New Challenges Facing the Multilateral Trading System
A Key Note Address
before The Ninth Trade Policy Forum,
Pacific Economic Cooperation Council, Seoul,
September 11, 1996
I am particularly pleased this morning to meet many old friends as well as new ones in the PECC in which I had the privilege of serving as a founding member of the Standing Committee for more than ten years before Dr. Kim Ki Whan took over that position in 1993. I would like to thank Dr. Kim for providing me with this opportunity for a reunion with the PECC family and to speak once again before this forum.
As we all know, the major task facing the multilateral trading system today is to implement what has been accomplished in the Uruguay Round and address important problems left unsolved. Since the present forum is devoted to discussion of some of these issues, I may offer an overview on the major issues facing the multilateral trading system and the WTO, which was set up following the successful conclusion of the Uruguay Round in 1994. I would like to do so in the hope that it may serve as a prelude to the more substantive deliberations in this forum in the next few days.
One of the important achievements in the Uruguay Round is that it established a stronger, more comprehensive and equitable framework of multilateral trade rules backed by a new dispute settlement procedure. However, there is a widely held view that the objectives and provisions of the Uruguay Round are often being evaded or distorted by new forms of protectionism. For example, although voluntary export restraints have been outlawed by the Uruguay Round, “administrative protection” such as the abuse of the antidumping code and countervailing duty has taken their place as alternatives. The policy makers in developing countries had hoped that the successful conclusion of the Uruguay Round would reduce bilateral dealings in trade matters in favor of multilateral solutions. But the tendency to negotiate bilaterally has increased and the use of bilateral threats has been intensified in the larger trading nations. In this regard, we must find ways to make the dispute settlement mechanism agreed upon in the Uruguay Round work more effectively and thus minimize the resort to bilateral measures on the part of the larger trading nations. The WTO members should bring pressures to bear on the larger trading nations to resolve differences multilaterally, rather than through bilateral negotiation.
Another important achievement in the Uruguay Round can be found in the conclusion of the General Agreement on Trade in Services. The agreement laid down a set of general principles including Most Favored Nation treatment and transparency of regulations, which will work to liberalize trade in individual services such as banking, insurance, and construction. Unfortunately, the negotiations in individual service sectors, such as telecommunications and maritime services, failed to reach agreement. Dissatisfied with the insufficient national treatment and market access measures offered by some countries, the U.S. withdrew from the financial services negotiations. Needless to say, the exclusion of the U.S. from the financial services agreement will severely hamper the effectiveness of the agreement. For further liberalization in trade in services, it will be essential in the next negotiation to resolve the conflict between the two sides and secure the participation of the United States. As is well known, many services are location- specific in either their production or their consumption, and barriers to trade in services tend to vary with the nature of the services. The main challenge is to find ways to bring about agreements in line with the general principles of the GATT.
In the area of intellectual property rights, the Uruguay Round agreement has obligated all contracting parties to enact and implement legislation giving patent and copyright protection to foreign companies and authors. Unfortunately, there is a perception that the current agreement is not being well respected in some countries. This has become a new challenge to the WTO in resolving disputes arising between countries having different levels of law enforcement for the protection of intellectual property rights.
With regard to trade‑related investment measures, the Uruguay Round instituted the principle of national treatment to ensure equal treatment for domestic and foreign firms. Yet the Round had only limited success, requiring further progress toward liberalization in trade-related investment. At present, improved and comprehensive rules on investment, called the Multilateral Agreement on Investment (MAI), are being discussed in the OECD. However, it should be stressed that this issue will better be addressed on a truly multilateral basis. It is as vital for developing countries to be able to attract new investment as it is for developed countries. It is to be hoped that new multilateral investment rules will provide continued spur to economic expansion all over the world through the right of establishment, national treatment, and easier market access.
Limited progress was made in the Uruguay Round regarding liberalization of trade in the agricultural sector. Because of the political as well as economic sensitivity of this issue for most countries, a gradual approach was inevitable. Yet, it is considered to be a significant achievement of the Uruguay Round to have developed a framework for international cooperation in agricultural trade via reduced subsidies and more transparent policy measures. Obviously, genuine liberalization in the agricultural sector has a long way to go.
Finally, the Uruguay Round was able to produce an agreement on a timetable to phase out quantitative restrictions in the trade in textiles and apparel originally imposed under the Multi-Fiber Arrangement of the GATT. Even if the needed adjustment is slow, the agreement itself represents substantial progress in the liberalization of an important part of world trade.
