What does GATT mean for Indonesia?

The recent GATT ministerial conference in Morocco endorsed the results of the Uruguay Round of trade negotiations. Economist Mari Pangestu looks at what the endorsement means to Indonesia.

JAKARTA (JP): The recently signed Final Act of the Uruguay Round of Multilateral Trade Negotiations was hailed with jubilance as well as trepidation.

Free traders and countries which rely on international trade also breathed a sigh of relief. After all one of the important reasons for the initiation of the Uruguay Round in 1986 was to thwart the increase of protectionist tendencies by both developed and developing countries.

Especially worrisome was, first, the acceleration of unilateral actions to offset perceived "unfair trade" by the U.S. and EU through anti-dumping laws, countervailing duties, voluntary export restraints and use of the Super 301.

A second worrying development was the development of regional (e.g. European Union) and bilateral (e.g. U.S.-Japan) trade agreements.

The collapse of the Round and the multilateral trading system had been weighing on the world economy since its initial due date of completion was imposed for the end of 1990.

A strengthened GATT system also provided additional relief to those who feared that there would be an increase in economic friction in the post cold war era as economic tensions that had been muted due to the importance of cooperation on the security front were unleashed.

As such, developing countries should rejoice because the completion of the Round has removed one of the big dark clouds that have affected confidence with regard to the future of the world trading system.

This, in turn, is expected to contribute to the recovery of the world economy which has moved sluggishly through the first three years of the 1990s.

World trade is expected to grow at four to five percent per year for the remainder of the decade and one percent of this is estimated to be a result successful completion of the Uruguay Round (GATT Secretariat).

The majority of the increase in trade will come from previously protected industries, mainly the textiles and agriculture sectors -- both of which are important for developing countries.

The trade liberalization that has come the Uruguay Round is also expected to contribute one percent to world income growth in the next 10 years because of increased efficiency in resource allocation.

And these estimates include just the static gains. There will also be dynamic gains from opening up of markets due to increased innovation, increased technological capability and economies of scale which could mean higher growth in world trade and income.

Other than the improved opportunities due to market opening and income growth, developing countries such as Indonesia should celebrate the strengthened GATT and the accompanying institutional changes.

Such countries can now fall back on the GATT rules and principles in fending off strong protectionist, often unilateral, actions.

Developing countries are in a weak bargaining position when facing large industrial nations bilaterally or regional groups of industrialized nations. Indeed the strengthened GATT was intended to discipline trade practices that would take us away from the principles of free trade.

Another reason for the initiation of the Uruguay Round is to make GATT more relevant and responsive to changes in the international trading environment by including new issues such as services, trade related investment and intellectual property rights.

The more credible GATT is founded on its ability to address new issues flexibly and fairly, otherwise once again there would be deviations from the multilateral trading system. Thus, while developing countries may feel that new issues are being championed by developed countries, they should remember that the alternative -- an escalation of unilateral, bilateral and regional action -- is much less attractive than a strengthened multilateral system.

These new issues will in the medium and long term be important for developing countries also.

Of course we are not out of the woods yet. The Uruguay Round agreement is far from perfect. It contains many weaknesses and compromises that are inevitable in negotiations between 125 countries.

The increased trade tensions between Japan and U.S., which preceded the signing in mid-April, is sufficient to underscore that the multilateral system will continue to coexist with rules of the game being determined at the regional, bilateral and unilateral levels.

The cynical are predicting that the emerging pattern will be one of GATT or no GATT, but this is partially true.

Efforts to limit imports for various reasons such as protection, environmental considerations and labor rights, will continue and there will be mechanisms to achieve this within and outside of the GATT treaty.

For instance while the rules on antidumping have been improved, there is still likely to be antidumping actions put into effect under the guise of protection.

Despite its limitations, the GATT system is still the best to ensure a fair trading environment. Thus, it is really up to the developing countries to prepare so they can take advantage of the improved rules under the improved GATT.

It is now especially important that all GATT nations understand how to use the strengthened dispute settlement mechanism so they can go through the WTO effectively. There is also a need to anticipate the new issues in the post Uruguay Round with regard to trade and environment, labor standards and competition policy.

Finally, it is important to note that there will be no free ride for developing countries. For the first time developing countries are participating fully in the GATT negotiations and will have to commit to open their markets and follow GATT discipline, as well as being monitored of the new GATT policeman, the WTO.

Therefore, the process of opening up in the next ten years will mean increased competition in the domestic market. But this is nothing new, since this has been the direction of policy since deregulation and reforms were undertaken in 1986.

Now, however, we cannot postpone this process because of our commitments. To be able to take advantage of new international trade opportunities, Indonesia will have to be competitive.

Indonesia's homework to prepare for the new treaty is clear. There is no turning back, and many steps need to be taken to ensure our competitiveness. These range from improving the investment climate, continued deregulation, alleviating infrastructure bottleneck, increasing our technological capability and so on.

The writer is head of the economics department at the Center for Strategic and International Studies and a lecturer at University of Indonesia.