SPECIAL AND DIFFERENTIAL TREATMENT FOR DEVELOPING COUNTRIES IN THE WTO

Transcription

1 TRADE-RELATED AGENDA, DEVELOPMENT AND EQUITY (T.R.A.D.E.) WORKING PAPERS 2 SPECIAL AND DIFFERENTIAL TREATMENT FOR DEVELOPING COUNTRIES IN THE WTO This working paper, written by HESHAM YOUSSEF, of the Permanent Mission of Egypt to the United Nations Office and Specialized Agencies at Geneva, was initially commissioned by the South Centre pilot project on WTO. An earlier draft of the text appeared as a communication from Egypt in the WTO (Special and Differential Treatment for Developing Countries in the Multilateral Trading System, WT/GC/W/109, WT/COMTD/49, 5 November 1998). The current text is the result of additional work by the author and has been edited by the South Centre. SOUTH CENTRE JUNE 1999

2 THE SOUTH CENTRE In August 1995, the South Centre became a permanent intergovernmental organization of developing countries. In pursuing its objectives of promoting South solidarity, South-South co-operation, and co-ordinated participation by developing countries in international forums, the South Centre has full intellectual independence. It prepares, publishes and distributes information, strategic analyses and recommendations on international economic, social and political matters of concern to the South. The South Centre enjoys support and co-operation from the governments of the countries of the South and is in regular working contact with the Non- Aligned Movement and the Group of 77. Its studies and position papers are prepared by drawing on the technical and intellectual capacities existing within South governments and institutions and among individuals of the South. Through working group sessions and wide consultations which involve experts from different parts of the South, and sometimes from the North, common problems of the South are studied and experience and knowledge are shared.

3 CONTENTS List of Abbreviations I. Introduction... 1 II. Special and Differential Treatment: Background and Policy Issues at Stake... 3 II.1 A historical note... 3 II.2 Some underlying issues... 6 II.3 Special and differential treatment in GATT in the pre-uruguay Round period 9 II.3.1 Article XVIII of GATT: Balance-of-payments difficulties II.3.2 Part IV of GATT: Trade and Development II.3.3 The Tokyo Round II.4 Special and differential treatment in the context of the Uruguay Round negotiations III. Special and Differential Treatment Under the WTO III.1 Brief background III.2 Categories of S&D treatment III.3 Special and differential treatment, market access and technical assistance III.3.1 Increasing trade opportunities for developing countries III.3.2 Technical assistance III.4 Implementation of special and differential treatment under the WTO III.4.1 The Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) III.4.2 The General Agreement on Trade in Services III.4.3 The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) III.4.4 The Agreement on Agriculture III Domestic support commitments III Export subsidy commitments... 27

4 iv III Market access commitments III.4.5 Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries (NFIDCs) III.4.6 The Agreement on the Application of Sanitary and Phytosanitary Measures III.4.7 The Agreement on Technical Barriers to Trade III.4.8 The Agreement on Textiles and Clothing (ATC) III.4.9 The Agreement on Trade-Related Investment Measures (TRIMs) III.4.10 The Agreement on Subsidies and Countervailing Measures III.4.11 The Agreement on Implementation of Article VI of GATT (Antidumping) III.5 Special measures in favour of least developed countries IV. The Way Ahead IV.1 Future approach to special and differential treatment IV.1.1 IV.1.2 The issue of the adequacy of the transitional periods and of modifying agreements The issue of flexibility concerning domestic policy options to facilitate the process of economic growth and development in developing countries IV.2 Conclusions Annex 1: GATT and Developing Countries Selected Bibliography... 48

5 PREFACE The South Centre, with funding support from UNDP, has established a pilot project to monitor and analyse the work of WTO from the perspective of developing countries. Recognizing the limited human and financial resources available to the project, it focuses on selected issues in the WTO identified by a number of developing countries as deserving priority attention. It is hoped that the project will lead to more systematic and longer term activities by the South Centre on WTO issues. An important objective of the project is to respond, to the extent possible within the limited resources, to the needs of developing country negotiators in the WTO for concise and timely analytical inputs on selected key issues under negotiation in that organization. The publication of analytical cum policy papers under the T.R.A.D.E. working paper series is an attempt to achieve this objective. These working papers will comprise brief analyses of chosen topics from the perspective of developing countries rather than exhaustive treatises on each and every aspect of the issue. It is hoped that the T.R.A.D.E. working paper series will be found useful by developing country officials involved in WTO discussions and negotiations, in Geneva as well as in the capitals. The text of these working papers may be reproduced without prior permission. However, clear indication of the South Centre s copyright is required. South Centre, June 1999

