7:36 AM Jan 22, 1996

GREATER MARGINALIZATION RISKS WARNING

Geneva 22 Jan (Chakravarthi Raghavan) -- The trends of globalization and liberalization in the world economy have created the premises for international trade to become an engine of economic growth, but there are real dangers of marginalization of a large number of countries in the international trading system, UNCTAD Secretary-General Rubens Ricupero cautions in the Report to UNCTAD-IX.

The trade liberalization resulting from the Uruguay Round and regional economic integration, as well as autonomous liberalization measures of developing countries have created both opportunities and challenges for promoting economic growth and sustainable development.

While the impact of liberalization will be spread over a number of years because of the phased implementation of the Uruguay Round Agreements, there would be transitional impacts in the meanwhile for the countries, the report notes. The likelihood of adjustment pressures on developing countries was recognized at Marrakesh and the Uruguay Round agreements hence incorporate range of measures at spreading out the adjustment process to minimize costs.

These measures, the report says, should be complemented by a positive approach designed to smooth the economic adjustment by addressing the rigidities that slow them down. International support should also be mobilized for efforts of developing countries to rationalize resource allocation and develop supply capabilities.

Special attention should be paid to the contribution of the services sector to development and the role of trade in services as well as to efficient ways of trading, the report says.

Global competition is now characterized by declining trend in shares of profits arising from product- or process-based comparative advantage, and a correlative increase in profitability and competitiveness based on information advantages and reductions in transaction costs.

The immediate task for national and international policy is to secure an enhanced role in world trade for developing countries and countries in transition through export expansion and diversification, both in terms of products and markets.

This objective, the report says, can be promoted through policies and actions to strengthen supply capabilities, capacities for trade efficiency, improving market access and help weaker countries overcome transitional difficulties and constraints arising from commodity dependency.

In terms of trade policy to enhance participation of developing and transition economies in international trade, the Report calls for effective implementation of the Uruguay Round commitments, especially in areas of market access for goods and services of export interest to developing countries and the transition economies.

There was considerable margin for interpretation under the Agreements, thus allowing countries an element of discretion in their trade policies that could lead to reintroduction of protection.

It was hence essential that countries, particularly major trading nations, should implement their commitments fully and exercise appropriate restraint in application of trade remedies such as safeguards, anti-dumping and countervailing measures against products of developing countries and the transition economies.

There was already a built-in future work programme of the Uruguay Round Agreements -- new negotiations for further trade liberalization in agriculture and services beginning 1999, negotiation on missing provisions in GATS and review of possible extension of TRIMs to cover investment and competition, as well as proposals for review of various agreements that could lead to their amendments.

And to continue the momentum for further liberalization of multilateral trade, there would be a need for further multilateral trade negotiations on trade liberalization to focus on issues related to tariff peaks and tariff escalation.

In the agricultural sector, where the tariffication process has led in several cases to establishment of tariffs providing more protection than the non-tariff barriers they replaced, the objective should be to reduce out-of-quota tariff rates to non-prohibitive levels. The reduction in tariffs should also include the goal of reducing tariff escalation on products of interest to developing countries in order to give them increased access to markets for processed products and promote the diversification of their traditional commodity exports into higher-value-added products.

In the GATS, sectoral negotiations were continuing on maritime services, basic telecommunication services; an achieving an MFN-based financial services agreement; formulating rules on subsidies, safeguards and government procurement; and on disciplines to ensure that qualification requirements and procedures, technical standards and licensing requirements in the field of professional services do not constitute unnecessary barriers to trade.

The negotiations on temporary movement of natural persons (as a mode of delivery for services) which was continued beyond Marrakesh had achieved only some limited improvements on the part of developed countries.

Pending further liberalization in the next round, the Report suggests that steps could be taken in the meantime to ensure increased transparency of immigration laws and regulations and non-discrimination in movement of persons from different countries. Measures could also be taken to reduce the restrictive impact of economic needs tests and exempt more categories from such requirements.

While unconditional MFN is a basic requirement of GATS, it also allows time-bound MFN exemptions. However, some of these exemptions are couched in terms that would cover future measures while most of the measures scheduled will apply for an indefinite period. This brings in an element of sector-specific reciprocity and conditionality.

The outcome of negotiations on financial services, clearly points out how sectoral interests could endanger the integrity and comprehensiveness of GATS and the basic principles of a multilateral system, namely, non-discrimination.

