Good evening Ladies and Gentlemen, and dear friends:
It is a great pleasure and honor to be invited by VOA to participate in this session in direct dialogue with all of you listeners from Cambodia, on the subject of the recent accession of Cambodia as member to WTO. I will take about 4 to 5 minutes of your time to introduce the subject under review. In this introduction, I will provide a summary of what WTO is, and what are the main benefits that a country can expect for being a member of WTO. I will also discuss the condition under which a country, and Cambodia in particular, would or would not benefit from this membership, or what kind of reforms it will require for Cambodia to take in order to benefit from WTO.
What is the WTO?
The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business.
The world is complex. This brief section tries to reflect the complex and dynamic nature of trade. It highlights some of the benefits of the WTO’s trading system, but it doesn’t claim that everything is perfect—otherwise there would be no need for further negotiations and for the system to evolve and reform continually.
Nor does it claim that everyone agrees with everything in the WTO. That’s one of the most important reasons for having the system: it’s a forum for countries to thrash out their differences on trade issues.
That said, there are many over-riding reasons why we’re better off with the system than without it. Here are 10 of them.
A. THE TENBENEFITS
1. The system helps to keep the peace
This sounds like an exaggerated claim, and it would be wrong to make too much of it. Nevertheless, the system does contribute to international peace, and if we understand why, we have a clearer picture of what the system actually does.
Peace is partly an outcome of two of the most fundamental principles of the trading system: helping trade to flow smoothly, and providing countries with a constructive and fair outlet for dealing with disputes over trade issues. It is also an outcome of the international confidence and cooperation that the system creates and reinforces.
History is littered with examples of trade disputes turning into war. One of the most vivid is the trade war of the 1930s when countries competed to raise trade barriers in order to protect domestic producers and retaliate against each others’ barriers. This worsened the Great Depression and eventually played a part in the outbreak of World War 2.
Two developments immediately after the Second World War helped to avoid a repeat of the pre-war trade tensions. In Europe, international cooperation developed in coal, and in iron and steel. Globally, the General Agreement on Tariffs and Trade (GATT) was created.
Both have proved successful, so much so that they are now considerably expanded — one has become the European Union, the other the World Trade Organization (WTO).
How does this work?
Crudely put, sales people are usually reluctant to fight their customers. In other words, if trade flows smoothly and both sides enjoy a healthy commercial relationship, political conflict is less likely.
What’s more, smoothly-flowing trade also helps people all over the world become better off. People who are more prosperous and contented are also less likely to fight.
But that is not all. The GATT/WTO system is an important confidence-builder. The trade wars in the 1930s are proof of how protectionism can easily plunge countries into a situation where no one wins and everyone loses.
The short-sighted protectionist view is that defending particular sectors against imports is beneficial. But that view ignores how other countries are going to respond. The longer term reality is that one protectionist step by one country can easily lead to retaliation from other countries, a loss of confidence in freer trade, and a slide into serious economic trouble for all — including the sectors that were originally protected. Everyone loses.
Confidence is the key to avoiding that kind of no-win scenario. When governments are confident that others will not raise their trade barriers, they will not be tempted to do the same. They will also be in a much better frame of mind to cooperate with each other.
The WTO trading system plays a vital role in creating and reinforcing that confidence. Particularly important are negotiations that lead to agreement by consensus, and a focus on abiding by the rules.
2. The system allows disputes to be handled constructively
As trade expands in volume, in the number of products traded, and in the numbers of countries and companies trading, there is a greater chance that disputes will arise. The WTO system helps resolve these disputes peacefully and constructively.
There could be a down side to trade liberalization and expansion. More trade means more possibilities for disputes to arise. Left to themselves, those disputes could lead to serious conflict. But in reality, a lot of international trade tension is reduced because countries can turn to organizations, in particular the WTO, to settle their trade disputes.
Before World War 2 that option was not available. After the war, the world’s community of trading nations negotiated trade rules which are now entrusted to the WTO. Those rules include an obligation for members to bring their disputes to the WTO and not to act unilaterally.
When they bring disputes to the WTO, the WTO’s procedure focuses their attention on the rules. Once a ruling has been made, countries concentrate on trying to comply with the rules, and perhaps later renegotiating the rules — not on declaring war on each other.
Around 300 disputes have been brought to the WTO since it was set up in 1995. Without a means of tackling these constructively and harmoniously, some could have led to more serious political conflict.
The fact that the disputes are based on WTO agreements means that there is a clear basis for judging who is right or wrong. Once the judgement has been made, the agreements provide the focus for any further actions that need to be taken.
The increasing number of disputes brought to GATT and its successor, the WTO, does not reflect increasing tension in the world. Rather, it reflects the closer economic ties throughout the world, the GATT/WTO’s expanding membership and the fact that countries have faith in the system to solve their differences.
Sometimes the exchanges between the countries in conflict can be acrimonious, but they always aim to conform with the agreements and commitments that they themselves negotiated.
3. A system based on rules rather than power makes life easier for all
The WTO cannot claim to make all countries equal. But it does reduce some inequalities, giving smaller countries more voice, and at the same time freeing the major powers from the complexity of having to negotiate trade agreements with each of their numerous trading partners.
Decisions in the WTO are made by consensus. The WTO agreements were negotiated by all members, were approved by consensus and were ratified in all members’ parliaments. The agreements apply to everyone. Rich and poor countries alike have an equal right to challenge each other in the WTO’s dispute settlement procedures.
This makes life easier for all, in several different ways. Smaller countries can enjoy some increased bargaining power. Without a multilateral regime such as the WTO’s system, the more powerful countries would be freer to impose their will unilaterally on their smaller trading partners. Smaller countries would have to deal with each of the major economic powers individually, and would be much less able to resist unwanted pressure.
In addition, smaller countries can perform more effectively if they make use of the opportunities to form alliances and to pool resources. Several are already doing this.
There are matching benefits for larger countries. The major economic powers can use the single forum of the WTO to negotiate with all or most of their trading partners at the same time. This makes life much simpler for the bigger trading countries. The alternative would be continuous and complicated bilateral negotiations with dozens of countries simultaneously. And each country could end up with different conditions for trading with each of its trading partners, making life extremely complicated for its importers and exporters.