In sum, the Uruguay Round made considerable progress in formulating a framework agreement for services trade, intellectual property rights, and starting to bring agriculture within the scope of WTO disciplines. Maintaining the momentum of the achievements of the Uruguay Round will require further progress with respect to these issues and also with respect to other issues left unsolved in the Round. It is indeed significant that developing countries were able to participate more fully in the negotiations than they did in the pervious rounds of multilateral trade negotiation, assuming greater responsibility in maintaining the open international trading system.
In additions to the issues on which further progress needs to be made in the implementation of the Uruguay Round agreements, there are also “new issues” raised by developed countries which include environment, labor standards, and competition policy. Since these issues are posing great challenges to the open multilateral trading system and the WTO, let me briefly touch upon each of those issues.
Regarding the issue of the environment, it is quite clear that environmental degradation is a serious global concern and something should be done internationally to reduce it. However, the implications of linking the environmental concern to the open international trade policy are less clear. There is a widespread view that enforcement of environmental standards would be prejudicial to developing countries in terms of resource allocation, growth prospects, and exports and this is especially so since those seeking protection will cloak their demand with the legitimacy of environmental concern. People in some developing countries are also noting that the people in rich countries devastated their own environments a century or more ago.
The available evidence suggest that the amount of resources spent for reducing environmental degradation at home in developing countries is a positive function of rising per capita income and therefore any measure reducing economic growth may retard environmental improvement in such countries. As for pollution activities with international spillovers, it is clear that multilateral accords are called for. Nonetheless there is a compelling argument that trade sanctions may be an inappropriate mechanism to achieve the desired goal. For one thing, it is difficult to enforce trade sanctions except for directly traded goods, while there are many other sources of environmental degradation including production of non-trade goods and various consumption activities. The challenge for the WTO is to promote understanding of the nature of the problem, limitation of trade measures, and finding ways to address the legitimate concerns for the environment in such a way that protectionist motives cannot use the issue as a pretext for pursuing their own selfish interest. An additional question is whether or not the functioning of the open multilateral trading system will be improved by the incorporation of environmental concerns into the scope of the WTO’s functions.
Turning to the issue of labor standards, advocates of global labor standards have argued that labor is “exploited” in developing countries and that wages are kept artificially low. This view, however, seems overlook the reality in poor countries that there exists chronic excess supply of labor in the labor market even for such meager wage rates and that labor productivity is generally low without capital equipment and technology. Whether or not labor is treated fairly is a matter that should be judged in the context of the existing conditions of the country concerned. The truth of the matter is that the comparative advantage of poor countries rest mainly or solely in the lower wage rates and it is one of the few points of leverage available for them to challenge in international competition and to pursue economic growth based on an outward-looking strategy, as was so well illustrated by the experience of Asian NIEs. Hence it is natural for poor countries to worry about the proposal of global labor standards because setting global labor standards at a level above what is prevailing in the poor countries would deprive them of much of their comparative advantages. In short, the humanitarian concern for labor conditions is healthy and legitimate. Yet there is a danger that it may be used to protect workers and their industries in developed countries from international competition against imports from the poor countries.
Competition policy is a new item on the agenda of international forums these days. Yet it is a logical development in the process of economic integration as the experience of the European Union has illustrated. As tariff barriers were reduced, and anti-dumping mechanisms were phased out beginning in 1970, it was felt in European countries that a competition policy was needed to ensure that trade among Common Market member nations was not distorted.
The current evolution of the multilateral trading system is certainly a step toward global economic integration but the goal remains far off. Yet, we now see the movement for extending a kind of “Fair Trade Act” by the developed countries to the global trading system. Acknowledging that there is a need for harmonizing rules of international competition for fair trade, we must also realize that there are so many constraints and unknowns, political, cultural as well as economic. One of the central questions would be how multilateral competition policy rules might affect the economic prospects of less developed countries. I am forced at this moment to conclude that gathering information on the practices and experiences of individual countries and building up a common understanding is the first step to be taken before the issue is brought onto an official agenda.
Finally, preferential trade arrangements draw our particular attention. While the current proliferation of preferential trade agreements appears to be an approach to progressively liberalizing trade and investment in a region, few regional arrangements are fully compatible with GATT rules. There are a number of reasons for concern about proliferation of preferential arrangements. In particular, use of rules of origin and other projectionist measures within trading blocs has considerable potential for trade diversion, and can therefore pose a major threat to the WTO and to multilateral trade liberalization.
