Experts caution against rush into a trade facilitation agreement

Third World Network  

 Published in SUNS #7699 dated 19 November 2013

Geneva, 18 Nov (Kanaga Raja) -- A group of eminent trade experts from developing countries has advised developing countries to be very cautious and not be rushed into an agreement on trade facilitation (TF) by the Bali WTO Ministerial Conference, given the current internal imbalance in the proposed agreement as well as the serious implementation challenges it poses.
 
"While it may be beneficial for a country to improve its trade facilitation, this should be done in a manner that suits each country, rather than through international rules which require binding obligations subject to the dispute settlement mechanism and possible sanctions when the financial and technical assistance as well as capacity-building requirements for implementing new obligations are not adequately addressed."
 
This recommendation is in a report by the Geneva-based South Centre. The report, " WTO Negotiations on Trade Facilitation: Development Perspectives", has been drawn up from discussions at two expert group meetings organised by the Centre.
 
The eminent experts included Rubens Ricupero (former Secretary-General of UNCTAD), S. Narayanan (former Ambassador of India to the WTO), Ali Mchumo (former Managing Director of the Common Fund for Commodities and former Ambassador of Tanzania to the WTO), Li Enheng (Vice Chairman, China Society for WTO Studies), Carlos Correa (Professor, University of Buenos Aires), Deepak Nayyar (Vice Chair, Board of South Centre, former Vice Chancellor of Delhi University and former Chief Economic Advisor to Government of India), Yilmaz Akyuz (Chief Economist, South Centre, former Director of UNCTAD's Globalisation and Development Strategies Division) and Chakravarthi Raghavan (Editor Emeritus of the South-North Development Monitor).
 
Noting that an agreement on trade facilitation has been proposed as an outcome from the Bali WTO Ministerial Conference, the South Centre report said that the trade facilitation negotiations have been focused on measures and policies intended for the simplification, harmonization and standardization of border procedures.
 
"They do not address the priorities for increasing and facilitating trade, particularly exports by developing countries, which would include enhancing infrastructure, building productive and trade capacity, marketing networks, and enhancing inter-regional trade. Nor do they include commitments to strengthen or effectively implement the special and differential treatment (SDT) provisions in the WTO system".
 
The negotiations process and content thus far indicate that such a trade facilitation agreement would lead mainly to facilitation of imports by the countries that upgrade their facilities under the proposed agreement. Expansion of exports from countries require a different type of facilitation, one involving improved supply capacity and access to developed countries' markets.
 
Some developing countries, especially those with weaker export capability, have thus expressed concerns that the new obligations, especially if they are legally binding, would result in higher imports without corresponding higher exports, which could have an adverse effect on their trade balance, and which would therefore require other measures or decisions (to be taken in the Bali Ministerial) outside of the trade facilitation issue to improve export opportunities in order to be a counter-balance to this effect.
 
According to the report, another major concern voiced by the developing countries is that the proposed agreement is to be legally binding and subject to the WTO's dispute settlement system. This makes it even more important that the special and differential treatment provisions for developing countries should be clear, strong and adequate enough. The negotiations have been on two components of the TF: Section I on the obligations and Section II on special and differentiated treatment (SDT), technical and financial assistance and capacity building for developing countries.
 
Most developing countries, and more so the poorer ones, have priorities in public spending, especially health care, education and poverty eradication. Improving trade facilitation has to compete with these other priorities and may not rank as high on the national agenda. If funds have to be diverted to meet the new trade facilitation obligations, it should not be at the expense of the other development priorities. 
 
"Therefore, it is important that, if an agreement on trade facilitation were adopted, sufficient financing is provided to developing countries to meet their obligations, so as not to be at the expense of social development," the report stressed.
 
The negotiation mandate established in the "Modalities for Negotiations on Trade Facilitation" of the 2004 July Package, the report noted, was confined to "clarifying and improving" relevant aspects of trade facilitation articles under the GATT 1994 (i. e. Articles V, VIII and X GATT), with a view to further expediting the movement, release and clearance of goods, including goods in transit.
 