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7 LIST OF ABBREVIATIONS AMS ATC BOP CCFF DSU FAC GATS GATT GDP GNP GSP LDCs MFN MTS NFIDCs NTMs QRs R&D S&D SMC SME SPS SSG TBT TNC TRIMs TRIPs Aggregate Measure of Support Agreement on Textiles and Clothing Balance-of-payments Contingency and Compensatory Financing Facility Understanding on Rules and Procedures Governing the Settlement of Disputes Food Aid Convention General Agreement on Trade in Services General Agreement on Tariffs and Trade Gross domestic product Gross national product Generalized System of Preferences Least-developed countries Most Favoured Nation Multilateral trading system Net Food-Importing Developing Countries Non-tariff measures Quantitative restrictions Research and development Special and differential Singapore Ministerial Conference Small and medium sized enterprises Sanitary and phytosanitary Special safeguard Technical barriers to trade Transnational Corporations Trade-related investment measures Trade-related aspects of intellectual property rights Organizations EU FAO IFIs IMF ISO ITC ITO NAFTA UN UNCTAD UNDP WTO European Union Food and Agriculture Organization of the United Nations International financial institutions International Monetary Fund International Standards Organization International Trade Centre (UNCTAD/WTO) International Trade Organization North American Free Trade Association United Nations United Nations Conference on Trade and Development United Nations Development Programme World Trade Organization

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9 I. INTRODUCTION One of the major issues in multilateral trade negotiations and in the implementation of multilateral trade rules is the extent to which the rights and obligations of developing countries, on account of their lower levels of development, should differ from those of developed countries and how this should be achieved. The manner in which countries at different levels of development are treated in world trade has been a major, often controversial issue. Special and differential (S&D) treatment, which addresses the requirements and special needs of the weaker member states, is of fundamental importance for the developing countries. Over the years, first in the framework of the General Agreement on Tariffs and Trade (GATT), and currently in the World Trade Organization (WTO) as the liberalization commitments of developing countries have deepened and the multilateral trade agenda broadened, the issue of S&D treatment has grown in importance. For example, agreements have been concluded in a number of new areas critical for national development, including trade in services, the protection of intellectual property rights and agricultural trade, as a result of which developing countries have assumed important new commitments, as they have in other areas, such as market access, technical barriers to trade, and sanitary and phytosanitary measures. The experience gained and the challenges faced in the process of implementation of the Uruguay Round so far should contribute to an evolution and improvements in the nature and focus of S&D treatment, taking fully into account the evolving development needs of developing countries, particularly the weakest among them, namely the leastdeveloped countries (LDCs). At this crucial time, when intense negotiations are set to start in WTO by the year 2000, and when the trade negotiating agenda may be broadened even further, developing countries need to examine whether the S&D provisions in the Uruguay Round Agreements have been implemented in letter and spirit, are adequate to level the unequal playing fields between them and the developed countries, are contributing to their national development and are allowing them sufficient options and space to manoeuvre. They should also examine how their evolving needs and requirements with respect to S&D treatment should be addressed in the future, by the improvement and strengthening of what is already in place in given agreements, and by assuring that any new areas fully take into account and reflect their development needs and situation. In the process, developing countries should share their experience regarding their respective efforts to take advantage of S&D provisions and examine the role that the WTO secretariat, and the United Nations and the United Nations Conference on Trade and Development (UNCTAD) in particular, could play in assisting them to make the best possible use of S&D treatment.

10 2 South Centre T.R.A.D.E. Working Papers The paper aims to assist developing countries in this process by: reviewing various S&D provisions prior to and following the Uruguay Round; identifying S&D provisions that have not been implemented, and also those where implementation has been less than adequate; identifying the difficulties that prevent developing countries from maximizing the benefits from use and implementation of S&D provisions; indicating how S&D provisions can enhance the participation of developing countries in trade negotiations and assist them in implementing their WTO obligations; and presenting proposals for the improvement of S&D treatment in the ongoing and future negotiations in the WTO. In future, developing countries are likely to be in a better position and to have more leverage to press for improvements in S&D treatment, including in future negotiations, due to various factors. They have gained more negotiating experience during the Uruguay Round negotiations. They have also gained practical experience in the course of implementation of Uruguay Round Agreements, both in their domestic policies and through their participation in international trade. Also, developed countries have become increasingly interested in the markets of developing countries, which have grown in relative terms, and they are therefore keen to see the consolidation and furtherance of trade liberalization efforts in developing countries. (This was quite evident in the negotiations that took place after the conclusion of the Uruguay Round in the areas of basic telecommunications, financial services and information technology.) Finally, while developing countries do not normally take a group position on issues in WTO, S&D treatment is a cross-cutting policy matter and an issue where they have common and shared interests and thus have considerable scope to co-operate and press their demands in a co-ordinated manner as a group. The remainder of this paper is divided into three parts. The first refers briefly to the conceptual and historical background with respect to special and differential treatment. The second part examines the special and differential treatment provisions in various WTO agreements and their implementation since the inception of the WTO. The final, concluding part discusses the issue of how special and differential treatment should be approached as the multilateral trading system continues to evolve.