Past multilateral deliberations on regionalism, including those during the Uruguay Round, focused mainly on the interpretation of Article XXIV of the GATT. The article permitted preferential trading arrangements only when 1) the arrangement was to consist of complete tariff removal for countries within the arrangement; 2) it was to cover “substantially all” trade; and 3) the arrangement had to go into effect according to a predetermined and fixed timetable. These deliberations, however, have fundamental limitations. Simply interpreting these existing rules, which were devised half a century ago with few changes made thereafter, avoids serious consideration of fundamental changes taking place in the nature and scope of regional trade agreements. It may be desirable to rephrase Article XXIV in such a way as to assure compatibility with the open multilateral trading system and perhaps even to attach further conditions for those entering into preferential arrangements.
It is encouraging in this respect that recently the Committee on Regional Trade Agreements was established within the WTO. I believe that the critical examination of various regional trade agreements in a single forum will enhance mutual recognition among members, and that there is much to be gained from transparent and consistent application of rules and criteria applied to regional trade agreements.
It is not clear, however, whether or not, and to what extent, consideration of the rules and criteria for examining regional trade agreements falls under the jurisdiction of the Committee. To capitalize on the momentum created by the establishment of the Committee, I hope that the WTO ministerial meeting will provide the Committee with an explicit mandate on options available for clarification and better application of the relevant rules and criteria. The Committee should also consider possible ways of harmonizing preferential rules of origin and anti‑dumping practices to significantly reduce trade distortions caused by regional trade arrangements.
Whether or not preferential trade arrangements are necessarily inconsistent with further multilateral liberalization is a much discussed problem. In this connection I am pleased to note that APEC stands out as a case that demonstrates how regionalism can complement, support and stimulate the multilateral process.
APEC contains the most dynamic economies of the Asia-Pacific region, including most PECC member economies. APEC now represents 45% of world trade and 54% of world output. From its inception, APEC committed itself to “open regionalism,” which was first heralded by the PECC, and played a substantial role in steering the Uruguay Round to a successful conclusion. APEC has, indeed, encouraged its member economies to participate actively in the Uruguay Round negotiations and to implement the outcome of the negotiations as scheduled, as well as to undertake work aimed at deepening and broadening the results of the Uruguay Round. Following the Bogor Declaration, which set the long‑term goal of free and open trade and investment in the region for no later than 2010 for developed members and 2020 for developing members, APEC leaders produced the APEC Action Agenda last year in Osaka, under which each APEC economy was to present its Action Plan within a specific time‑frame in order to accelerate the APEC process.
In these remarks, I have reviewed the global trade situation following the Uruguay Round and the establishment of the WTO. I have also commented briefly on the “new issues” in the hope that this may spark further discussion in here in the next few days. I understand that this forum is being convened in Seoul at this time with an eye to the first WTO Ministerial Meeting, scheduled for Singapore in December, this year. Certainly, the Singapore meeting will provide a significant opportunity to review the progress of the WTO in its first two years and setting the future direction of multilateral trade efforts.
Although I am not well informed on the particular issues on the agenda for the Ministerial Meeting, I personally hope that in the area of trade and investment, finding ways of reducing “administered protection” and bilateral negotiating practice will be placed high on the agenda. In particular, ways must be found to make the dispute settlement mechanism agreed in the Uruguay Round work more effectively so as to minimize resort to bilateral measures on the part of the larger trading nations, as I mentioned earlier.
Related to this, I would like to see the Ministerial Meeting act to strengthen the functions of the WTO. As it is, the WTO, poorly equipped with manpower and financial resources, is not in a position to adequately perform the function of dispute settlement, trade policy surveillance, and other related activities. If the WTO is to be made an international organization truly governing the open international trade system, its functional capacity and authority, both in perception and reality, must be elevated to a level comparable to the World Bank and the IMF.
The new issues are also important and may find their way onto the agenda of the Ministerial Meeting sooner or later. But, very frankly, my impression is that it is rather premature to ask the WTO to take up those issues right now, given the enormity of the challenges confronting the WTO with regard to the “order” issues and given the limited resources available. Moreover the new issues require a gestation period in which information is gathered and a common understanding is forged among the parties concerned. At the present stage, those tasks seem to fall more properly within the ambit of the PECC.