Jul 31, 1986


GENEVE, JULY 29 (IFDA/CHAKRAVARTHI RAGHAVAN) – Multilateral Trade Negotiations (MTNS) to strengthen and improve the GATT Trading System would be doomed to failure if they avoid the fundamental trade policy issues and the underlying economic and political factors, the UN Conference on Trade and Development has warned.

In a report (TD/B/1101) on the International Trading System, the UNCTAD Secretariat notes that negotiations are being initiated "in a general atmosphere of disrespect for existing obligations", and against the background of "negotiating proposals which are directly opposed to the existing rules and principles of the system".

Much of the erosion of the GATT system, according to UNCTAD, is due to the fact that GATT ins only a part of the agreed Havana proposals, which covered a much wider range of measures than tariff bindings and related disciplines later incorporated in GATT.

A number of studies, UNCTAD notes, have identified the main symptoms of the erosion of the multilateral system, and have expressed concern that trade relationships are increasingly based on power relationships rather than contractual commitments.

Third world countries are now finding it difficult to avoid a perception that industrialised countries "are not prepared to accept a steady increase in imports, even from a limited number of developing countries, in sectors where such imports compete in any significant way with their domestic production".

The importing countries take recourse to various "trade obstructing measures", whose net effect is to threaten "to confine" third world countries to a "limited", "acceptable", often insignificant, share of world markets in such product sectors as they may be able to develop a competitive edge".

"This has underlined the real limits to export-oriented policies as a generally applicable approach to economic development, and has provided governments with an incentive to examine alternative models of growth, particularly those aimed at regional economic security", the report adds.

The GATT system itself, UNCTAD underlines, was on basis that trade flows should be determined by comparative advantage, as reflected in relative prices, with protection limited to measures affecting prices through tariffs.

The system also assumed the existence of a monetary system of styble exchange rates, and pursuit of compatible macro-economic policies by the major industrial countries.

The drafters of GATT did not foresee the rapid shifts in competitive positions; particularly not those brought about by rapid spread of new technologies.

They had also assumed continued structural adjustment along classical lines – with industrial countries of the time maintaining their dominant position by continually moving into areas of higher technology and capital intensity, while "new entrants" would carry on as producers of raw materials and of light, labour-intensive manufactures.

Some of the more current negotiations proposals (such as for "selective" safeguards and bringing new themes into GATT) may be aimed at "re-establishing a greater degree of stability in trade flows at the expense of stable trade policy environment required for dynamism in world economy", according to UNCTAD.

Proposals for "selective" safeguards may be an element in the negotiating position of some industrial countries designed to protect themselves against "disruptive" effect of new entrants.

"However, other proposals appear to be directed to the source of the perceived problem – by trying to control the rate of development of indigenous technologies, or by impeding the diffusion of new technologies, or by increasing the ability of TNCS to operate and invest, and by securing a measure of control over the production and sale of key services on a global scale.

"In other words, shifts in competitive positions may be impeded through the control of factors of production, including information and technology, as well as through a more flexible and discriminatory use of trade measures".

The unconditional MFN clause in article one of GATT, UNCTAD underlines, was to be the basis of the multilateral trading system.

Though there are many formal exceptions to this in GATT itself – in provisions for customs unions, free trade areas, and the GSP – none of these call into question the status of MFN as the "cornerstone" of the system.

But now unilateral deviations, such as conditional application of the Tokyo round codes and continuing pressure for "selective" safeguards, "threaten to completely undermine the system".

There is also the resort to discriminatory protective actions outside GATT rules – "Grey area" measures like voluntary export restraints (VERS) and the Multifibre arrangements – and "new negotiations may see efforts to legalise such actions".

The reliance on retaliation as the "ultimate recourse for enforcement of rights" in the GATT system handicaps the weaker trading partners.

While the system could be strengthened through resort to joint action by all signatories if the rights of one were in jeopardy, "only a clearer political commitment by the major trading countries to abide by the rules can generate confidence in the system".

The widely held perception that major trading countries, if pressed, would ignore their multilateral obligations, and it would be more prudent "to make a deal" or adopt "a pragmatic approach", even by sacrificing rights of access and to non-discriminatory treatment, has led to "pragmatic" solutions, whose cumulative effect had led to erosion of the system itself.

In MTNS, third world countries are unable to obtain meaningful concessions since they are usually not the principal suppliers of products of vital interest to them nor are they able to offer any meaningful reciprocity.

The autonomous and non-reciprocal nature of the GSP concessions to them is also being altered by policies under which "graduation" could be avoided through reciprocal measures not only in trade but also in services, intellectual property and investment.

The future of the tariff-based system itself has been called into question by a variety of flexible or contingent non-tariff protecting measures – safeguard actions, anti-dumping duties, price "undertakings", VERS, variable levies, etc.

Any effort to strengthen the trading system, which fails to address the problem of commodity price fluctuations and earnings would also have little relevance to the primary commodity exporting countries, in UNCTAD’s view.

Since the ability of these countries to import depends on commodity export earnings, which tend to be erratic and decline in the long term, these countries could never accept disciplines over their import regimes.

It was this logic that led to inclusion of multilateral commitments on raw materials and commodity arrangements in the Havana charter.

The charter had also recognised that restrictive business practices (RBPS) could nullify advantages of trade concessions and undermine multilateral disciplines.

More recently, governments have begun to encourage or at least tolerate RBPS restraining competition.

As regards TNCS, their importance in the trading system is due not only to the increasing amount of trade between individual entities of a TNC, but the changing attitudes of home governments.

"In the main home countries of TNCS, national TNCS are now seen as ‘national champions’ in development of new technologies in product innovation and in penetration of export markets for goods and services".

Third world countries, unlike the industrial countries, tend to be almost exclusively "host" countries and have a variety of measures to ensure that TNCS conform to their development strategies.

These measures – domestic content, export performance and development of indigenous technology – have come under attack in TNC home countries.

The negotiating proposals on services appear to aim at obtaining concessions on treatment of foreign enterprises by host countries, and incorporate these into an overall trading system.

Third world countries on the other hand, recognising the importance of TNCS and inadequacies of multilateral trade disciplines that ignore existence of TNCS, are reluctant to accept multilateral rules or concessions that would reduce their capacity to maintain effective control on TNCS, UNCTAD adds.

During the 1980’s, UNCTAD notes, the international community tried to reverse the process of erosion of the trading system – through the 1982 GATT Ministerial declaration and work programme and the 1983 commitments at UNCTAD-VI on standstill and rollback.

These on the surface would suggest the existence of a solid basis for starting MTNS.

"In reality, however, such negotiations will not only be doomed to failure, but could also exacerbate the decline rather than improve the system if they avoid taking into account not only the fundamental trade policy issues at stake but also the underlying economic and political factors which have led to the erosion of the international trading system".