WTO: Rethinking the special and differential treatment granted to developing countries
The special and differential treatment granted to developing countries, a key principle in the multilateral trading system, now appears broken-down. Based on a speech given at the WTO Forum, this post reviews -with a focus on agriculture- why this is so and what could be done.
By Sébastien Jean
Post
Rights and obligations should be adapted to each country’s level of economic development. This statement is one of the founding principle of the multilateral trading system: present since GATT inception and taking shape in the fifties, it was fully blown with the addition of Part IV to the GATT in 1964, and took a new dimension with the enactment of the Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, also known as the Enabling Clause, in 1979. A variety of provisions –145 in 2000, according to the WTO-- now spread across all agreements. Under the terms of “reciprocity and flexibility”, the Report of the Panel on Defining the Future of Trade convened by then-WTO Director-General Pascal Lamy (WTO, 2013) emphasises the need to reconsider this system, moving toward a more “granulated” and dynamic approach. This is a welcome invitation to think about a badly needed update.
Indeed, the way SDT is implemented presently is inaccurate, inequitable and inefficient. Inaccurate, because SDT is granted to countries classified as developing in the WTO, while this category (built out of self-declaration, meaning that countries can choose each group they belong to) includes countries which are now well industrialised. Inequitable, because the same treatment is offered to countries with very different levels of economic development. Inefficient, in two respects. Firstly, because the focus on exemptions did not prove really helpful in fostering economic development: it relaxes some obligations without necessarily paving the way toward good policies, while involving risk of being unable to have its requests heard (as illustrated by the exclusion of agriculture from the GATT and by the long-standing specific regime applied to textiles and apparel). Secondly, because SDT now largely appears as an obstacle to reform, making it difficult to strike the kind of grand bargain between emerging and industrialised countries, which is necessary for multilateral negotiations to move forward.
Why is this system so unsuitable? Two main reasons can be emphasised. The first is that SDT relies upon a binary typology, whereby countries are classified as developed or developing. The system could also be called ternary, taking into account the further exemptions and special provisions created for least developed countries (LDCs). Specific provisions are included in several agreements or proposals for specific groups of countries (Small and Vulnerable Developing Countries, Net Food Importing Developing Countries, etc.), but they remain of limited reach and do not alter the general architecture of the system.
The second reason is that the system is static, relying on a once-and-for-all classification of countries. This is an unfortunate characteristic in a period where changes are so rapid in world trade. The increasing economic clout of emerging countries has been a game changer over the past decade, with in particular China turning into a trading superpower. In the meantime, policies themselves also changed a lot. This is reflected in the increasing gap between bound [1] and applied tariffs: for agricultural and food products in developing countries, the latter now amount on average to less than a third of the former, meaning that any reasonable cut in bound tariffs will, in many cases, have little or no bearing on applied protection. Domestic support is another striking example: the OECD estimates that total support to farmers amounted to the equivalent of $193 bn in 2012, almost half the total for all OECD countries ($415 bn, source OECD, 2013). And domestic support in India, not included in OECD estimates by lack of information (as a result of the unwillingness of Indian authorities to give access to the relevant information), although inferior in absolute value to the one in China, also amounts to a huge figure, likely comparable to the ones for the US or the EU in order of magnitude (see Hoda and Gulati, 2013, for orders of magnitude). The time when domestic support could be thought of as a specificity of rich countries is long gone. Policies also significantly changed as far as exports are concerned: while multilateral disciplines focus on export subsidies, export restrictions proved during the last decades that they can be at least as much, if not more disruptive for world markets. This is largely due to developing countries’ practices.
The defects of the SDT system are not new, but they are increasingly glaring, up to a point where an update now appears inevitable, if the negotiating capacity of the WTO is to be preserved.
Two main directions are worth considering –preferably jointly-- to revamp the system. One is to make the system intrinsically gradual. More than three categories are definitely needed if Nicaragua or Zimbabwe are to be given different rights and obligations than China or Chile. This gradualism should rely upon objective, possibly quantitative, criteria. Another is to allow countries’ status to change over time. This can also be made possible using objective, possibly quantitative, criteria. Noteworthily, an advantage of relying upon objective criteria would be to abandon the present system of self-declaration. Another might be to open the possibility to differentiate countries’ status across sectors.
In any case, implementation will be uneasy, both for obvious political economy reasons and because of technical difficulties. Reform is all the more difficult when multilateral disciplines are “path-dependent”, i.e. when they have been set with reference to policies carried out in the past: as time elapses, the legitimacy of such discipline may become questionable when applied policies change significantly. This is in particular the case of bound duties and of ceilings set for domestic support under the Aggregate Measurement of Support (AMS, the central measurement of domestic support for WTO disciplines). In such cases, allowing the above-mentioned type of gradual, time-variant approaches might need to change the way these disciplines are defined, making references to the present situation, not to past policies. Instead of focusing on the balance of concessions, negotiators would then need to consider the balance of disciplines.
The increasing importance of trade-related rules, as opposed to tariff or subsidies, for instance, also calls for a deep change in the way SDT is thought of. Exemptions are often useless, if not impracticable, when disciplines deal with rules. Thinking about the way to make agreed rules friendly to the weakest economies is then far more important than exempting them from their application.