11 Special and Differential Treatment for Developing Countries in the WTO 3 II. SPECIAL AND DIFFERENTIAL TREATMENT: BACKGROUND AND POLICY ISSUES AT STAKE II.1 A historical note While the term special and differential treatment is of relatively recent origin, the idea is more than half a century old, going back to the initial attempts to cast the foundations of the international trading system at the 1947 Havana Conference. Independent developing countries were relatively few in those days, and still did not represent a major force to be reckoned with on the global scene. Nonetheless, the development concerns and special needs of developing countries figured in the ideas embodied in the Havana Charter and the International Trade Organization (ITO) to which it was supposed to give rise. Among other things, the Charter recognized the importance of international trade in commodities and the need to deal with it in the framework of the new organization. The ITO, however, was stillborn and many of these intentions remained unfulfilled. In its place, GATT emerged as a provisional tariff agreement, which dealt with only a part of the international trade agenda. Its early reputation as a rich men s club was due to the fact that its priorities and the secretariat and processes were dominated by the North, and the concerns and needs of the emerging developing world were little more than an afterthought and were hardly addressed. Indeed, the nature of GATT led to mounting criticisms from the developing countries, of which only a relative few were members. These criticisms were expressed primarily within the framework of the United Nations, where developing countries found an appropriate political platform to air their views and demands. In the very early days it was mostly the Latin American countries that articulated the complaints. But these were joined soon by the group of newly independent nations of Asia and Africa, which upon becoming members of the United Nations, sought international understanding and support for their needs to overcome their colonial legacy and achieve their development objectives. Essentially comprising a facility to negotiate reciprocal tariff cuts, GATT was not geared or ready to respond to developing countries needs and demands for a comprehensive trade agenda, or to grant special status and treatment for countries at lower levels of development. GATT was not a trade policy forum and the majority of its members, coming from the North, were not receptive to the political demand that an organic link be forged between trade and development, and that international trade should become a strategic means to be used by the international community to promote development in the developing countries. In the face of this resistance by developed countries, the developing countries began to jointly advance their common positions on trade and development issues in the United Nations. The first UN Conference on Trade and Development in 1964 brought this into focus, and gave birth to a new trade and development organization, in which their aspirations were embodied and a comprehensive trade and development agenda was

12 4 South Centre T.R.A.D.E. Working Papers established. The first UNCTAD also witnessed the creation of the Group of 77, as a collective instrument of the developing countries to promote their shared development interests. In effect, the process and pressures from the South, which led to the establishment of UNCTAD, were also largely responsible for Part IV being incorporated into GATT Articles. Intended, at least in part, as a response to the political challenge of the new institution, the aim of Part IV was to introduce a development dimension into GATT, thus making it more acceptable to developing countries, by giving legal recognition to their demands for special treatment for countries at lower levels of development and with little or no bargaining power to exercise influence, offer or secure concessions and promote their national goals. Part IV somewhat assuaged the hesitant, even hostile, attitude of developing countries towards GATT. More importantly, it opened the door for preferential treatment of developing countries in international trade rules, in order to promote their development, and provided some flexibility in relation to the notion of strict reciprocity. These were the foundations that made possible the Generalized System of Preferences (GSP) negotiated within UNCTAD. Part IV also made it easier for developing countries to adopt a number of domestic measures in support of their national development. The basic thrust of Part IV was to give developing countries a better chance to gain improved access to the Northern markets, which they could hardly do by engaging in quid pro quo bargaining with the industrialized countries via mutual tariff concessions the standard mode of negotiating in GATT. Part IV notwithstanding, the successive rounds of GATT negotiations to liberalize multilateral trade benefited developing countries only to a limited degree, due to the smaller size of their economies and to their exports being typically concentrated on a limited number of products, in particular primary commodities. They were also handicapped in negotiating reductions of high tariffs in developed countries on products of export interest to them because individually they were usually insignificant suppliers of many of these products, and they were also unable to bring pressure to bear on developed countries through collective action. Moreover, developing countries had little to offer in terms of reciprocal concessions; their imports of crucial intermediate and capital goods carried minimal tariff duties, while high duties had to be imposed on their other imports since this was a relatively simple means of collecting revenues for the government in the absence of a developed tax structure. The start of the Uruguay Round of negotiations under GATT, some 20 years after Part IV came into being, signaled the beginning of a new phase which introduced some major changes regarding the issue of trade and development, and the status of developing countries in the international trading system. These changes were in part due to the expanding trade agenda under the impulse of the major countries of the North and their TNCs, and also to the changes that had been taking place in the developing countries economies. They were also due to the shift towards neoliberalism in the North, which was subsequently bolstered by the profound changes in the global geopolitical situation. The changed policy approach resulted in a major revision and roll-back of the traditional international development agenda, a weakening of collective action by the South, and the erosion of the UN s role in the economic sphere. With the weakening of the role of the UN, the focus shifted to GATT and eventually to its institutional incarnation (for GATT