Criteria would therefore to be developed to ensure that exemptions from MFN treatment would indeed by reviewed and phased out without additional payment in order to ensure that the multilateral approach of GATS is applied as far as possible to all sectors and modes of supply.

Developing countries will bear a relatively greater burden for adapting to the results of the Uruguay Round. The international community has accepted the need to assist these countries to face the challenges and difficulties posed by reform and liberalized international trading context. This is embodied in the Marrakesh Ministerial Declaration on possible negative effects on LDCs and net-food importing countries.

But the problems faced by developing countries to adapt to the post-Uruguay Round system goes beyond these emergency measures.

Those of them unable to compete effectively in international trade or defend their interests within the multilateral framework of rights and obligations will be further marginalized.

Hence measures must be taken, the Report argues, to assist developing countries to increase their competitiveness in world markets in the light of reduced preferential tariff margins, to effectively implement the multilateral trade agreements, specially in setting up necessary institutions and domestic mechanisms, and to effectively defend their rights and interests in multilateral and regional fora.

The Conference, the Secretary-General's report suggests, could define a specific action programme of technical and financial assistance in this respect.

As set in the Marrakesh decision, LDCs and net food importing countries would need increased food aid, BOP support through access to compensatory financing schemes and more vigorous debt-relief measures. Simultaneously, the efforts of these countries to improve agricultural production and infrastructure should be supported through technical and financial aid.

To compensate for erosion of preferential tariff margins, the remaining possibilities for preferential treatment should be maximized such as through improvements in the GSP.

The GSP preferences should be made sufficiently secure to enable exporters in developing countries to build an export strategy based on them. The benefits of GSP should accrue to the largest possible number of countries.

Specific measures to enhance effectiveness should include: extension of product coverage to agricultural and resource-based products, tropical industrial products, leather, footwear, metals and minerals, textiles and clothing products. There should be multilaterally agreed criteria for product or country graduation from GSP. Drawing on the Uruguay Round agreement on rules of origin, there should be harmonization of GSP rules of origin among preference-giving countries.

The report refers to the growing trend towards universality of the WTO -- some 128 countries became GATT contracting parties before end of 1994, while another 15 developing countries are in the process of negotiating accession to the WTO. At the same time, important trading nations like China and the Russia are not yet members and the WTO system could not be seen as universal in this situation.

Referring to the institutional problems and challenges posed to countries seeking WTO accession, and the greatly complicated process now because of extension and intensification of obligations, the Report notes that countries seeking accession face increasing demands, sometimes going beyond the scope of the Agreements. This is particularly so for the countries in transition.

These countries are undergoing a fundamental transformation into market-based economies and need a certain degree of flexibility to put into place trade regimes consistent with WTO membership.

Some of these countries, for e.g., have only begun to develop tariff regimes over the last two or three years. In some cases they were still not in place. The approach in the Uruguay Round to maximise tariff cuts and tariff bindings on all participants may not necessarily be applicable to these countries.

Another area of concern is in new areas within the WTO competence such as in services and intellectual property protection.

Given the link between WTO accession and transition to a market-based economy, the Report suggests that priority should be given in the accession negotiations to systemic transformation. Issues governing tariff reductions and other trade restrictions should be dealt with in the context of the resumption of growth, structural adjustment and increased capacity of these economies to compete internationally, the report suggests.

The Report also underlines the need for Structural Adjustment policies in developed countries and need for governments to facilitate structural adjustment both by creating a favourable macro-economic policy environment and cross-sectoral or industry-specific measures to influence the process of adjustment.

There is already agreement at UNCTAD on need for positive structural adjustment policies to promote shifts in patterns of production and trade in line with changes in comparative advantage.

The report calls in this regard for action in three main areas:

* in the agricultural sector, such action should focus on accommodating increases in import competition as a result of the longer-term process of liberalization;

* in the textiles and clothing sector, the objective should be to accelerate the process of liberalization;

Delaying removal of quotas until the very end of the 10-year phase-out period could result in a concentration of structural adjustment problems to the last stage.

* support by developed countries of investment abroad and other forms of cross-border production cooperation should focus more on encouraging relocation of uncompetitive lines of production to developing countries and economies in transition. This may require refocusing investment guarantee schemes as well as strengthening the fiscal incentives directed to this goal.