SDT is a heavily loaded subject politically, on which any move will necessarily be slow and difficult. As a matter of fact, the issue of differentiation among developing countries has already been widely discussed for several years, in particular since the failure of the Cancún Ministerial Conference in 2003. Still, possible and desirable evolutions are worth further thoughts.
This post is based on the author’s participation to the Panel session on "Looking beyond MC9 – how to deal with reciprocity and flexibility in moving forward on the DDA?" organised by the Directorate General for Trade of the European Commission at the WTO Public Forum in Geneva, on 3 October 2013.
References:
OECD (2013), Agricultural Policy Monitoring and Evaluation 2013. OECD Countries and Emerging Economies, OECD Publishing.
WTO (2013), The Future of Trade: The Challenges of Convergence, Report of the Panel on Defining the Future of Trade convened by WTO Director-General Pascal Lamy, WTO.
Hoda, Anwarul and Ashok Gulati; (2013), “India’s Agricultural Trade Policy and Sustainable Development”; ICTSD Programme on Agricultural Trade and Sustainable Development; Issue Paper No. 49; International Centre for Trade and Sustainable Development, Geneva, Switzerland, www.ictsd.org.
The second reason is that the system is static, relying on a once-and-for-all classification of countries. This is an unfortunate characteristic in a period where changes are so rapid in world trade. The increasing economic clout of emerging countries has been a game changer over the past decade, with in particular China turning into a trading superpower. In the meantime, policies themselves also changed a lot. This is reflected in the increasing gap between bound [1] and applied tariffs: for agricultural and food products in developing countries, the latter now amount on average to less than a third of the former, meaning that any reasonable cut in bound tariffs will, in many cases, have little or no bearing on applied protection. Domestic support is another striking example: the OECD estimates that total support to farmers amounted to the equivalent of $193 bn in 2012, almost half the total for all OECD countries ($415 bn, source OECD, 2013). And domestic support in India, not included in OECD estimates by lack of information (as a result of the unwillingness of Indian authorities to give access to the relevant information), although inferior in absolute value to the one in China, also amounts to a huge figure, likely comparable to the ones for the US or the EU in order of magnitude (see Hoda and Gulati, 2013, for orders of magnitude). The time when domestic support could be thought of as a specificity of rich countries is long gone. Policies also significantly changed as far as exports are concerned: while multilateral disciplines focus on export subsidies, export restrictions proved during the last decades that they can be at least as much, if not more disruptive for world markets. This is largely due to developing countries’ practices.
The defects of the SDT system are not new, but they are increasingly glaring, up to a point where an update now appears inevitable, if the negotiating capacity of the WTO is to be preserved.
Two main directions are worth considering –preferably jointly-- to revamp the system. One is to make the system intrinsically gradual. More than three categories are definitely needed if Nicaragua or Zimbabwe are to be given different rights and obligations than China or Chile. This gradualism should rely upon objective, possibly quantitative, criteria. Another is to allow countries’ status to change over time. This can also be made possible using objective, possibly quantitative, criteria. Noteworthily, an advantage of relying upon objective criteria would be to abandon the present system of self-declaration. Another might be to open the possibility to differentiate countries’ status across sectors.
In any case, implementation will be uneasy, both for obvious political economy reasons and because of technical difficulties. Reform is all the more difficult when multilateral disciplines are “path-dependent”, i.e. when they have been set with reference to policies carried out in the past: as time elapses, the legitimacy of such discipline may become questionable when applied policies change significantly. This is in particular the case of bound duties and of ceilings set for domestic support under the Aggregate Measurement of Support (AMS, the central measurement of domestic support for WTO disciplines). In such cases, allowing the above-mentioned type of gradual, time-variant approaches might need to change the way these disciplines are defined, making references to the present situation, not to past policies. Instead of focusing on the balance of concessions, negotiators would then need to consider the balance of disciplines.
The increasing importance of trade-related rules, as opposed to tariff or subsidies, for instance, also calls for a deep change in the way SDT is thought of. Exemptions are often useless, if not impracticable, when disciplines deal with rules. Thinking about the way to make agreed rules friendly to the weakest economies is then far more important than exempting them from their application.
SDT is a heavily loaded subject politically, on which any move will necessarily be slow and difficult. As a matter of fact, the issue of differentiation among developing countries has already been widely discussed for several years, in particular since the failure of the Cancún Ministerial Conference in 2003. Still, possible and desirable evolutions are worth further thoughts.
This post is based on the author’s participation to the Panel session on "Looking beyond MC9 – how to deal with reciprocity and flexibility in moving forward on the DDA?" organised by the Directorate General for Trade of the European Commission at the WTO Public Forum in Geneva, on 3 October 2013.
References:
OECD (2013), Agricultural Policy Monitoring and Evaluation 2013. OECD Countries and Emerging Economies, OECD Publishing.
WTO (2013), The Future of Trade: The Challenges of Convergence, Report of the Panel on Defining the Future of Trade convened by WTO Director-General Pascal Lamy, WTO.
Hoda, Anwarul and Ashok Gulati; (2013), “India’s Agricultural Trade Policy and Sustainable Development”; ICTSD Programme on Agricultural Trade and Sustainable Development; Issue Paper No. 49; International Centre for Trade and Sustainable Development, Geneva, Switzerland, www.ictsd.org.
[1] Bound (or consolidated) tariffs are actually ceilings which, by multilateral agreements, countries commit not to exceed in their applied tariffs. The corresponding concession schedules are defined at the tariff line level.
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