The principle of non-discrimination built into the WTO agreements avoids that complexity. The fact that there is a single set of rules applying to all members greatly simplifies the entire trade regime.
And these agreed rules give governments a clearer view of which trade policies are acceptable
Protectionism is expensive: it raises prices. The WTO’s global system lowers trade barriers through negotiation and applies the principle of non-discrimination. The result is reduced costs of production (because imports used in production are cheaper) and reduced prices of finished goods and services, and ultimately a lower cost of living.
There are plenty of studies showing just what the impacts of protectionism and of freer trade are. These are just a few figures:
Food is cheaper
Negotiating agricultural trade reform is a complex undertaking. Governments are still debating the roles agricultural policies play in a range of issues from food security to environmental protection.
But WTO members are now reducing the subsidies and the trade barriers that are the worst offenders. And in 2000, new talks started on continuing the reform in agriculture. These have now been incorporated into a broader work programme, the Doha Development Agenda, launched at the fourth WTO Ministerial Conference in Doha, Qatar, in November 2001.
Clothes are cheaper
UK consumers pay an estimated £500 million more per year for their clothing because of these restrictions. For Canadians the bill is around C$780 million. For Australians it would be A$300 annually per average family if Australian customs duties had not been reduced in the late 1980s and early 1990s.
The textiles and clothing trade is going through a major reform — under the WTO — that will be completed in 2005. The programme includes eliminating restrictions on quantities of imports.
If customs duties were also to be eliminated, economists calculate the result could be a gain to the world of around $23 billion, including $12.3 billion for the US, $0.8 billion for Canada, $2.2 billion for the EU and around $8 billion for developing countries.
The same goes for other goods …
If Australia had kept its tariffs at 1998 levels, Australian customers would pay on average A$2,900 more per car today. In 1995, aluminium users in the EU paid an extra $472 million due to tariff barriers.
One of the objectives of the Doha Development Agenda (DDA) is another round of cuts in tariffs on industrial products, i.e. manufactured and mining products. Some economists, Robert Stern, Alan Deardorff and Drusilla Brown, predict that cutting these by one third would raise developing countries’ income by around $52 billion.
… and services
The group of economists led by Robert Stern estimates that lowering services barriers by one third under the Doha Development Agenda would raise developing countries’ incomes by around $60 billion.
And so it goes on. The system now entrusted to the WTO has been in place for over 50 years.
In that time there have been eight major rounds of trade negotiations. Trade barriers around the world are lower than they have ever been in modern trading history. They continue to fall, and we are all benefiting.
5. It gives consumers more choice, and a broader range of qualities to choose from
Think of all the things we can now have because we can import them: fruits and vegetables out of season, foods, clothing and other products that used to be considered exotic, cut flowers from any part of the world, all sorts of household goods, books, music, movies, and so on.
Think also of the things people in other countries can have because they buy exports from us and elsewhere. Look around and consider all the things that would disappear if all our imports were taken away from us. Imports allow us more choice — both more goods and services to choose from, and a wider range of qualities. Even the quality of locally-produced goods can improve because of the competition from imports.
The wider choice isn’t simply a question of consumers buying foreign finished products. Imports are used as materials, components and equipment for local production.
This expands the range of final products and services that are made by domestic producers, and it increases the range of technologies they can use. When mobile telephone equipment became available, services sprang up even in the countries that did not make the equipment, for example.
Sometimes, the success of an imported product or service on the domestic market can also encourage new local producers to compete, increasing the choice of brands available to consumers as well as increasing the range of goods and services produced locally.
If trade allows us to import more, it also allows others to buy more of our exports. It increases our incomes, providing us with the means of enjoying the increased choice.
The WTO’s own estimates for the impact of the 1994 Uruguay Round trade deal were between $109 billion and $510 billion added to world income (depending on the assumptions of the calculations and allowing for margins of error).
More recent research has produced similar figures. Economists estimate that cutting trade barriers in agriculture, manufacturing and services by one third would boost the world economy by $613 billion — equivalent to adding an economy the size of Canada to the world economy.
In Europe, the EU Commission calculates that over 1989–93 EU incomes increased by 1.1–1.5% more than they would have done without the Single Market.
So trade clearly boosts incomes.
Trade also poses challenges as domestic producers face competition from imports. But the fact that there is additional income means that resources are available for governments to redistribute the benefits from those who gain the most — for example to help companies and workers adapt by becoming more productive and competitive in what they were already doing, or by switching to new activities.
7. Trade stimulates economic growth, and that can be good news for employment
Trade clearly has the potential to create jobs. In practice there is often factual evidence that lower trade barriers have been good for employment. But the picture is complicated by a number of factors. Nevertheless, the alternative — protectionism — is not the way to tackle employment problems.
This is a difficult subject to tackle in simple terms. There is strong evidence that trade boosts economic growth, and that economic growth means more jobs. It is also true that some jobs are lost even when trade is expanding. But a reliable analysis of this poses at least two problems.
First, there are other factors at play. For example, technological advance has also had a strong impact on employment and productivity, benefiting some jobs, hurting others.
Second, while trade clearly boosts national income (and prosperity), this is not always translated into new employment for workers who lost their jobs as a result of competition from imports.
In other words, some countries are better at making the adjustment than others. This is partly because some countries have more effective adjustment policies. Those without effective policies are missing an opportunity.
There are many instances where the facts show that the opportunity has been grasped — where freer trade has been healthy for employment. The EU Commission calculates that the creation of its Single Market means that there are somewhere in the range of 300,000–900,000 more jobs than there would be without the Single Market.
Often, job prospects are better in companies involved in trade. In the United States, 12 million people owe their jobs to exports; 1.3 million of those jobs were created between 1994 and 1998. And those jobs tend to be better-paid with better security. In Mexico, the best jobs are those related to export activities: sectors which export 60 per cent or more of their production, pay wages 39% higher than the rest of the economy and maquiladora (in-bond assembly) plants pay 3.5 times the Mexican minimum wage.
The facts also show how protectionism hurts employment. The example of the US car industry has already been mentioned: trade barriers designed to protect US jobs by restricting imports from Japan ended up making cars more expensive in the US, so fewer cars were sold and jobs were lost.
In other words, an attempt to tackle a problem in the short term by restricting trade turned into a bigger problem in the longer term.