Thus, the negotiations are not meant to limit or eliminate the rights and obligations of Members under the three GATT articles or to impinge on national policy and regulatory space. Yet, several of the proposed provisions are in fact amending, not just clarifying, the GATT Articles V, VIII, and X.
 
This goes beyond the negotiation mandate and would require an amendment of the GATT in accordance with the procedures provided for by the Agreement Establishing the WTO, said the report.
 
It further emphasised that the negotiation mandate sets an intrinsic link between Section I and Section II of the draft text, whereby it conditions implementation by developing countries and LDCs on the acquisition of financial and technical capacity, based on the delivery of assistance by developed country Members of WTO (as contained in Paragraphs 2, 3, 6 of Annex D of the "July package" WT/L/579).
 
The report goes on to highlight the main issues of concern for a large number of developing countries on the trade facilitation issue. It said that many developing countries have legitimate concerns that they would have increased net imports, adversely affecting their trade balance. While the trade facilitation agreement is presented as an initiative that reduces trade costs and boosts trade, benefits have been mainly calculated at the aggregate level.
 
Improvements in clearance of goods at the border will increase the inflow of goods. This increase in imports may benefit users of the imported goods, and increase the export opportunities of those countries that have the export capacity.
 
However, the report noted, poorer countries that do not have adequate production and export capability may not be able to take advantage of the opportunities afforded by trade facilitation (in their export markets).
 
"There is concern that countries that are net importers may experience an increase in their imports, without a corresponding increase in their exports, thus resulting in a worsening of their trade balance."
 
Many of the articles under negotiations (such as the articles on ‘authorized operators' and ‘expedited shipments') are biased towards bigger traders that can present a financial guarantee or proof of control over the security of their supply chains. There is also the possibility that lower import costs could adversely affect those producing for the local markets.
 
"The draft rules being negotiated, mainly drawn up by major developed countries, do not allow for a balanced outcome of a potential trade facilitation agreement," the report asserted.
 
New rules under Section I are mandatory with very limited flexibilities that could allow for Members' discretion in implementation. The special and differential treatment under section II has been progressively diluted during the course of the negotiations. Furthermore, while the obligations in Section I are legally binding, including for developing countries, developed countries are not accepting binding rules on their obligation to provide technical and financial assistance and capacity building to developing countries.
 
The trade facilitation agreement would be a binding agreement and subject to WTO dispute settlement. The negotiating text is based on mandatory language in most provisions, which includes limited and uncertain flexibilities in some parts.
 
Accordingly, said the report, if a Member fails to fully implement the agreement it might be subject to a dispute case under the WTO DSU (Dispute Settlement Understanding) and to trade sanctions for non-compliance.
 
The cost of non-compliance could thus be significant; and to avoid potential trade sanctions, countries may have to invest in infrastructure and incur substantial costs to comply with binding commitments. It is worth noting that several WTO Members have been already challenged under WTO dispute settlement based on the grounds established by articles V, VIII, and X of the GATT 1994.
 
"Many of the proposed rules under negotiations are over-prescriptive and could intrude on national policy and undermine the regulatory capacities and space of WTO Member States. The negotiating text in several areas contains undefined and vague legal terminology as well as ‘necessity tests', beyond what the present GATT articles require."
 
According to the report, these could establish multiple grounds for challenging a broad range of WTO Members' laws, rules, regulations and measures not only in matters that pertain to customs, but also on more broadly trade-related matters and on regulations ‘on or in connection with' import, export and transit of goods (for example, in the proposed article 1 on ‘publication and availability of information' and article 6 on disciplines on fees and charges').
 
It further pointed out that several provisions would have significant influence on national legislative processes. For example, some of the articles proposed under the agreement refer to an undefined open-ended category of ‘interested parties' which have to be included among those which a country has to consult prior to introducing new laws or measures (Article 2 on ‘prior publication and consultation').
 
The reference to the category ‘interested parties' is not in the present GATT 1994. It could include an expanded list of entities that have a direct or indirect relation to the trade transactions covered by the agreement, and do not necessarily have to be located in the territory of the Member implementing the measure.
 
"This may lead to lobbying and pressures by various interest groups from outside the Member, which could have an undue influence on national regulatory and legislative processes."
 