13 Special and Differential Treatment for Developing Countries in the WTO 5 was only a provisional arrangement and was never formally constituted as an organization) after the Uruguay Round was concluded, namely WTO. The changing context was of major strategic significance for the developing countries situation in various ways: The basis for and value of GSP have been eroded as tariffs were reduced on a number of products of interest to developing countries, as a result of the Uruguay Round. While Part IV of GATT continued in existence, its philosophy and political foundations had been weakened and its specific provisions were de facto challenged by a number of outcomes of the Uruguay Round. The liberalization tide involved developing countries in opening up their markets, with major implications for their national development in view of their inability to compete on equal terms with advanced economies. The opening up of their economies in a number of trade-related fields, which did not involve goods, had potentially serious implications for vital economic and social sectors and for the developing countries goal of building up their domestic capacity. While tariffs were gradually being reduced as a means of protecting national economies, new non-tariff instruments for achieving protectionist ends, often disguised as concerns for otherwise legitimate objectives, were being introduced by developed countries. These new and often highly sophisticated forms of protectionism place developing countries in a difficult situation, in part because they are the countries most affected and will find it most difficult to adjust, and also because it is hard to challenge the overt intent of these measures, such as protecting consumer health and safety or pursuing environmental goals. Unlike in the earlier period, when developing countries were mainly concerned with securing improved access to the markets in the North, they now had to face the additional task of having to liberalize and open up their own economies and thus to cope with powerful and often global economic actors from the North. In facing this dual challenge, the developing countries all too often had adequate means neither to penetrate Northern markets, nor to protect their own national space and economies. It is broadly accepted that the new trade policy regime that has emerged does not adequately take into account the development realities and objectives of developing countries. In response to their needs, special and differential treatment was provided as a concession in various agreements. However, rather than being an ambitious and comprehensive strategy to deal with development challenges, in a number of cases S&D treatment often consists of granting longer transition periods for developing countries to adjust to new trade and trade-related disciplines, periods that seem too short, bearing in mind the situation of most developing countries. In other instances, technical assistance

14 6 South Centre T.R.A.D.E. Working Papers was to be offered to help developing countries to participate in the WTO process and to integrate more easily into the mainstream of the world trading system. Moreover, some developed countries, in spite of accepting the principle of S&D treatment, have doubted its value in certain areas, tried to narrow its scope, criticized it on theoretical grounds, and, indeed, have exerted pressures on developing countries involved in accession negotiations to forego some of the benefits accorded to developing countries that are already members of WTO. Yet, special and differential treatment will be required as long as there is a gap between the economic capacities and levels of development of the various WTO members. At present, the gap between developed and developing countries is widening rather than narrowing, and the world trading system of grossly mismatched actors makes a mockery of the notion of level playing fields. This calls for continuing efforts to strengthen S&D treatment and have it recognized as a vital component of the evolving trade regimes, and a means of turning WTO into a development sensitive and supportive organization, which is engaged with the rest of the UN system in an integrated and comprehensive global effort to overcome the inequities in global development. This is a matter of strategic importance for the nature of the world trading system in the 21 st century and for development prospects in the South. II.2 Some underlying issues International trade theory is used to support the pursuit of the liberalization of international trade, on the grounds that it will promote allocative efficiency by exploiting comparative advantage. It is therefore expected to lead to higher levels of production and growth both nationally and internationally. All trading partners are said to benefit, though the theory does not suggest that all will benefit to the same extent. In the real world, market failure, imperfect competition, underdeveloped infrastructure and different levels of human and technological resources challenge the assumptions of the simple theoretical model and its predictions. Nonetheless, there are numerous benefits to be gained by engaging in international trade. The essential point, however, is that trade is there to serve development and should be liberalized to the extent that it serves development objectives. Thus, developing countries, although always eager to engage in greater international trade and in multilateral trade negotiations, have been aware that there may well be limits to what they could gain from such negotiations. These concerns have become more acute as a kind of multilateral trading system has evolved which, in view of the continuing relative weakness of developing countries due both to their relative underdevelopment and to their fragmented participation, has developed on lines that often operate to their disadvantage. To begin with, the initiative in pressing for new multilateral trade negotiations has so far come from developed countries, which by definition have certain priorities and objectives in sight. Naturally, their agenda does not necessarily coincide with the key concerns of the South. For example, for many years developing countries clearly had an

