Sat, 15 May 2004

How WTO talks will affect us

Martin Khor The Star Asia News Network Selangor, Malaysia

In the next two months, there will be intensive talks in and about the World Trade Organization's (WTO) agenda as countries try to meet a new deadline of the end of July to conclude "framework agreements" on some issues.

The key topics include the so-called "Singapore issues" as well as agriculture and industrial tariffs.

The "Singapore issues" (so-called as they were first introduced at the WTOs Ministerial in Singapore in 1996) are investment, trade and competition, transparency in government procurement and trade facilitation. The talks on services are also proceeding.

How these agreements will turn out will have serious implications.

While the theme of last week's Budget Dialogue sessions (chaired by Prime Minister and Finance Minister Abdullah Ahmad Badawi) was Public and Private Sector Partnership towards enhancing Malaysia's Performance and Competitiveness -- there are strong global dimensions that will affect the country's future economic performance and competitiveness.

Strengthening the nation's economy depends on managing both the domestic and international aspects. Global developments can impact on Malaysia's economy's performance, as shown by the financial crisis of the late 1990s.

In recent years there has been concern that some existing rules and especially some proposals being put in the WTO by some developed countries could affect Malaysia's "policy space" and constrain the country's ability to maintain some important national policies.

At the WTO's Ministerial Conference at Cancun in September 2003 there was an attempt by major developed countries to start negotiating on the "Singapore issues". However, many developing countries (with Malaysia playing a prominent role) were able to prevail on this point.

But, negotiations and discussions have resumed since March 2004. At the end of July, a General Council meeting will make some important decisions.

Since 1996, the developed countries have put immense pressure on starting negotiations towards new WTO agreements on these four topics. Many developing countries have been resisting the start of negotiations.

If new agreements are formed on these issues on the lines proposed by the developed countries, it would be difficult for developing countries to maintain many of their key economic and social policies.

For example, in the case of an investment agreement -- with "free competition" -- Malaysia would find it difficult to regulate foreign investments (e.g. foreign investment requirements on entry, equity, joint ventures, inflows and outflows of funds, etc) and to give preferences or aid to local firms.

On government procurement, the eventual aim is a treaty that would provide "national treatment" to foreign firms, and thus prohibit preferences to local firms for government projects and supplies to government.

The proposed agreements are aimed at curbing assistance to locals, while giving unprecedented rights to foreign goods, services and firms. Social development policies such as balancing of equity shares, as well as macro-economic management, and regulation of financial flows, would be affected.

Although the Cancun talks failed, an opportunity now exists to have at least three Singapore issues -- trade and investment, trade and competition policy and transparency in government procurement -- dropped altogether from the WTO agenda. A decision to do this can be proposed at the July meeting of the WTO General Council and if backed by a majority of developing countries, it could get these issues off the table.

The EU, Japan and some other countries still want talks to continue on all four issues (the fourth is trade facilitation). But if a strong majority of developing countries take a strong position that three of the issues should be knocked off the agenda, they could well succeed.

What is required is an effort to unite as many developing countries as possible to take a common position.

The WTO is also negotiating a new round of industrial tariff cuts, under the title "non-agriculture market access" (Nama). The main text being considered is known as the Derbez text (after the name of the Mexican Trade Minister who chaired the Cancun conference).

However, there are many problems in the Derbez text, which could threaten the viability and growth of local firms.

o First, it wants a "non-linear formula" which dictates that there be corresponding percentage tariff cuts, where tariffs are higher. This formula will drastically reduce developing countries tariffs, resulting in cheap imports that threaten their domestic industries.

o Second, it dictates that almost all presently unbound tariff lines shall be bound at twice the present applied rate (i.e. that tariffs cannot be raised above this bound level) and also be subjected to the non-linear formula.

o Third, there is also a "sectoral approach" proposal that tariffs be brought down quickly to zero in a few years for seven or more sectors. Local firms in these sectors will be affected.

As an answer to these proposals, the following positions can be taken:

o Developing countries should not be subjected to the "non- linear" and sectoral approaches.

o They should be given the flexibility to determine their own rate of tariff reduction and the products for which to bind their tariffs -- similar to the approach in the Uruguay Round talks (1987-1995), in which developing countries were given a target of average overall reduction of 27 percent, with the flexibility to choose the rates of each tariff line.

Some of the major developed countries (and some developing countries) have made requests through the WTO services negotiations for Malaysia (and other developing countries) to commit to remove restrictions and regulations (or to prohibit future ones) in a wide range of service sectors, including finance, distribution, telecommunications, other utilities, and professional services, etc.

They would like foreign service providers not to face restrictions regarding entry and equity ownership.

It is important to note that there is a difference between unilateral liberalization, which is done by a country at its own pace, and liking, and liberalization under WTO commitments.

Under unilateral liberalization a country can decide it is in its own interests to liberalize and allow foreign participation up to a degree and change without having to be penalized.

However, if liberalization measures are committed under the WTO (by entering into the schedules in the services agreement), the country is legally bound to stick to these levels of liberalization and cannot alter them unless compensation is made.

Thus, if some degree of liberalization is seen to be desirable in particular sectors, it may be better to carry out this exercise unilaterally without necessarily committing it under the WTO.

The services agreement in WTO also allows countries to choose its own rate of commitments. Thus although a country like Malaysia may receive requests for liberalization of many sectors from many countries, it need not agree to them. Developing countries are especially allowed by the WTO services agreement to liberalize fewer sectors at a slower pace.

A services master plan mapping out national strategy for services should be formulated. Within that plan, the enhancement of domestic services sector, and their potential for export, should be aimed for. The plan should also propose what is the optimal level of foreign participation in the various sectors. Based on this, the desired scope and pace of liberalization can be determined.

Liberalization measures, when deemed appropriate, can be undertaken on a "unilateral" basis, without necessarily committing these measures (or without necessarily at the same level liberalized) in the WTO. This allows for flexibility to change policies or revert back, should the need arise.

It should be clear that while other countries are free to make requests, the country is not obliged to agree to any of the requests, and should thus not feel "pressurized" into making commitments beyond what it is comfortable with.