The Trump administration, in another sign of its tough approach to trade, moved in March to exclude India and Turkey from a program that has long granted the two countries preferential duty-free access to US markets. India, said the president, was being punished for failing to provide “equitable and reasonable access” to its markets for US goods. The administration’s action came after Brazil and Australia lodged parallel claims that India’s sugar subsidy regime has depressed world prices. Earlier this year, the World Trade Organization (WTO) took a similar step, ruling against China’s rice and wheat subsidies.
These actions underscore an important issue, bringing the role of larger developing countries in the trading system to the front burner. Developing countries’ exports have grown to represent almost half of total world exports, with the largest 15 developing economies accounting for some three-quarters of that share (table 1). When the players—advanced or emerging—are large, their actions can have sizeable economic effects in international markets. There is thus a strong rationale to have them play by the same rules.
|Table 1 Merchandise exports by selected countries and groups and share in total world exports|
|Country||Merchandise exports (billions of US dollars)||Percent increase in merchandise exports in 2017 from 2000||Share in total world exports (percent)|
|United Arab Emirates||49.8||313.5||529.1%||0.8%||1.8%|
|Source: World Trade Organization, http://data.wto.org.|
The central issue at hand is the long-standing practice in the WTO—and its predecessor, the General Agreement on Tariffs and Trade (GATT)—that each country may “self-declare” as developing to benefit from special and differential treatment (S&DT). Least developed countries qualify automatically, however, once certain thresholds are met. While the exact meaning of S&DT is defined in the context of each negotiation—preferential market access, exceptions to commitments, technical assistance, etc.—the concept departs from the key principles of reciprocity and nondiscrimination that underlie the multilateral trading system.
Reforming the System
One way to improve the system would be to limit the practice of developing-country self-declaration. The United States recently proposed that in current and future negotiations, members or acceding members of the Organization for Economic Cooperation and Development (OECD) may not invoke the self-declaration option. The same would apply to members of the Group of 20 (G-20), “high income” countries as per the World Bank definition, or countries that account for 0.5 percent or more of global merchandise trade. Over 30 countries would fall in at least one of these categories (table 2).
|Table 2 List of WTO developing-country members covered by US proposal WT/DT/W/764|
|WTO developing-country member||Share in global merchandise trade (annual average 2015-17, percent)||OECD member||G-20 member||"High-income" country per World Bank definition|
|United Arab Emirates||1.69%||✓|
|Trinidad and Tobago||0.05%||✓|
|Antigua and Barbuda||0.00%||✓|
|Saint Kitts and Nevis||0.00%||✓|
|Sources: World Trade Organization, http://data.wto.org; Organization for Economic Cooperation and Development, www.oecd.org/about/membersandpartners/; G-20 Summit, www.g20.org/en/summit/about/; and World Bank, https://databank.worldbank.org/data/download/site-content/CLASS.xls.|
But the US proposal is flawed. It would disallow India, Indonesia, and Vietnam, for example, to self-declare, even though they are certainly developing countries. In a rebuttal to the US approach, China, India, South Africa, and others submitted a proposal of their own. While reiterating that self-declaration is appropriate in the WTO context, they make the point that per capita indicators must be given top priority when assessing development levels. And yet, from an economic perspective, the issue is whether a country is large enough in terms of world trade shares that its policy decisions can impact global prices, as in the case of India’s policies on sugar.
Agreeing on a formal categorization of developing countries in the WTO context can become a byzantine negotiating exercise, with little likelihood of agreement because of the diverse nature of countries in this category (Low, Mamdouh, and Rogerson 2018). In reality, however, differentiation does occur. The WTO Trade Facilitation Agreement (TFA) allows countries to self-determine the timeline for implementation of commitments, in some cases linked to technical assistance. Nine developing countries have notified their readiness to immediately observe all obligations, and 30 others, including Brazil and China, have agreed to immediately implement more than 75 percent of commitments. More broadly, Taiwan recently opted to declare itself “developed.”
Track Record on "Differentiated Treatment"
Existing literature shows that the theoretical foundation for S&DT is shaky and the empirical evidence inconclusive (Ornelas 2016). For example, the system benefits only those countries that participate in multilateral negotiations with reciprocal exchanges of concessions. As a result, the expansion of export sectors where developing countries typically possess comparative advantage, like agriculture, continues to face constraints. In addition, the design and practice of nonreciprocal market access preferences seem to be biased against developing countries. These preferences can foster exports of specific products and sectors in beneficiary countries, but S&DT does not support a growth-promoting strategy. Ultimately, developing countries themselves are handicapped, lacking leverage to pursue their export interests—at the same time, they forego a commitment device to help them make good trade policy choices (Staiger 2005).
If S&DT is so disadvantageous to developing countries, why do they adhere to it in the WTO context? One reason is that smaller, poorer members may lack the ability to effectively negotiate and implement trade agreements and to leverage the opportunities of international trade. They thus embrace a rationale for technical assistance and capacity building, along with transition periods for implementation of new rules, as with the TFA. In other cases, some countries use the claim to S&DT to block progress in multilateral negotiations they consider stacked against them. But emerging-market countries would be better served by claiming a seat at the table to influence agenda-setting and seek improved market access. Active engagement in the system would bring the benefits of contractually based nondiscriminatory liberalization, stability, and predictability (Keck and Low 2004).
An Alternative Course of Action
The “developed-developing” dichotomy does not serve the WTO membership well. Rather than debating definitional criteria, however, WTO members should consider the following steps to help integrate developing countries in global trade:
- Countries can decide to follow Taiwan’s example and not claim differentiated treatment, without the need to declare themselves “developed.”
- Countries could opt not to claim differentiated treatment in a specific negotiation, as with the implementation of TFA commitments. The ongoing negotiations on fisheries subsidies disciplines provide a good opportunity to put this measure into practice.
- Flexible negotiating formats, in particular plurilateral agreements open to participation by all countries, are a useful alternative for designing rules in areas of interest to groups of members. Finding a way to bring them to the WTO would benefit the broader WTO membership, increasing transparency. Countries not wanting to join a negotiation would not be required to do so or be allowed to block it.
- Active engagement by larger developing countries in trade negotiations could strengthen their bargaining position to set a balanced negotiating agenda, encompassing the interests of countries at different levels of development, including, for example, in agriculture.
- Negotiations should provide for differentiated treatment taking into account the policymaking challenges in developing countries without establishing permanent exemptions. These provisions should either be time-bound or have clear threshold and phaseout criteria, as in the WTO Agreement on Subsidies and Countervailing Measures.
- Technical assistance and capacity-building support for development and reform in developing economies can be essential to success and are thus in the interest of both those that provide such assistance and those that receive it.
The WTO rules need to be improved to ensure the effectiveness of the trading system. S&DT must be turned on its head, not to escape multilateral rules or commitments but to conduct rule-making and contractually based market opening. Taking these steps is the best way to defend against unilateral actions that threaten international trade.