15 Special and Differential Treatment for Developing Countries in the WTO 7 interest in negotiating tariff reductions and better access for products of export interest to them, but they did not carry sufficient weight to press their case. On the other hand, despite developing country resistance to developed country proposals for negotiations on intellectual property rights, eventually an agreement was negotiated, for instance, during the Uruguay Round, which imposed strict disciplines in this area. But no comparable instruments were negotiated, for instance, to facilitate or encourage the transfer of technology to developing countries. Another example is the Agreement on Trade-Related Investment Measures (TRIMs). Under this agreement the interests and rights of investors have been addressed but there are no comparable disciplines regarding the obligations of investors. Similarly, liberalization of trade in goods and services has been aggressively pursued by developed countries while restrictions on the movement of natural persons, an issue that is of great interest to many developing countries, are all but ignored. Hence, the level and coverage of liberalization commitments, and the strength of the rules in some areas, leave much to be desired from the perspective of the developing countries. It is clear also that the very processes by which negotiations are conducted and concluded work to the disadvantage of developing countries. Many developing countries are at considerable practical disadvantage in participating in WTO processes and negotiations, due to their lack of skilled personnel and the high cost of maintaining an adequate-size-delegation to deal with trade matters. 1 While the difficulties facing developing countries in relation to adequate participation in the activities of international organizations are not limited to the WTO, due to the specific nature of this organization and the legal obligations that bind all members once a decision is made, it is imperative that the international community pay particular attention to facilitating the effective participation of developing countries in multilateral trade negotiations. This very substantial practical disadvantage adds to the major disparities in bargaining power between developed and developing countries based on differences in economic and political strength. As a consequence, the negotiated results are likely to reflect the interests of the more powerful parties to the bargain. Implementation of negotiated agreements also presents problems for developing countries. On the one hand, they have substantial practical problems to face in implementing some of their commitments owing to the lower level of development. On the other hand, developed country implementation of several of the Uruguay Round Agreements including those on textiles and clothing, antidumping, agriculture, sanitary and phytosanitary measures, to name but a few has been carried out in a manner that is disadvantageous from the perspective of many developing countries. 1 For example, the WTO convened over 2,300 meetings in 1996 and over 2,800 meetings in 1997, or an average of over 10 meetings each working day. This problem of adequate participation is especially severe for African countries, and for those, also mostly from Africa, that do not even have representation in Geneva.

16 8 South Centre T.R.A.D.E. Working Papers Furthermore, the structural weaknesses of most developing countries mean that they are unable to use the dispute settlement procedures to full effect, being limited in their capacity to defend themselves, to bring disputes before the dispute settlement mechanism, and, indeed, the possibility of using and to pursue retaliation against a non-complying party, or parties especially if they happen to be major trading powers from the North. As noted, the basic approach underlying multilateral trade negotiations -- that of granting reciprocal concessions -- though seemingly rational, poses considerable difficulties for developing countries and places them at a disadvantage in the process of negotiations. Reciprocity thus raises a key issue, that of whether developing countries should make the same concessions as developed countries and be subjected to the same rules. This has become a question of growing importance in view of the fact that developed countries increasingly press for negotiations on matters that are only indirectly related to crossborder flows of trade and hence impinge on domestic policy in numerous areas. If developing countries are to compete on the same (de facto highly unequal) terms (ironically called level playing fields ) with the most powerful and highly competitive economies, the gains from trade are likely to be particularly skewed, and risks or losses for national economies in the South pronounced. Thus in multilateral agreements on trade and trade-related matters, from the point of view of the development of the South, the starting premise should be that special and differential treatment must be extended to developing countries, based on their particular economic circumstances and needs. The condition of underdevelopment makes it essential that developing countries have more flexibility and discretion in the use of policies in order to develop and diversify their productive capacity and ability to export, with a view to enhancing their overall economic growth and development. While the principle of special and differential treatment for developing countries has been accepted and a number of related steps taken, trade and trade-related negotiations still seem to start from the premise that the same rules should apply to all, and only through the bargaining process will special and differential treatment be accorded to developing countries. For developing countries, S&D treatment is now regarded as essential if they are to participate in and accept the additional obligations resulting from multilateral trade negotiations. In the absence of S&D treatment, many developing countries would find it extremely difficult to accept strict disciplines and higher liberalization commitments or be willing to join new negotiations. S&D treatment should give them more flexibility and discretion in the use of public policies to enhance their prospects for industrialization, diversification of production and exports, export promotion and overall growth and development. Crucially, S&D treatment also provides a means through which developed countries could offer enhanced trading opportunities to developing countries. In some cases S&D treatment is used to compensate developing countries for perceived shortcomings in other negotiated agreements. Ideally, shortcomings should be addressed directly in the agreement itself, but this may not be possible or easily achievable in practice. However, since the results of negotiations are usually reached in compromises and packages, the shortcomings in some areas may be compensated in others -- as, for example, when some sectors of major export interest to developing countries are dealt with unfairly, as in the case of agriculture, or are not even subject to strict multilateral