Even when a country has difficulty making adjustments, the alternative of protectionism would simply make matters worse.
8. The basic principles make the system economically more efficient, and they cut costs
Many of the benefits of the trading system are more difficult to summarize in numbers, but they are still important. They are the result of essential principles at the heart of the system, and they make life simpler for the enterprises directly involved in trade and for the producers of goods and services.
Trade allows a division of labour between countries. It allows resources to be used more appropriately and effectively for production. But the WTO’s trading system offers more than that. It helps to increase efficiency and to cut costs even more because of important principles enshrined in the system.
Imagine a situation where each country sets different rules and different customs duty rates for imports coming from different trading partners. Imagine that a company in one country wants to import raw materials or components — copper for wiring or printed circuit boards for electrical goods, for example — for its own production.
It would not be enough for this company to look at the prices offered by suppliers around the world. The company would also have to make separate calculations about the different duty rates it would be charged on the imports (which would depend on where the imports came from), and it would have to study each of the regulations that apply to products from each country. Buying some copper or circuit boards would become very complicated.
That, in simple terms, is one of the problems of discrimination.
Imagine now that the government announces it will charge the same duty rates on imports from all countries, and it will use the same regulations for all products, no matter where they come from, whether imported or locally produced. Life for the company would be much simpler. Sourcing components would become more efficient and would cost less.
Non-discrimination is just one of the key principles of the WTO’s trading system. Others include:
- transparency (clear information about policies, rules and regulations);
- increased certainty about trading conditions (commitments to lower trade barriers and to increase other countries’ access to one’s markets are legally binding);
- simplification and standardization of customs procedure, removal of red tape, centralized databases of information, and other measures designed to simplify trade that come under the heading “trade facilitation”.
Together, they make trading simpler, cutting companies’ costs and increasing confidence in the future. That in turn also means more jobs and better goods and services for consumers.
9. The system shields governments from narrow interests
The GATT-WTO system which evolved in the second half of the 20th Century helps governments take a more balanced view of trade policy. Governments are better-placed to defend themselves against lobbying from narrow interest groups by focusing on trade-offs that are made in the interests of everyone in the economy.
One of the lessons of the protectionism that dominated the early decades of the 20th Century was the damage that can be caused if narrow sectoral interests gain an unbalanced share of political influence. The result was increasingly restrictive policy which turned into a trade war that no one won and everyone lost.
Superficially, restricting imports looks like an effective way of supporting an economic sector. But it biases the economy against other sectors which shouldn’t be penalized — if you protect your clothing industry, everyone else has to pay for more expensive clothes, which puts pressure on wages in all sectors, for example.
Protectionism can also escalate as other countries retaliate by raising their own trade barriers. That’s exactly what happened in the 1920s and 30s with disastrous effects. Even the sectors demanding protection ended up losing.
Governments need to be armed against pressure from narrow interest groups, and the WTO system can help.
The GATT-WTO system covers a wide range of sectors. So, if during a GATT-WTO trade negotiation one pressure group lobbies its government to be considered as a special case in need of protection, the government can reject the protectionist pressure by arguing that it needs a broad-ranging agreement that will benefit all sectors of the economy. Governments do just that, regularly.
10. The system encourages good government
Under WTO rules, once a commitment has been made to liberalize a sector of trade, it is difficult to reverse. The rules also discourage a range of unwise policies. For businesses, that means greater certainty and clarity about trading conditions. For governments it can often mean good discipline.
The rules include commitments not to backslide into unwise policies. Protectionism in general is unwise because of the damage it causes domestically and internationally, as we have already seen.
Particular types of trade barriers cause additional damage because they provide opportunities for corruption and other forms of bad government.
One kind of trade barrier that the WTO’s rules try to tackle is the quota, for example restricting imports or exports to no more than a specific amount each year.
Because quotas limit supply, they artificially raise prices, creating abnormally large profits (economists talk about “quota rent”). That profit can be used to influence policies because more money is available for lobbying.
It can also provide opportunities for corruption, for example in the allocation of quotas among traders. There are plenty of cases where that has happened around the world.
In other words, quotas are a particularly bad way of restricting trade. Governments have agreed through the WTO’s rules that their use should be discouraged.
Nevertheless, quotas of various types remain in use in most countries, and governments argue strongly that they are needed. But they are controlled by WTO agreements and there are commitments to reduce or eliminate many of them, particularly in textiles.
Many other areas of the WTO’s agreements can also help reduce corruption and bad government.
Transparency (such as making available to the public all information on trade regulations), other aspects of “trade facilitation”, clearer criteria for regulations dealing with the safety and standards of products, and non-discrimination also help by reducing the scope for arbitrary decision-making and cheating.
Quite often, governments use the WTO as a welcome external constraint on their policies: “we can’t do this because it would violate the WTO agreements”.
B. AND THE TEN MISUNDERSTANDINGS
- the rules of the WTO system are agreements resulting from negotiations among member governments,
- the rules are ratified by members’ parliaments, and
- decisions taken in the WTO are virtually all made by consensus among all members.
In other words, decisions taken in the WTO are negotiated, accountable and democratic.
The only occasion when a WTO body can have a direct impact on a government’s policies is when a dispute is brought to the WTO and if that leads to a ruling by the Dispute Settlement Body (which consists of all members). Normally the Dispute Settlement Body makes a ruling by adopting the findings of a panel of experts or an appeal report.
Even then, the scope of the ruling is narrow: it is simply a judgement or interpretation of whether a government has broken one of the WTO’s agreements—agreements that the infringing government had itself accepted. If a government has broken a commitment it has to conform.
In all other respects, the WTO does not dictate to governments to adopt or drop certain policies.
As for the WTO Secretariat, it simply provides administrative and technical support for the WTO and its members.
In fact: it’s the governments who dictate to the WTO.
Yes, one of the principles of the WTO system is for countries to lower their trade barriers and to allow trade to flow more freely. After all, countries benefit from the increased trade that results from lower trade barriers.
But just how low those barriers should go is something member countries bargain with each other. Their negotiating positions depend on how ready they feel they are to lower the barriers, and on what they want to obtain from other members in return. One country’s commitments become another country’s rights, and vice versa.
The WTO’s role is to provide the forum for negotiating liberalization. It also provides the rules for how liberalization can take place.
