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An undifferentiated WTO: Self-declared development status risks institutional irrelevance

An undifferentiated WTO: Self-declared development status risks institutional irrelevance
Photo credit: WTO

17 Jan 2019

14 minute read

Communication from the United States

In the preamble to the Marrakesh Agreement Establishing the World Trade Organization, the Parties recognized that “their relations in the field of trade and economic endeavor should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development….”

Since the WTO’s inception in 1995, Members have made significant strides in pursuing these aims. Global Gross National Income (GNI) per capita on a purchasing-power-parity (PPP) basis, adjusted for inflation, surged by nearly two-thirds, from $9,116 in 1995 to $15,072 in 2016.The United Nations Development Program’s (UNDP) Human Development Index (HDI) for the world increased from 0.598 to 0.728 between 1990 and 2017.

According to the World Bank, between 1993 and 2015 – the most recent year for which comprehensive data on global poverty is available – the percentage of people around the world who live in extreme poverty fell from 33.5 percent to 10 percent, the lowest poverty rate in recorded history.Despite the world population increasing by more than two billion people between 1990 and 2015, the number of people living in extreme poverty fell by more than 1.1 billion during the same period, to about 736 million.

Trade appears to have been an important contributor to these positive trends. Between 1995 and 2017, exports of goods more than tripled and exports of services more than quadrupled, increasing by 260 percent and 315 percent, respectively. Underpinned by principles of transparency, openness, and predictability, WTO rules were crafted in part to set conditions most favorable for increasing trade, attracting investment, and improving efficiency.

The economic tides since the creation of the WTO have lifted nearly all boats. Regional data, as shown in Table 1, makes this clear. For example, the share of the population in East Asia and the Pacific living in extreme poverty fell from 54 percent in 1993 to 2 percent in 2015 (from 902 million people in 1995 to 47 million, a 95 percent decline); in South Asia, the share fell from 45 percent in 1993 to 12 percent in 2015 (from 542 million people to 216 million, a 60 percent decline); and in Latin America and the Caribbean, the share fell from 13 percent in 1993 to 4 percent in 2015 (from 61 million people to 26 million, a decline of nearly 58 percent). However, it is clear that some countries have not benefited as much from the rising tides. In Sub-Saharan Africa, the decline in the share of population living in extreme poverty was much more modest, from 59 percent in 1993 to 41 percent in 2015. Notably, the number of extremely poor people in Sub-Saharan Africa actually rose by 26 percent (from 327 million to 413 million.) A review of economic, social, trade, and other data for individual WTO Members reveals an even starker picture of economies that have substantially advanced in development and those whose gains have been more modest.

While helping to lift WTO Members to disparate levels of development, the economic tides also eroded the old order, including the development divide that was frequently described in “North-South” terms. Under this framing, countries had been broadly grouped into the industrialized “North” and the developing “South”. The South had one significant subset, the least-developed countries (LDCs), whose membership was determined according to criteria set by the United Nations. Whatever its usefulness was in 1995, the binary “North-South” construct does not reflect the development realities of 2019.

Despite the great development strides made in the years since the WTO’s inception, the WTO remains stuck in a simplistic and clearly outdated construct of “North-South” division, developed and developing countries. Each is a seemingly static set, regardless of economic, social, trade, and other indicators. This binary construct does not reflect the realities of 2019. Nor does it reflect how Members viewed development at the time the WTO was created. The preamble to the Marrakesh Agreement Establishing the World Trade Organization recognizes there are “needs and concerns at different levels of economic development,” implying there could be many levels of development.

We should also recall that in the preamble to the Marrakesh Agreement Establishing the World Trade Organization, Members also expressed their desire to contribute to the objectives noted above “by entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations.” Indeed, this is a foundational principle going back to the GATT 1947.

There has been much discussion lately about staying committed to the “rules-based multilateral trading system.” However, if you look behind the curtains, that system is hardly monolithic. All the rules apply to a few (the developed countries), and just some of the rules apply to most, the self-declared developing countries. The perpetuation of this construct has severely damaged the negotiating arm of the WTO by making every negotiation a negotiation about setting high standards for a few, and allowing vast flexibilities or exemptions for the many. These are not “reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations.”

Other international organizations have recognized that in order to properly carry out their functions, they must make distinctions among what have traditionally been considered “developing country” members. To not do so, puts those that need special and differential treatment (S&D) the most at a disadvantage and perpetuates conduct that is no longer warranted by factual circumstances.

