Report 2002: Building Institutions for Markets, Washington, DC, World Bank.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

Acknowledgements

The Open University — Tue, 29 Mar 2011 15:34:01 GMT

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

Grateful acknowledgement is made to the following sources for permission to reproduce material in this unit.

Every effort has been made to contact copyright holders. If any have been inadvertently overlooked the publishers will be pleased to make the necessary arrangements at the first opportunity.

Making the International: Economic Interdependence and Political Order: copublished with Pluto Press. (2004) (Chapter 2, pp. 11–31)

Photos

Don't miss out

1. Join the 200,000 students currently studying with The Open University.

2. Enjoyed this? Browse all our free course materials in the LearningSpace.

3. Find out more about this topic on OpenLearn.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Licence

RSS Feed for the unit Developing countries in the world trade regime

Introduction

Learning outcomes

1.1 The WTO

1.2 Developing countries

Question

2 The road to Doha

3.1 Market access: expectations unfulfilled

3.1.1 Agriculture

3.1.2 Textiles and clothing

3.1.3 Tariff escalation

3.2.1 Social disruption

3.2.2 The protection of intellectual property: the costs of TRIPS

3.2.3 Fighting on too many fronts

Question

3.3.4 Dispute settlement

Question

4.1 Uniting the developing countries

4.2 Environmental and labour standards

Question

Activity 1

Discussion

4.3 Asymmetry between labour and capital

5 Conclusion

Further reading

Next steps

References

Acknowledgements

Photos

Don't miss out