None of the relevant GATT 1994 articles seem to require any consultation with any party, inside the Member or outside, prior to promulgation of laws or administrative regulations. There are only requirements on prior publication before enforcement (of rules and regulations) in certain cases. The proposed article would thus introduce a totally new obligation which is intrusive with regard to a Member's regulations.
 
Several of the provisions under negotiations could hold significant administrative and institutional burdens on LDCs and other developing countries, said the report, adding that customs and customs-related institutional mechanisms in these countries are not as advanced compared to developed countries.
 
"It is worth noting that most of the proposals based on which negotiations are undertaken were presented by developed countries, reflecting the nature and form of practice that they already undertake at the national level. Thus, developing countries are asked to converge to the practice and standards of developed countries. While some developing countries may have the capacity to upgrade their capacity accordingly, many others will have difficulties in aligning the facilities of all their customs agencies and in all regions of the country."
 
The experts' report stressed that meeting the obligations is likely to involve significant costs for developing countries. The costs include human resource expenses, equipment and information-technology systems, as well as other significant infrastructure expenditures.
 
These costs would not be limited to a one-time investment and most of them are of a recurring nature, and would thus be a burden especially on low-income countries. For example, it noted, Turkey's efforts to modernize its customs information technology required US$28 million. In Morocco, the costs of information and communication technologies (ICT) were estimated at US$10 million, while in Chile the total investment cost of implementing an automated customs system amounted to US$5 million in the early 1990s.
 
In Jamaica, the introduction of the computerized customs management system cost about US$5.5 million, while Tunisia needed US$16.21 million to computerize and simplify procedures. Furthermore, a 2003 OECD report highlighted that in Bolivia, a five year project for customs modernization cost US$38 million, of which about US$25 million was spent for institutional improvements and US$9 million for computerized systems.
 
For Chinese Taipei, express clearance alone necessitated establishing 20 new processing lines each equipped with an X-ray scanning machine. There are a total of 117 officers at the express division, working day and night shifts so as to provide a continuous day and night long service.
 
"The infrastructure and automated systems mentioned above are only part of the investments required to allow implementing the practices stipulated under a potential trade facilitation agreement," said the report. A World Bank report noted that the costs of implementing ICT at customs is only part of the life cycle cost of these systems and that too often these maintenance and upgrading costs are underestimated and not adequately included in the life cycle costs.
 
"Accordingly, meeting these costs will necessitate an allocation in the national budgets and could divert limited resources from public services, such as health care, food security and education to customs administration," the South Centre report added.
 
"This is the reason developing countries are insisting that the additional costs of meeting the new obligations are provided to them, as was the understanding when the trade facilitation negotiation mandate was established. However, there is not yet a binding or adequate commitment for the provision of new and additional funds."
 
Most trade facilitation provisions under negotiations are entirely new or go far beyond what the World Customs Organization (WCO) Revised Kyoto Convention (RKC) requires. The arguments that the proposed trade facilitation agreement would largely be a copy of the RKC, or that it would simply reaffirm what most Member states already agreed to in the RKC, do not hold, as it would contain obligations that go beyond the Convention.
 
Moreover, said the report, any obligation undertaken under a new agreement on trade facilitation could be enforced through the dispute settlement body of the WTO and through cross-sectoral retaliation among countries, unlike the Kyoto Convention.
 
"To be balanced, a trade facilitation agreement requires strong and effective rules under Section II on SDT for developing countries, particularly the LDCs. These countries need clear and mandatory rules to operationalize the intrinsic link between their obligation to implement and their acquisition of capacity."
 
Procedural rules under Section II should not be burdensome on these countries in a way that dilute their rights as provided for under Annex D. They should be able to designate themselves the provisions under Section II, and to determine when they have acquired the capacity.
 
Moreover, the agreement should include mandatory rules on obligations by developed country members to provide long-term and specific financial and technical assistance, and capacity-building to developing and least developed country Members in accordance with their specific needs for implementing their obligations. A trade facilitation fund should be established to ensure resources for the long-term.
 