The rules written into the agreements allow barriers to be lowered gradually so that domestic producers can adjust.
They have special provisions that take into account the situations that developing countries face. They also spell out when and how governments can protect their domestic producers, for example from imports that are considered to have unfairly low prices because of subsidies or “dumping”. Here, the objective is fair trade.
Just as important as freer trade — perhaps more important — are other principles of the WTO system. For example: non-discrimination, and making sure the conditions for trade are stable, predictable and transparent.
Underlying the WTO’s trading system is the fact that freer trade boosts economic growth and supports development. In that sense, commerce and development are good for each other.
At the same time, whether or not developing countries gain enough from the system is a subject of continuing debate in the WTO. But that does not mean to say the system offers nothing for these countries. Far from it. The agreements include many important provisions that specifically take developing countries’ interests into account.
Developing countries are allowed more time to apply numerous provisions of the WTO agreements. Least-developed countries receive special treatment, including exemption from many provisions.
The needs of development can also be used to justify actions that might not normally be allowed under the agreements, for example governments giving certain subsidies.
And the negotiations and other work launched at the Doha Ministerial Conference in November 2001 include numerous issues that developing countries want to pursue.
The preamble of the Marrakesh Agreement Establishing the World Trade Organization includes among its objectives, optimal use of the world’s resources, sustainable development and environmental protection.
This is backed up in concrete terms by a range of provisions in the WTO’s rules. Among the most important are umbrella clauses (such as Article 20 of the General Agreement on Tariffs and Trade) which allow countries to take actions to protect human, animal or plant life or health, and to conserve exhaustible natural resources.
Beyond the broad principles, specific agreements on specific subjects also take environmental concerns into account. Subsidies are permitted for environmental protection. Environmental objectives are recognized specifically in the WTO agreements dealing with product standards, food safety, intellectual property protection, etc.
In addition, the system and its rules can help countries allocate scarce resources more efficiently and less wastefully. For example, negotiations have led to reductions in industrial and agricultural subsidies, which in turn reduce wasteful over-production.
A WTO ruling on a dispute about shrimp imports and the protection of sea turtles has reinforced these principles. WTO members can, should and do take measures to protect endangered species and to protect the environment in other ways, the report says. Another ruling upheld a ban on asbestos products on the grounds that WTO agreements give priority to health and safety over trade.
What’s important in the WTO’s rules is that measures taken to protect the environment must not be unfair. For example, they must not discriminate. You cannot be lenient with your own producers and at the same time be strict with foreign goods and services. Nor can you discriminate between different trading partners. This point was also reinforced in the recent dispute ruling on shrimps and turtles, and an earlier one on gasoline.
Also important is the fact that it’s not the WTO’s job to set the international rules for environmental protection. That’s the task of the environmental agencies and conventions.
An overlap does exist between environmental agreements and the WTO — on trade actions (such as sanctions or other import restrictions) taken to enforce an agreement. So far there has been no conflict between the WTO’s agreements and the international environmental agreements
Key clauses in the agreements (such as GATT Art. 20) specifically allow governments to take actions to protect human, animal or plant life or health. But these actions are disciplined, for example to prevent them being used as an excuse for protecting domestic producers — protectionism in disguise.
Some of the agreements deal in greater detail with product standards, and with health and safety for food and other products made from animals and plants. The purpose is to defend governments’ rights to ensure the safety of their citizens.
As an example, a WTO dispute ruling justified a ban on asbestos products on the grounds that WTO agreements do give priority to health and safety over trade.
At the same time, the agreements are also designed to prevent governments setting regulations arbitrarily in a way that discriminates against foreign goods and services. Safety regulations must not be protectionism in disguise.
They must be based on scientific evidence or on internationally recognized standards.
Again, the WTO does not set the standards itself. In some cases other international agreements are identified in the WTO’s agreements. One example is Codex Alimentarius, which sets recommended standards for food safety and comes under the UN Food and Agriculture Organization (FAO) and World Health Organization (WHO).
But there is no compulsion to comply even with internationally negotiated standards such as those of Codex Alimentarius. Governments are free to set their own standards provided they are consistent in the way they try to avoid risks over the full range of products, are not arbitrary, and do not discriminate.
The relationship between trade and employment is complex. So is the relationship between trade and equality.
Freer-flowing and more stable trade boosts economic growth. It has the potential to create jobs, it can help to reduce poverty, and frequently it does both.
The biggest beneficiary is the country that lowers its own trade barriers. The countries exporting to it also gain, but not as much. In many cases, workers in export sectors enjoy higher pay and greater job security.
However, producers and their workers who were previously protected clearly face new competition when trade barriers are lowered. Some survive by becoming more competitive. Others don’t. Some adapt quickly (for example by finding new employment), others take longer.
In particular, some countries are better at making the adjustments than others. This is partly because they have more effective adjustment policies. Those without effective policies are missing an opportunity because the boost that trade gives to the economy creates the resources that help adjustments to be made more easily.
The WTO tackles these problems in a number of ways. In the WTO, liberalization is gradual, allowing countries time to make the necessary adjustments. Provisions in the agreements also allow countries to take contingency actions against imports that are particularly damaging, but under strict disciplines.
At the same time, liberalization under the WTO is the result of negotiations. When countries feel the necessary adjustments cannot be made, they can and do resist demands to open the relevant sections of their markets.
There are also many other factors outside the WTO’s responsibility that are behind recent changes in wage levels.
Why for example is there a widening gap in developed countries between the pay of skilled and unskilled workers? According to the OECD, imports from low-wage countries account for only 10–20% of wage changes in developed countries. Much of the rest is attributable to “skill-based technological change”. In other words, developed economies are naturally adopting more technologies that require labour with higher levels of skill.
In recent years, developing countries have become considerably more active in WTO negotiations, submitting an unprecedented number of proposals in the agriculture talks, and working actively on the ministerial declarations and decisions issued in Doha, Qatar, in November 2001. They expressed satisfaction with the process leading to the Doha declarations. All of this bears testimony to their confidence in the system.
At the same time, the present rules are the result of multilateral negotiations (i.e. negotiations involving all members of GATT, the WTO’s predecessor). The most recent completed negotiation, the Uruguay Round (1986–94), was only possible because developed countries agreed to reform trade in textiles and agriculture — both issues were important for developing countries.