17 Special and Differential Treatment for Developing Countries in the WTO 9 disciplines, or harbour high tariffs in terms of tariff escalation and/or tariff peaks on products of special interest to developing countries. Thus, for developing countries, S&D treatment constitutes an integral part of the balance of rights and obligations of the Uruguay Round Agreements as a whole. They accepted the obligations in the expectation that some of their concerns would be addressed and dealt with through S&D provisions. As already noted, a few developed countries have raised questions about the extent to which developing countries need S&D treatment in certain areas and also whether some S&D provisions compromise the achievement of other benefits from trade liberalization. This leads to continuing attempts by these countries to narrow the scope of S&D treatment in various areas. The lack of sympathy for wide-ranging S&D treatment by these developed countries is also manifested by the increasing pressure they exert on developing countries involved in accession negotiations. As a price for accession to the WTO, they are pressed to accept relatively high levels of obligations and to give up the right to benefit from some of the S&D provisions accorded to existing WTO members. Some developing countries that have recently acceded to WTO have succumbed to this pressure. If this trend continues, there will be varying levels of obligations among developing countries, with recently acceding countries having higher levels of obligations. When new reviews and negotiations take place, these same developed countries may well exert pressure on those developing countries benefiting from better S&D treatment to accept stricter disciplines and a de facto roll-back of what was already achieved. These efforts may gain support, at least indirectly, from the developing countries that have been forced to accept higher levels of obligations in accession negotiations. This is an important systemic issue that should be addressed by all developing countries -- whether they are long standing WTO members, newly acceding members or negotiating to accede to WTO, since this trend can negatively affect their economic prospects and present situation in WTO, and the overall coherence of the WTO agreements. This demands that continuing and additional efforts be undertaken to strengthen S&D treatment and to make it a properly recognized and key in-built part of the WTO process, and of working towards any trade or trade-related agreement in the future. II.3 Special and differential treatment in GATT in the pre-uruguay Round period Since the inception of GATT and until the Tokyo Round there were two main provisions in GATT relating to S&D treatment for developing countries, namely, Article XVIII of GATT entitled Governmental Assistance to Economic Development, which deals with balance-of-payments (BOP) difficulties, and Part IV of GATT entitled Trade and Development. In the Tokyo Round, however, a number of the codes that were negotiated contained special provisions for developing countries. 2 2 Annex I of this paper consists of a table summarizing the major developments in the evolution of S&D treatment in the system.

18 10 South Centre T.R.A.D.E. Working Papers II.3.1 Article XVIII of GATT: Balance-of-Payments Difficulties 3 GATT specified two sets of rules to govern import restrictions for BOP purposes. Article XII entitled Restrictions to Safeguard the Balance-of Payments can be invoked by any member while Article XVIII:B can be invoked only by developing countries. The other difference between these two Articles is that Article XVIII:B permits import restrictions to the extent necessary to deal with the threat of a serious decline in monetary reserves. Article XII, on the other hand, can be invoked only when the threat is imminent, and the reserves very low. Article XVIII has four sections. Section A permits a developing country to modify or withdraw concessions in order to promote the establishment of a particular industry. Section B permits a developing country facing BOP difficulties to control the general level of its imports by restricting the quantity or value of imports. Sections C and D provide procedures by which a developing country may protect infant industries through measures (usually quantitative restrictions) that are not otherwise consistent with other provisions of the GATT agreement. Importantly, Article XVIII:B allows developing countries to impose trade restrictions to overcome their BOP problems, taking into account not only the position of the foreign exchange reserves, but also the development needs of the economy. 4 However, more recently, assessments of the adequacy of foreign exchange reserves are, in practice, being made mainly on the basis of a comparison of the value of reserves with the value of imports during the past few years. The development dimension is being sidelined with the result that the distinction between Article XVIII:B and Article XII is becoming less and less meaningful. It has been argued that, since BOP problems usually arise from a macro-economic imbalance, quantitative restrictions should be used only in the short term, otherwise they will fail to rectify the BOP difficulties and may compromise long term growth. It is therefore argued that a change in the exchange rate, supported by appropriate macroeconomic policies, is a better way of addressing BOP problems. Moreover, in situations where BOP difficulties require immediate remedial action, it is suggested that this should take the form of price-based measures (import surcharges, import deposits, etc.), which generate fewer market distortions than quantitative restrictions. The problem with these criticisms is that they ignore the fact that markets in developing countries may not be very responsive to price-based measures, so these measures may not provide the necessary signals for efficient resource allocation. Article XVIII, therefore, provided developing countries with a large degree of flexibility in the use of their trade regimes to counter BOP problems. This flexibility, however, was criticized by a number of developed countries, which exerted strong pressures to tighten the procedures and put limitations on the flexibility under Article XVIII. 5 3 Due to a close link between the situation before and after the Uruguay Round in respect of Article XVIII, this section deals with the issue in its entirety covering both the pre- and post-uruguay Round situations. 4 When tariff bindings are modified or quantitative restrictions are imposed on imports under Sections A or C of Article XVIII, compensation is to be provided to members affected by these measures who are otherwise entitled to retaliate against the country invoking the said Sections of Article XVIII. 5 The way in which measures have been developed to deal with BOP difficulties is interesting. In the beginning the provisions were inadequate from the perspective of developing countries. They were,