Finally, said the report, in order for a trade facilitation agreement to be made legally effective and become part of the WTO body of law, it should be adopted through an amendment to the multilateral trade agreements in Annex 1A of the WTO Agreement. An agreement along the lines being proposed would alter the rights and obligations of Members under GATT 1994. An amendment of this has to be undertaken in accordance with Article X of the WTO Agreement.
 
Accordingly, a potential trade facilitation agreement will take effect only after two-thirds of the WTO membership has ratified it. Moreover, it will only be effective for Members that accepted it. The Members that accept the agreement will also accept applying the ‘most-favoured nation' rules to their commitments, thus extending accepted preferential treatment to WTO Members having difficulties to accept the agreement.
 
In some overall conclusions, the report said that while it may be beneficial for a country to improve its trade facilitation, this should be done in a manner that suits each country, rather than through international rules which require binding obligations subject to the dispute settlement mechanism and possible sanctions when the financial and technical assistance as well as capacity building requirements for implementing new obligations are not adequately addressed.
 
Thus, it added, one possibility is that the agreement provides that substantive provisions in the present Section 1 of the draft text are not legally binding on developing countries, just as the provision of financial resources and technical assistance is non-binding on developed countries. Instead, developing countries can endeavour to meet the obligations on an aspirational basis, and can apply for financial resources for programmes to upgrade their trade facilitation capacities.
 
In case commitments under a multilateral trade facilitation agreement are undertaken, these should be approached in a way that would provide developing Members and LDCs with policy space and flexibility to adopt and implement commitments commensurate with their capacity to do so, and subject to the provision of technical and financial assistance and capacity building.
 
"Developing Members and LDCs could then, at their discretion, progressively move into higher levels or standards of implementation, when capacity exists to do so, taking into account their development context."
 
According to the report, achieving the above necessitates a balanced agreement with effective and binding rules on SDT that fully operationalize Annex D (2004). Moreover, least developed countries should be exempted from undertaking binding commitments as long as they remain LDCs. This would be consistent with the understanding in other components of the Doha work programme, where the draft modalities for agriculture and NAMA stipulate that LDCs are not required to reduce their bound tariffs.
 
The South Centre report said: "On the basis of the current content of the negotiating text and given the current internal imbalance in the proposed agreement, developing countries are advised to be very cautious about rushing into a trade facilitation agreement by the ministerial conference in Bali, given the implementation challenges it carries. Furthermore, this decision should be considered in light of what developing countries and LDCs are able to obtain in other areas of interest to them."
 
The report also noted that a large part of the Doha work programme (the Doha Development Agenda) that would benefit developing countries and help to set right the imbalances of the Marrakesh Treaty remain to be completed.
 
"Developing countries and LDCs are advised to ensure that the entry into force of a trade facilitation agreement, if finally adopted, is linked to the conclusion of the Doha mandate with its development dimension fulfilled and based on the single undertaking."
 
As noted, some of the proposed obligations under a trade facilitation agreement would change current GATT 1994 provisions. Therefore, a formal process of amendment under article X of the Agreement Establishing the WTO would be required. In case an agreement is accepted on a ‘provisional basis', in the context of paragraph 47 of the Doha mandate, then WTO Members are advised to define what they mean by ‘provisional'. The enforceability of the new agreement should be conditional upon the conclusion of the Doha Round as a single undertaking and the approval of the new agreement in accordance with the WTO rules.
 
Hence, the DSU should not apply to the agreement when implemented on a ‘provisional' basis. Within the period of provisional application, Members should be able to voluntarily choose to apply all or parts of the agreement. This may help avoid a scenario in which the developed countries would already have attained a definitive agreement on trade facilitation and then have no more interest in negotiating or completing other issues in the single undertaking of the Doha round.
 
The report said that if a balanced text is not attained by the ministerial conference in Bali, negotiations on trade facilitation can continue post-Bali with a view towards attaining an agreement that is internally balanced, as well as within a balanced overall Doha outcome.
 
"Political arguments about the damage that could be made to the WTO as a global rule-making institution in case of failure to get an agreement on this subject should not be given precedence over the genuine interests of developing countries. Indeed, the greatest failure of the WTO will be to make decisions that do not ‘ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development'," it concluded.