In short, In the WTO trading system, everyone has to follow the same rules.
As a result, in the WTO’s dispute settlement procedure, developing countries have successfully challenged some actions taken by developed countries. Without the WTO, these smaller countries would have been powerless to act against their more powerful trading partners.
This is a natural result of the “rounds” type of negotiation (i.e. negotiations that encompass a broad range of sectors).
The outcome of a trade round has to be a balance of interests. Governments can find it easier to reject pressure from particular lobbying groups by arguing that it had to accept the overall package in the interests of the country as a whole.
A related misunderstanding is about the WTO’s membership. The WTO is an organization of governments.
The private sector, non-governmental organizations and other lobbying groups do not participate in WTO activities except in special events such as seminars and symposiums.
They can only exert their influence on WTO decisions through their governments.
The reasons are positive rather than negative. They lie in the WTO’s key principles, such as non-discrimination and transparency. By joining the WTO, even a small country automatically enjoys the benefits that all WTO members grant to each other. And small countries have won dispute cases against rich countries — they would not have been able to do so outside the WTO.
The alternative would be to negotiate bilateral trade agreements with each trading partner. That could even include regularly negotiating the renewal of commitments to treat trading partners as equals.
For this, governments would need more resources, a serious problem for small countries. And in bilateral negotiations smaller countries are weaker.
By joining the WTO, small countries can also increase their bargaining power by forming alliances with other countries that have common interests.
It would be wrong to suggest that every country has the same bargaining power. Nevertheless, the consensus rule means every country has a voice, and every country has to be convinced before it joins a consensus. Quite often reluctant countries are persuaded by being offered something in return.
Consensus also means every country accepts the decisions. There are no dissenters.
What is more, the WTO’s trade rules, resulting from the Uruguay Round trade talks, were negotiated by member governments and ratified in members’ parliaments.
C.AN EVALUATION OF CAMBODIA’S COSTS AND BENEFITS FOR JOINGING WTO
Now that Cambodia has become a member of WTO, the question of whether Cambodia should or should not join WTO is no longer relevant. However, we still discuss whether under Cambodia’s current very weak economic, environmental political, and social conditions what are the steps that Cambodia must take to reform its economy, political, legal and judicial, educational, labor organizations, corporate and public governance in order to take full advantage of WTO’s membership by improving its competitiveness especially through the development of local entrepreneurship. Among the weaknesses, systemic corruption is the most glaring and the most debilitating factor behind the mark slowdown of foreign direct investment due to increase in transaction and processing costs. This in turn leads to increase in poverty and mal-distribution of income. There is also the question of whether Cambodia would be able to cover the heavy costs of transition and whether Cambodia has the necessary technical knowledge and political will to carry out the necessary changes to meet the requirements by WTO.
In my opinion, Cambodia has no choice but to join WTO. One of the main factor pushing Cambodia into WTO is the coming into force of the new agreement of textile trade, in WTO in January, forced Cambodia to be in WTO. By doing so, Cambodia will face tremendous competition from other powerful and efficient countries like China and India. By not joining Cambodia will suffer a certain economic disaster and it would no longer be able to enter the markets of those countries members of WTO. Since, Textile comprises 80 percent of Cambodia exports. Cambodia staying out of WTO was not an option. For Cambodia, without carrying out fundamental reform in its economy and governance, the choice is between dying quickly and dying slowly. Cambodia not joining WTO would die quickly. Whereas joining WTO Cambodia can still die of a slow death without undertaking fundamental economic, political, and social reforms to make the country more competitive, domestically and internationally.
Washington D.C. September 6, 2004
Naranhkiri Tith, Ph.D.
D. SPECIFIC PROBLEMS FOR CAMBODIA WITH RESPECT TO ITS MEMBERSHIP OF WTO AS PERCEIVED BY NGOS AND OTHERS:
1. Small businesses worry about WTO
By Sam Rith
Small-to-medium businesses (SMEs) are worried that they could be put at risk of failure by the trade practice rules of the World Trade Organisation when Cambodia becomes a full member, according to participants in an SME study tour to Bangalore, India.
Before Cambodia joins the WTO, small and medium entrepreneurs would like the government to request the committee of the WTO to set rules to allow those businesses to compete fairly in the domestic markets of other member countries.
In India many small and medium enterprises such as rice milling, brick and tile makers, and spare parts producers went bankrupt because the Indian government did not have this market access specified before joining WTO.
India became a member of the WTO in 1994.
Cambodian participants in the SME study trip to Bangalore, Karnataka state, India from July 24 to August 2, were concerned that their products would not meet international standards.
Sreng Va, Kampong Cham rice miller and exporter, said: “We are very worried about our products when Cambodia becomes a member of WTO because we do not have modern milling machines.”
Va said rice milling in his province was increasingly not so active as previously, due to thousands of tons of unhusked rice being exported to Vietnam.
“Vietnam has modern rice machines that can rejoin broken rice grains. Broken grains affect the value of the rice. We cannot afford to buy these machines,” he said.
The Bangalore visit was organised by the Asia Foundation and sponsored by USAID.
Veronique Salze Lozach, economic program manager for the Asia Foundation, said it was to give an opportunity to some small-scale entrepreneurs to meet with their counterparts in Bangalore.
They were able to exchange common issues and potential solutions, meet with multi-sector and sector business associations experienced in providing practical services to their members, get involved in policy advocacy, and meet representatives of the public sector and organizations aimed at promoting investments, developing industrial zones and providing facilitated and transparent administrative procedures, through, for example, the implementation of “one window services” for registration, business operation and export.
Lozach said Bangalore was obviously a success story in developing products and services that were exported all over the world.
She said Bangalore was known as the Silicon Valley of India and some software industries based there, like Infosis, were among the most recognized in the world.
An economist from the Institute for Social and Economic Change in Bangalore said, however, it remained important to distinguish between some very successful innovators and other more traditional businesses, which were struggling to improve their competitiveness in both domestic and export markets.
Today there are 300,000 registered small industries and 1,300 infotech companies in Karnataka state, where Bangalore is.
The Asia Foundation chose this city as the destination for a group of small-scale businesses from Kampot, Kampong Cham and Kampong Chhnang, because Bangalore is known for its particularly successful efforts, both public and private, to seize economic opportunities offered by trade liberalization and attract international investors as well as stimulate domestic ones.
