Ideas & Debate

Revise the rulebook for smooth multilateral trade

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A ship arrives at the port of Mombasa. FILE PHOTO | NMG

The trade rulebook needs to be revised to ensure that it can deliver its full development potential.

The multilateral trading system provides a unique international regime that regulates the conduct of sovereign nations in trade policy.

Its norms, principles and institutions have served many of its member countries to overcome the so-called ‘prisoners’ dilemma’ in their strategic interaction with trading partners, where individually rational behaviour leads to collectively inefficient outcomes. This has helped increase international co-operation in multilateral market-opening and rule-making and has boosted trade flows around the world.

It is therefore striking that the World Trade Organisation (WTO) norms and disciplines have failed to preempt the unilateral measures and resulting heightened tensions that have emerged among the world’s major trading partners over the past year. These moves have directly eroded the spirit of multilateral trade cooperation, challenging the legitimacy and integrity of the system underpinning it.

While these trade tensions are a symptom rather than cause of the diminishing relevance and effectiveness of the multilateral trading system, they have brought to the fore the need to revitalise global partnership in trade – especially considering global commitments to do so under Goal 17 (global partnerships) of the 2030 Agenda for Sustainable Development. The question remains how to achieve this goal.

Mindful of the urgency of these systemic challenges, WTO members are currently debating various ways to ‘modernise’ different aspects of the institution, including its rule-making, transparency and dispute-settlement functions. One of the hot issues being debated is how to promote ‘development’ in the WTO through special and differential treatment (SDT).

Questions have been raised around how SDT should be designed and applied within the architecture of multilateral trade rules and disciplines, and who should be able to use such flexibilities.

Flexibilities in the form of SDT have allowed developing countries to temporarily opt out of some of the most constraining WTO rules – from their domestic perspectives.

This was an instrument to render trade integration economically, socially and politically sustainable. SDT also served as an effective negotiating instrument, making negotiated outcomes acceptable to developing countries and thereby increasing likelihood for consensus in multilateral negotiations.

Updating and modernising the principle of SDT to make it more effective, operational and better adapted to new trade realities is undoubtedly needed, especially as target 10.A of the Sustainable Development Goals calls for implementing “the principle of special and differential treatment for developing countries, in particular least developed countries [LDCs], in accordance with WTO agreements”.

On the other hand, a robust development dimension also requires effectively redressing the imbalances or inequities built into existing WTO rules. These include the Agreement on Agriculture, where developed countries enjoy entitlements on domestic support that LDCs and most developing countries are not able to access.

The crux of the matter is whether current SDT provisions provide an excessive level of flexibilities to major large developing countries with economic weight, discouraging them from opening up their markets. One argument goes that the current architecture of SDT – equally open to all developing countries and based on the principle of self-declaration of developing country status – is not well suited for the economic realities of 2019.

Indeed, the share of developing countries as a group in world trade rose from 28 percent in 1995 to 45 percent in 2018. So this school of thought considers that some developing countries should be ‘graduated’ from SDT and be treated in the same way as developed countries.

Others have underscored the continued relevance of SDT, given the persistent divide that exists between developed and developing countries. For instance, the average income per capita of developing countries, while rising, represents still only one tenth of that of developed countries ($45,029), and in the case of LDCs just two per cent ($887). Moreover, in the developing world, 736 million people, or 10 per cent of the world population, continue to live in extreme poverty.

The question is intriguing, partly because different indicators depict different pictures. If one looks at the aggregate figures, the increased presence of some dynamic, large and populous countries is a fact. But their global presence masks the still modest level of individual incomes, and high poverty levels in some cases.

At the same time, having high income per capita alone does not free some of the ‘high-income’ countries (like some small island or commodity-dependent states) of the constraints and vulnerabilities affecting their economies and populations (such as geographical location, natural endowments, income distribution or socio-political bottlenecks).

In fact, the development status of countries is not easily reducible to some representative quantitative values, especially when that status affects rights and obligations of countries in an international agreement.