19 Special and Differential Treatment for Developing Countries in the WTO 11 Restrictions on the use of Article XVIII were made part of the Tokyo Round agreements in 1979 when it was decided that priority should be given to least trade distorting measures. Later on, the new Understanding on Article XVIII that was reached during the Uruguay Round imposed more rigid rules for using quantitative restrictions including a commitment to announce time schedules for removing measures taken for BOP purposes, the requirement to give preference to price-based measures, and, when applying quantitative restrictions, the requirement that justification be provided concerning the reasons why price-based measures were not deemed adequate to deal with the BOP situation. Moreover, even when the use of quantitative restrictions is justified, it must be limited in duration and should restrict imports without any discrimination among various sources. During the period in which the Uruguay Round negotiations took place, a number of developing countries disinvoked, that is, stopped using, Article XVIII. Similarly, while 12 consultations have been held with developing countries 6 after the entry into force of WTO, Egypt, Israel, the Philippines, South Africa and Turkey have disinvoked BOP provisions. Five developing countries are currently subject to BOP consultations. These are Bangladesh, Nigeria, Pakistan, Sri Lanka and Tunisia. In some cases pressure was exerted by major developed countries on developing countries to disinvoke BOP provisions. This pressure continues to be exerted on Nigeria and Pakistan. In the case of India, the inability to reach an agreement on how to deal with BOP restrictions led the United States to initiate dispute settlement procedures against India. These dispute proceedings are still underway. 7 The ultimate result will be of considerable importance for developing countries. This is partly because, for the first time, aspects related to the implementation of Article XVIII and its Understanding have been subjected to dispute settlement procedures. The outcome of the dispute between India and the US may provide developing countries with a clearer view on whether any improvements are required in the manner in which GATT/WTO rules deal with their BOP difficulties. The number of developing countries invoking Article XVIII is not large, but this provision remains as a safeguard therefore, developed to allow them flexibility. But this flexibility was considered to be too lenient from the perspective of a number of developed countries and hence stricter rules were put in place during the Uruguay Round. 6 These countries are Bangladesh, Brazil, Egypt, India, Israel, Nigeria, Pakistan, the Philippines, South Africa, Sri Lanka, Turkey and Tunisia. Brazil s request for BOP restrictions was not accepted by the WTO Committee on Balance-of-Payments. 7 In fact, the dispute settlement panel issued its report on 6 April The panel, inter alia, has held that India is not entitled to maintain its balance-of-payments measures on the basis of the proviso to Article XVIII:11. (This proviso states that, no Contracting Party shall be required to withdraw or modify restrictions on the ground that a change in its development policy would render unnecessary the restriction which it is applying under this Section.) The reasoning developed by the panel to reach this conclusion seems to limit the scope of flexibility, available under Article XVIII:B to developing countries faced with balance-of-payments problems. Moreover, while the panel rejected India s argument that a Member invoking a balance-of-payments justification had a right to a lengthy period to phase out the measures that no longer met the eligibility criteria, it also noted that a number of factors favoured a longer implementation period, including the principle of special and differential treatment. This concession, however, seems to reinforce the current view in the North, which supports the S&D being granted to developing countries only in terms of longer implementation periods. India has appealed against the panel s report and now the matter is before the Appellate Body of WTO.