Lozach said Bangalore was a striking example of how political will, technological innovation and skilled human resources could rapidly turn an under-developed region into a successful export-oriented economy.
She said both the public and the private sector had a role to play in creating an environment favorable to the development of a competitive and sustainable private sector.
Va, who was on the tour, said the Cambodian government today helped motivate only big enterprises; but not the small and medium enterprises.
The Indian government is upgrading its SMEs, by helping to pay half of the interest rate of an entrepreneur’s bank loan. The Indian government also helps to find markets for SME products.
R S Deshpande, from the Institute of Economic and Social Change, said the keys to success were a deregulated and more transparent business environment; the availability of skilled and cheap human resources; and above all a strong political will to develop infrastructures, universities and training centers, and to facilitate investment, technological upgrading and innovation.
The Karnataka Association of Small Scale Industries (KASSIA) and the Women’s Business Association explained to the Cambodian delegation how they respond to the needs of their members by engaging in constant interaction with local and national government. Improved competitiveness and quality control were also mentioned as objectives.
“It was a good opportunity for us to participate with the group to Bangalore to take some experiences to upgrade our careers,” Va said. ” We now know more about advantages and how to protect ourselves from the disadvantages of joining the WTO.”
Va said his province has just set up a rice milling association. “It gives us more credibility with our customers, negotiating strength, and the resources to solve problems faster.”
Ty Sokurn, Kampong Chhnang local electrical wiring contractor, said the Cambodian government should advise SMEs what they need to do to meet international standards to compete with outside products and find marketplaces both inside and outside the country for them.
Sokurn said the Indian government was more open to motivate internal and external investors to invest in their country.
Besides the trip to Bangalore, the Asia Foundation organized trips to Indonesia, Thailand and Vietnam.
This was a chance for Cambodian local authority representatives from three provinces to gain exposure to the concept of “one stop shops” for registration and licensing and to learn new ways to develop a more business-friendly environment at the local level, for Cambodian stakeholders to be directly exposed to an acting Commercial Court, to see examples of how intellectual property regulations create opportunities for the private sector and meet their counterparts; and to be directly exposed to examples of how trade liberalization and access to new markets can create opportunities for the private sector.
Participants invited to join the trips represented rice millers, ice makers, brick and tiles manufacturers, fish sauce, salt, fish exporters, cashew growers, generator sales, engine spare parts repair, clean water suppliers, and rural electricity providers.
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Phnom Penh Post, Issue 13/18, August 27 – September 9, 2004
2. Issue #3, September 3, 2004
|WEDNESDAY SEPTEMBER 1, 2004
National Assembly votes in favor of WTO membership.
The National Assembly unanimously voted to ratify a law on Cambodia’s accession to the World Trade Organization, just barely meeting a membership deadline set by the international trade body, all newspapers report today.
Almost a year after WTO officials gave their nod to Cambodia’s requested membership, 106 of 107 lawmakers passed the accession package. Opposition lawmaker Son Chhay, who has expressed concern over Cambodia’s weak position in the trade club, left the room during the vote. He later told The Cambodia Daily that had he been present, he would have voted in favor of the WTO membership.
National Assembly President Prince Norodom Ranariddh said the vote approving Cambodia’s WTO accession gave the country a space in history amongst other poor nations inside the global trade group, Samleng Yuvechun Khmer reports.
Commerce Minister Cham Prasidh told reporters after the vote that he was very happy with the Assembly’s action. “If we join the WTO, there is a 95 percent change that the economy will be alive. But if we are slow to reform, we will die,” he said in Samleng Yuvechun Khmer and The Cambodia Daily.
Although Cambodia first applied to join the WTO in October 1994, it was not welcomed into the organization until July 2003, Koh Santepheap writes. Ongoing political deadlock stemming from last year’s national elections further prolonged the National Assembly’s approval of the WTO accession package, according to The Cambodia Daily.
With the Assembly’s positive vote, the Cambodian Senate and head of state must sign the agreement, TheCambodia Daily writes. The country’s official WTO membership will then commence 30 days after the government alerts the organization of its actions.
Cham Prasidh said the government must now pass more than 40 laws to attract investors and meet conditions set by the WTO. The minister said it would take two years to enact the reforms, which include improving anticorruption efforts, reducing bureaucracy, and increasing security, according to Samleng Yuvechun Khmer.
3. Law of the jungle: Cambodia’s accession to the WTO
The following is an edited extract of Oxfam International’s analysis of Cambodia’s World Trade Organisation accession.
Oxfam does not oppose the decision of the Royal Government of Cambodia to join the World Trade Organisation (WTO); clearly this is a decision for Cambodia and Cambodians.
However, we wish to expose this example of double standards in the Cambodian Accession Treaty, in which Cambodia has been asked to go much further than current WTO members in pulling down market protections. Once again it seems that there is one rule for the rich and another for the rest of the world.
At the Cancun ministerial conference, Cambodia will be the first Least Developed Country (LDC) to accede to the WTO since it was created in 1995.
This will be hailed by developed countries as the proof that the WTO can deliver for one of the world’s poorest countries. It will also be presented as a satisfactory outcome to the long-standing demand by LDC members (which automatically acceded when the WTO was created) that accession procedures for LDCs be simplified and streamlined.
Unfortunately, this rosy picture is far from the truth.
HE Mr Cham Prasidh, Minister of Commerce, has said: “This is a package of concessions and commitments that goes far beyond what is commensurate with the level of development of an LDC like Cambodia. Nonetheless, we do accept the challenges, because we see the benefits of joining the world trading system.”
In reality, Cambodia was pressured by members of the WTO into making concessions that go far beyond the level of commitments made by LDCs that are already members of the WTO.
For instance, Cambodia has been forced into immediately halting the licensing of affordable generic versions of new medicines, even though the Doha declaration allows LDCs to wait until at least 2016 to implement this complicated and far-reaching agreement.
Moreover, some of the requirements put upon Cambodia go far beyond what the United States and the European Union are willing to commit to in the present round of negotiations.
Tariff peaks are a case in point. Cambodia, a country where 80 percent of the population is employed in the agricultural sector, has been asked to provide less protection to its sensitive agricultural sectors (60 percent maximum tariff) than the US, EU and Canada. The EU’s highest tariff peak on agriculture is 252 percent. In the case of the United States and Canada, it is 121 percent and 120 percent respectively.