Self-declared paralysis at the WTO

The WTO’s approach to determining development status has not varied since the creation of the organization in 1995. The WTO Agreement does not specify criteria or a process for determining development status. Nor does it establish gradations among developing Members, with one exception – LDCs. The WTO – unlike the UN, the IMF, and the World Bank – does not have an analytic classification system for development status.

Lacking formal guideposts, any WTO Member can “self-declare” as a developing Member and thereby assert its right to benefit from S&D treatment – such as longer implementation timeframes – afforded to self-declared developing Members. According to the WTO Secretariat, there are 145 distinct S&D provisions contained in the WTO agreements.

Whether the WTO’s status quo approach to development status was sensible at its dawn, it makes no sense today in light of the vast changes in development and increasing heterogeneity among Members, seen in a number of economic, social, and other indicators explored in Section 1. For example, OECD members, G20 members, and other Members who have made significant gains in development can claim to be developing Members whenever and wherever they see fit, as if the world has stood still since the inception of the WTO. This does not seem to align with the original intent of S&D, which was conceived as a tool to help Members thought to be having difficulty integrating into the world trading system.

Self-declaration can lead to unpredictable and illogical results in the operation and implementation of existing WTO agreements. For example, Kazakhstan – ranked in UNDP’s “Very High Human Development” quartile and having made no previous claim to developing Member status – claimed such status for the first time for the purposes of implementing its obligations under the Trade Facilitation Agreement. Some of the wealthiest WTO Members – including Singapore; Hong Kong, China; Macao, China; Israel; the State of Kuwait; the Republic of Korea; United Arab Emirates; Brunei Darussalam; and Qatar – insist on being considered developing Members and can avail themselves of S&D provisions at their discretion – just like Sub-Saharan Africa.

In addition, the Bali Decision on tariff rate quota (TRQ) administration saw the creation of a mechanism to ensure unfilled TRQs were not a result of protectionist measures. Unfortunately, in the end, the mechanism applied only to developed Members; self-declared developing Members were only required to address the issue on a best-endeavor basis. While additional flexibilities and exemptions had been proposed in the Doha agriculture text and rejected, Bali was the first time that Members agreed to use development status to exempt all self-declared developing Members from a new commitment rather than take a smaller cut or a longer time to implement.

Simply put, self-declaration has severely damaged the negotiating arm of the WTO by making differentiation among Members near impossible. By demanding the same flexibilities as much smaller, poorer Members, export powerhouses and other relatively advanced Members – as evidenced by the indicators in Section 1 – create asymmetries that ensure that ambition levels in WTO negotiations remain far too weak to sustain viable outcomes. Members cannot find mutually agreeable trade-offs or build coalitions when significant players use self-declared development status to avoid making meaningful offers. Self-declaration also dilutes the benefit that the LDCs and other Members with specific needs tailored to the relevant discipline could enjoy if they were the only ones with the flexibility.

The following sections provide illustrative examples of how self-declaration – negatively affected negotiations at the WTO in the past. Ongoing negotiations and proposals for future work may need to confront this issue as well. For example, fisheries subsidies negotiations provide an important testing ground for the WTO’s ability to develop effective disciplines that prohibit the worst forms of fisheries subsidies – those that support illegal fishing and contribute to overcapacity and overfishing. In order to be effective, these disciplines must apply to the world’s largest fishing nations, many of which are self-declared developing countries. In agriculture, China and India – the world’s two largest providers of trade-distorting support – have put forward a proposal that calls for the elimination of the Total Aggregate Measurement of Support only for developed Members, as a prerequisite for self-declared developing Members to make any domestic support reforms.

Conclusion

Defenders of the status quo approach by some WTO Members for determining development status – self-declaration – may argue that Members effectively agreed to it by consensus in 1995. They may even claim their authorities would never have sought WTO membership if they could not self-declare as developing. Unfortunately, clinging to this approach leads to a system that prevents true liberalization while anchoring all Members to a world that no longer exists. This contradicts the goals stated by Members in the preamble to the Marrakesh Agreement Establishing the WTO.

Self-declaration and its first-order consequence – an inability to differentiate among Members – puts the WTO on a path to failed negotiations. It is also a path to institutional irrelevance, whereby the WTO remains anchored to the past and unable to negotiate disciplines to address the challenges of today or tomorrow, while other international institutions move forward.

Source World Trade Organisation
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Date 17 Jan 2019
  14 minute read
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