20 12 South Centre T.R.A.D.E. Working Papers mechanism to deal with BOP difficulties and is of great potential importance to all developing countries. II.3.2 Part IV of GATT: Trade and Development In the past, it was recognized by developed countries that developing countries needed to raise revenue through import duties for financing their economic development. Partly for this reason Article XXVIII bis (3) of GATT did not insist on full reciprocity for the concessions granted by developed to developing countries, that is, developing countries were not required to reduce their tariffs by similar margins to benefit from the tariff concessions granted by developed countries. In view of the continuing difficulties of developing countries in the field of trade, they pressed for further concessions, which led to proposals in the early 1960s concerning preferential market access to products originating from developing countries. In 1965 this resulted in the addition of Part IV to the Articles of GATT entitled Trade and Development, adding the following three new Articles to the original 35 Articles: Article XXXVI: which recognizes the development needs of developing countries and the importance of improved market access for their products. It also includes a reiteration of the principle of non-reciprocity. Many developing countries had acceded to GATT under terms that allowed them not to bind tariffs at the time of their accession. Article XXXVI confirmed this non-reciprocal flexibility. Article XXXVII: which incorporates the commitment by developed countries to take specific measures for the improvement of the export prospects of developing countries in the markets of developed countries. Article XXXVIII: which approves the principles and objectives for the granting of preferences to developing country products. These objectives were: increasing export earning of developing countries; promoting their industrialization; and accelerating their economic growth. 8 It should be noted that the commitment under Article XXXVII referred to above is not enforceable through the dispute settlement process in the sense that no retaliatory action can be undertaken if this commitment is not fulfilled by a developed country. Part IV of GATT constituted a formal recognition of the concerns of developing countries in negotiating multilateral trade rules. However, its provisions are all but forgotten. Developing countries need to monitor the implementation of these provisions, particularly in view of the new negotiations that will take place by the year The primary responsibility for trying to achieve the implementation of these provisions falls on 8 It is worth mentioning here that, after concluding the negotiations on these Articles, a 10-year waiver was provided in 1971 to make it possible for developed countries to give tariff preferences to developing countries in the context of their GSP (Generalized System of Preferences) schemes. Later on, the Enabling Clause provided a permanent legal basis for the continuation of GSP schemes.

21 Special and Differential Treatment for Developing Countries in the WTO 13 developing countries, which should follow up these matters in the appropriate WTO bodies. But it must be noted that developing countries cannot succeed in their efforts unless developed countries are also willing to respect these provisions. II.3.3 The Tokyo Round A major part of the Tokyo Round negotiations dealt with codes for dealing with non-tariff measures -- namely antidumping, subsidies and countervailing measures, standards, customs valuation, government procurement and import licensing. Each code provides for some form of S&D treatment for developing countries. These S&D provisions in the Tokyo Round codes were of three kinds: dealing with technical assistance to developing countries, subjecting developing countries to less strict disciplines, and exempting developing countries from some obligations. Some of these provisions were vague or of an aspirational nature. Article 13 of the antidumping code, for example, asked developed countries to consider more constructive remedies than the imposition of antidumping duties on exports from developing countries. 9 Other provisions, including some substantive exemptions from commitments for developing countries had binding legal force. Perhaps the most important of these was the provision in the subsidies code that exempted developing countries from the obligation to prohibit export subsidies on non-primary products. It should be mentioned, however, that, as far as developing countries were concerned, the Tokyo Round Codes were optional and, despite the fact that a number of S&D provisions were included therein, only a few developing countries acceded to them. One of the fundamental ways in which developing countries are exempted from multilateral disciplines regarding market access is the principle of non-reciprocity in trade negotiations with developed countries concerning tariff reduction or removal of other trade barriers. 10 This principle was recognized in Part IV (Article XXXVI) of GATT. Another important milestone with respect to this aspect of S&D treatment for developing countries was achieved in 1979, also in the context of the Tokyo Round. This was the agreement on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries which is also known as the Enabling Clause 11, which reconfirmed the principle of non-reciprocity recognized in Part IV (Article XXXVI) of GATT. This Enabling Clause contains the following main elements: 9 A similar obligation was included in the Uruguay Round agreement on antidumping. However, the implementation of this provision has been far from satisfactory and is, in fact, disappointing from the perspective of many developing countries. 10 Consistent with these provisions, many developing countries have not bound their tariffs on industrial products at levels comparable to those of developed countries. 11 Similar provisions for non-reciprocity are included in GATS Article XIX:2, which states that there shall be appropriate flexibility for individual developing countries Members for opening fewer sectors, liberalizing fewer types of transactions, progressively extending market access in line with their development situation....