There is a very real risk that Cambodia’s accession will serve as a template model for the accession of other LDCs and developing countries. Another 26 countries are also in the process of negotiation to become members of the WTO, including nine LDCs.
The establishment of a precedent would confirm the trend of demanding increasing levels of commitments of those countries that have not yet entered the WTO.
Cambodia is one of the world’s poorest countries. Under a succession of International Monetary Fund (IMF) programs, Cambodia has embarked on a rapid trade-liberalization exercise. Average tariff rates have been halved since 1996, to 15 percent.
Under the terms of two memoranda signed between the IMF and Cambodia in 2001, further reforms were introduced, including a sharp reduction in maximum tariff levels.
In addition to the shock caused by such rapid reform, the decrease in applied tariff rates demanded by the IMF and the World Bank weakened the bargaining position of Cambodia during the WTO accession process.
Economic growth has been dependent on garment exports-85 percent of all exports. Cutthroat competition in this sector and continued protectionism makes small countries’ market access extremely vulnerable.
Unfortunately, Cambodia is about to lose the preferential access it previously enjoyed through quotas because of the dismantling of the WTO textile agreement in December 2004.
For Cambodia, entering the WTO will not necessarily mean expanded market access in this area due to additional competition from highly competitive suppliers like China and India. Lower textile exports could be disastrous for Cambodia, given its already high balance of payments deficit (9.4 percent of GDP in 2001).
Rural poverty has fallen very slowly, at only 0.3 percent per year. Rural areas, where 80 percent of the workforce is still employed in agriculture, continue to suffer from poor infrastructure and a lack of essential services.
The protection of sectors that are vital to food security and rural livelihoods should continue at least until other employment opportunities are available for those currently employed in agriculture.
|FACTS ABOUT ACCESSION|
Not only must a country abide by all WTO rules to enter the WTO, but individual members are allowed to ask for further concessions from applicants in return for existing members’ support for their application.
Without the support of key WTO members, there is no chance that any country would enter the WTO. Thus, acceding countries are forced to negotiate bilateral agreements with all key players.
“WTO officials are fond of saying that the multilateral trading system is a rule-based system,” wrote trade analysts Grynberg and Joy in The Journal of World Trade in 2000. “Yet the accession process has no rules, except precedent and power… More importantly, the applicant cannot inflict any marginal cost on the WTO members when they demand progressively more trade concessions.”
In short, the big players call the shots.
The Doha ministerial conference pledged to facilitate LDC accession to the WTO, and to exercise restraint in seeking concessions and commitments on trade in goods and services from LDCs.
Unfortunately these pro-development principles were not respected when it came to the crunch of the Cambodian accession negotiations.
In the case of a poor country like Cambodia, accession is seen as a necessary means to achieve economic growth.
“In a time of harsh and fierce global competition, the survival of our country depends on our ability to capture the right opportunities and at the right time. We believe the entry to the WTO is such a case,” Cham Prasidh said in July.
WTO is seen as an additional step towards breaking away from Cambodia’s image as a poor, war-stricken country, isolated from the international community. According to one Cambodian official, Cambodia does not want only to be seen as “a country with killing fields”.
But will Cambodia really benefit from entering the WTO?
It is worthwhile looking at the situation of the 30 LDC members of the WTO. Despite their membership, they have been unable to secure trade opportunities commensurate with their development needs.
Low-income countries account for 40 percent of the world’s population but only 3 percent of world trade. During the period 1997-2000, non-oil-exporting LDCs have actually seen their value of exports decrease because of the absence of any WTO or other international measure to address falling commodity prices.
In the current negotiations, despite promises made at the United Nations by WTO members, LDCs have still not received any insurance that they will obtain bound, duty-free and quota-free market access to developed countries, one of their long-standing demands.
In fact, the current round will probably erode the trade preferences that they currently enjoy, marginalizing them even further. In the case of the dispute settlement costs, lack of technical capacity and political pressures have prevented LDCs from defending their rights.
None of them has made any claims at the dispute settlement body so far. Technical assistance remains a drop in the ocean, with just $22 million in 2002 to be distributed among 104 developing country members.
|FLEXIBILITY-OR LACK OF IT|
When asked what constituted special and differential treatment in Cambodia’s accession deal, a WTO official said that Cambodia has secured longer implementation periods for the following agreements: Technical Barriers to Trade (2008); Sanitary and Phytosanitary Measures (2008); Customs Valuation (2009); Trade Related aspects of Intellectual Property (TRIPS) (2007).
This is an extremely poor example of an SDT package. Not only is Cambodia unlikely to be significantly more developed by 2009-the close of the longest implementation period-but it has no recourse to exemptions from the rules of the agreements or any elements of positive discrimination.
Implementing all these agreements within four years will be extremely burdensome for a country like Cambodia where the national budget is under stress and already unable to cover essential social expenditures in the areas of health and education.
According to available estimates, the cost of implementation of such agreements is around $100 million. One might wonder whether using any resources for the implementation of these agreements is a reasonable use of public funding in such a poor country.
|PRESSURE FROM MEMBERS|
The Malaysian representative in Cambodia’s Working Party, a group of interested WTO members, said in July that, “[We feel] deep regret [because of the] onerous demands made by members to acceding countries like Cambodia”.
Despite the fact that Cambodia is unlikely to become a major trading nation there are several areas where there is clear evidence of pressure from WTO members in the accession deal. While there is reluctance among Working Group members to “name and shame” the key demandeurs, it is widely known that the US takes the lead.
The Cambodian negotiator’s demands for technical assistance in the implementation of the four agreements (TRIPS, customs valuation, TBT, SPS) were rejected outright by the US.
Due to the pressure of other members, Cambodia had to revise substantially its first offer on market access in agriculture and industrial products in April 2003. This is in complete contradiction to the pledge made by WTO members to exercise due restraint in demanding further market access concessions from acceding LDCs.
Overall, this means that the bound average tariffs of Cambodia have decreased from the initial offer by 25 percent to a level of 22.13 percent, which is extraordinary low for an LDC.
Reportedly, during the negotiations on the accession package the Cambodian delegation had requested a reference be made to the Doha Declaration regarding access to medicines. Some WTO members opposed this, hence it was dropped.
