WTO braces for new millennium of trade talks

By Tony Hartono

WELLINGTON, New Zealand (JP): Ministers of all 134 World Trade Organization (WTO) members will meet in Seattle from Nov. 30 to Dec. 3 to launch a new millennium of trade negotiations.

At the ministerial conference in Singapore in December 1996, they signed the Singapore Declaration, transforming the General Agreement on Tariffs and Trade (GATT) into the WTO. The declaration also agreed to strengthen the role of the WTO in creating freer world trade.

Although GATT succeeded in lowering some industrial tariffs during the Uruguay round of 1986 to 1994, its main objectives have not yet been fully achieved.

In fact, GATT made slow progress in reducing tariffs on many selected goods, particularly agriculture and textiles, while leaving export subsidies to remain large. Protective tariffs can seriously distort the pattern of trade, while subsidies will encourage overproduction.

As subsidizing countries cannot sell surplus products at an international price, the growth of world trade will slow down, causing global living standards to fall. The challenge for the forthcoming WTO Ministerial Summit is how to address these trade barriers and to resolve them. But can the WTO meet the challenge? The following highlights this.

The WTO is a comprehensive and complex multinational organization in history, and its mandate has been broadened to cover both trade and nontrade related issues.

Within the organization, the highest authority is in the ministerial conference, which meets approximately every two years. To carry out its daily activities, the ministerial conference established the General Council, which appointed Mike Moore as the new director general of the WTO for three years from Sept. 1.

As noted above, the WTO will continue to focus on the unfinished Uruguay round negotiations in dismantling tariff and other nontariff barriers on trade. For many countries, some selected industrial tariffs remain too high while retaining large subsidies on farm products.

In many cases, these barriers are designed to protect farmers' incomes. Asia Pacific Economic Cooperation (APEC) leaders in Auckland strongly asserted this. The United States, the leader of free trade, imposed a tariff of nine percent on New Zealand lamb imports, a decision which led to strong protests by New Zealand farmers.

Cars entering Indonesia have a tariff of over 200 percent on them. The European agricultural policy still maintains large subsidies, although the EU's Agenda 2000 agrees to gradually reduce them.

In addition, the proposal for imposing tariffs on the Internet and electronic commerce is another controversial issue on the WTO trade agenda.

In regard to its nontrade activities, the WTO has the power to impose sanctions on any member that clearly disobeys WTO rules and principles of nondiscrimination, reciprocity and equal access to markets. Nondiscrimination requires that no country receives special treatment in international trade, whereas reciprocity means entry in one market in return for entry into another.

Access to markets is linked to the principle of comparative advantage, not to subsidies or dumping that result in trade wars. Nevertheless, trade is a complex business and very often member countries differently interpret the WTO rules, causing trade disputes to occur. To resolve these disputes and to ensure their compliance, a Dispute Settlement Body (DSB) was set up.

The WTO has also established a Trade Policy Review Body (TPRB) to ensure that no countries will produce national regulations that are incompatible with WTO rules. This incompatibility is asserted in the standstill and rollback WTO provisions. The standstill requests all WTO members not to issue national regulations that will disturb trade relations among them.

The rollback calls for all members not to increase tariffs on any products which were reduced to zero percent without consulting the WTO.

Under these provisions, Indonesia cannot change its level of tariffs on rice and sugar from zero percent to 30 percent or 35 percent next year without reasons acceptable to the WTO, although the International Monetary Fund (IMF) gave a green light to this plan. As part of its letter of intent with the IMF, the Soeharto government agreed to reduce tariffs on these two commodities to zero percent.

Other nontrade issues that the Seattle round must concentrate on are the contentious issues of labor standards and trade and the environment.

Apparently, the United States' trade policy to protect its lamb industry from international competition has a lengthy tale because New Zealand requested the WTO to form a dispute panel. The main task of the panel is to examine the legality of the U.S. policy on lamb tariffs and make the final recommendation.

This legal action by New Zealand indicates our seriousness to urge all WTO members, including the United States, to respect WTO rules. As noted above, the United States imposed a nine percent tariff on New Zealand lamb imports starting from July 1999, which will gradually fall to three percent in the year 2002.

Basically, New Zealand accused the United States of breaking Articles 1 and 3 on tariff and trade agreements, but the United States denied it by saying that under the WTO safeguard clause of Section 21, they are entitled to give protection to any industry that is "injured".

In this case, the United States used the "infant industry" argument to justify its lamb tariff protection, whereas, in fact, the argument was more appropriate for developing members which face persistent trade deficits.

Normally, the dispute panel will take at least one year to resolve issues. No further action is required if the United States wins. But if it loses, it may make an appeal within three months. If the appeal is still rejected, two things might happen. (1) The United States must compensate New Zealand farmers and revise or even revoke its lamb tariffs. (2) If the United States ignores the decision, the WTO can request New Zealand to retaliate and close its market to all American goods. However, if the United States does the same, a trade war begins.

The WTO is very important to all New Zealanders because its economy very much depends on external trade. More than half its export receipts come from farm products, and the inclusion of farm products as that of industrial goods in the WTO will expand market opportunities for our primary products and services.

But many international commentators are cynical about the successful conclusion of the Seattle round, at least for the following reasons: 1. Over the last two years, the proponents for protectionism believed that the move of liberalism had gone too far, causing the global crisis to occur in 1997. They also claimed that global free-trade negotiations had given up national policies, particularly in the financial sector, which needs to be controlled to prevent crises. Therefore, trade negotiations must be compatible with national regulations, but not the contrary. 2. At the last Asia-European Meeting (ASEM) in Berlin, 25 ministers failed to agree on a draft of the inclusion of labor standards in the Seattle round. Dr. Supachai, the next director general of the WTO, asserted that the implementation of the draft would upset the comparative advantage of trade from developing countries, thus restricting exports to developed countries. Developing countries represent more than 75 percent of WTO members. Instead of the WTO, the International Labor Organization (ILO) should appropriately handle all issues on labor and other social clauses. 3. A meeting of 25 WTO ministers in Lausanne, Switzerland last month achieved insignificant progress in freeing up agricultural exports. For food security reasons, Japan, supported by the UE, Norway, and Korea, was not in favor of reducing trade barriers on their highly protected agricultural sectors. 4. The performance of the WTO dispute panel was damaged by its decision on banana exports from the Carribean to the EU in favor of the United States. Knowing these trade opportunities, the United States accused the exports of being illegal and they must be stopped. As a result, thousands of Carribean farmers are screaming.

Unless there are significant changes in the above attitudes in the next few days, the launch of a new round of free-trade negotiations will remain doubtful.

Tony Hartono Ph.D is a former senior economic researcher with the ASEAN Secretariat in Jakarta and currently employed by The Open University, Department of Economics, Lower Hutt.