The draft report of the working party shows that Cambodia had then asked for a 2009 deadline for TRIPS compliance, including pharmaceuticals, but they were eventually bargained down to 2007.
According to the WTO Secretariat, the 2007 deadline is generous given that Cambodia already has some intellectual property laws in place.
However, the truth is that Cambodia has recently passed and promulgated a law excluding pharmaceutical patenting altogether until the 2016 deadline agreed in the Doha Declaration. It would be a global scandal if the WTO accession now requires the Cambodian government to overturn this law.
The Cambodian government and the public will have to pay the cost of this early deadline in terms of higher prices for drugs. As a result many people will be deprived of access to the medicines they badly need.
Furthermore, to secure support from key players, Cambodian delegates had to negotiate bilateral deals with the US, EU and Australia. The content of such bilateral treaties has not been fully disclosed.
It is not known at this stage if other bilateral agreements were concluded.
Given the harsh experience of Cambodia, the following reform of the WTO accession process must take place.
4. Building Entrepreneurial Economies
By Carl J. Schramm
From Foreign Affairs, July/August 2004
The United States, using its own direct-aid programs and its influence over development agencies, has encouraged other nations to adopt the features and institutions of post-Cold War American capitalism. But this approach — the so-called Washington consensus — has often yielded disappointing results. Many economies in Latin America, eastern Europe, and elsewhere are stagnant or backsliding, and most of the world’s poorest economies show few signs of new life. Going forward, the American economic model should not be abandoned, as some development economists advocate, but it must be improved. The current template is incomplete. In particular, it fails to reproduce a vital element of the U.S. economy: support for entrepreneurship.
Not only does the United States have a high rate of new business starts, it breeds a constant flow of new high-impact firms — the kind that create value and stimulate growth by bringing new ideas to market, be they new technologies, new business methods, or simply new and better ways of performing routine tasks. These firms do not appear automatically, as a natural by-product of having free-market institutions. Nor are they the result of any single factor. Rather, the United States has evolved a multifaceted “system” for nurturing high-impact entrepreneurship — a system that, with the right development policies, might be cultivated in many other countries as well.
Such an approach has been missing so far. The Washington consensus focuses on macroeconomic issues such as finance and trade, along with general institution building. Nations are urged to create good banking systems, reasonable interest and exchange rates, and stable tax structures. They are expected to privatize, deregulate, and invest in infrastructure and basic education. Entrepreneurship, meanwhile, is considered only as an afterthought and in piecemeal fashion. Some policymakers, for instance, have suggested that venture capital firms should be added to the list of financial institutions that developing countries ought to have. But venture capital will do no good without ventures to support. Micro-enterprises are not sufficient either. Existing programs to support small businesses, such as those promoted by the U.S. Agency for International Development and nongovernmental organizations, offer livelihoods to many people. But these ventures tend to involve cottage industries that add little to the economy in terms of productivity or growth. Even micro-entrepreneurs with great potential cannot succeed without national mechanisms to feed and sustain them. Nor can a developing nation prosper in the long term only by attracting outsourced work, which has a disturbing tendency to migrate to still lower-cost locales. Real opportunities arise only when a nation is the initiator: a breeder of new firms, based on new ideas that add unique value.
START-UPS’ STARRING ROLE
The system that generates and supports entrepreneurship in the United States is surprisingly unappreciated. Perhaps this is because when modern economic thought first took shape in the early and middle decades of the twentieth century, the West already had a mature industrial economy. With a universe of large corporations and modern equity markets already in place, economists were preoccupied with impersonal market forces, business
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5. Corruption ‘sucking vitality’ from country
By Richard Woodd (Phnom Penh Post; April 2004)
RAMPANT corruption at all levels is “sucking the vitality out of Cambodia,” and costing the country desperately needed foreign investment, says a private sector business leader and legal specialist.
“Every survey of the private sector in the past four years has identified corruption as the number one issue for people in business who are paying taxes and trying to operate legally in this environment,” Brett Sciaroni told a public debate at the Foreign Correspondents’ Club in Phnom Penh.
“Corruption is rampant and widespread and has become increasingly worse in recent years. It’s an urgent issue that must be grappled with by the country’s political leadership. We’ve had enough talking, it’s time for action.”
A new report on obstacles to foreign investment estimates under-the-table payments in the manufacturing and service sectors alone at $120 million a year. Sciaroni says this is just the tip of the iceberg.
He sits on the Private Sector Forum, which Prime Minister Hun Sen created four years ago to meet twice a year with the Council of Ministers for ongoing dialogue and consultation on policy and legal issues. He is also a partner in a leading Southeast Asian law firm and a legal adviser to the government.
Sciaroni said politicians were always talking about introducing anti-corruption laws, “but the government already has sufficient laws for the purpose. The problem is not the law, it’s implementation of the law”.
The forum was suspended after the anti-Thai riots and had not met for over a year due to the lack of progress on formation of a government. “The forum had an agreement with the previous government that before new laws, regulations or policies were initiated, we would be consulted through our working group sessions,” Sciaroni said.
“The political hiatus has cost us foreign investment. For those of us who have been here a while it has been business as usual, but for potential new investors there has been a reluctance to commit. They can’t understand why it’s taking so long to form a government. New investment has been slowed down.
“Last December-January the Ministry of Finance started issuing new tax demands and customs duties, and at that point we began petitioning the government to resume the Private Sector Forum meetings. Our concern is that although it’s still a caretaker government, departments with regulatory authority have started to act and no mechanism exists for the private sector to have input. Unfortunately the attitude seems to be that the formation of a government is imminent so nobody will do anything that might jeopardize their own position.”
Sciaroni said forum members constantly raised corruption issues with senior ministers. “The tax base has to be broadened and that has been talked about for years; there is a great need for accountability in all ministries because of the huge financial leakage that occurs. This involves any revenue that the government collects. I believe donor money merely plugs the gaps caused by the leakage. Corruption diverts funds from public projects and ministries, and it is in everyone’s interest for the leadership to take some strong action that will start hitting back at the level of abuse we see today.”
Asked what he personally would do about corruption if he had the means and opportunity, Sciaroni said: “For starters, all the assets of elected members and senior officials should be on public record.”