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A fresh trade insecurity at WTO

The ruling in a recent WTO dispute, a case that the Government of India claims it won, actually lays the ground for trade discrimination between developing countries. Chakravarthi Raghavan in Geneva analyses the Appellate Body judgment in the India-EC dispute on trade preferences.

THE RIGHT of developing countries to access developed country markets on a non-discriminatory tariff basis and compete with other exporters to those markets has received a serious setback, with the recent ruling of the WTO's Appellate Body (AB) in the dispute raised by India against the European Community over its Generalised Scheme of Preferences (GSP), and within it the Drug benefits scheme extended to some 12 countries, including Pakistan.

In a technical sense, India won the case (as the Commerce Ministry claimed on April 7) the particular scheme of the EC was struck down as GATT-illegal, and the EC has been asked to bring its scheme into conformity with the GATT 1994 and the 1979 Enabling Clause.

However, the effect of the ruling is to erode the contractual rights of developing countries and modify the contractual obligation of all developed countries to provide Most-Favoured-Nation treatment.

It will also modify, under the Enabling Clause of 1979, the "more favourable treatment'' to developing countries under generalised, non-reciprocal and non-discriminatory'' preference schemes, into a right of developed countries to discriminate among developing countries.

To understand the issues and problems, one has to go back to the past — the history of the GSP at UNCTAD and its subsequent endorsement at GATT through a waiver, and then the Enabling Clause of 1979, and now made part of the WTO. The panel went into it, but the AB just ignored this.

The Enabling Clause allowed developed countries to formulate individual tariff preference schemes to benefit developing countries — and until this latest AB ruling — required such schemes to be generalised, non-discriminatory and non-reciprocal (meaning no reciprocal conditions of market access or other benefits to the preference-giving country).

The schemes were considered autonomous, and not justiciable. But with the creation of the WTO, the Enabling Clause became a part of contractual rights and obligations, legislated into the WTO, and measures under the GSP became challengeable.

Discriminatory preferences

The European Commission, in framing its GSP, provided special preferences to select developing countries as judged by the EC to be combating the production and trafficking in narcotic drugs (the Drug Arrangements).

The other parts of its GSP also enable the EC to provide benefits to developing countries to promote environment standards or labour standards. The Drug Arrangements initially were provided to some of the central American countries and to members of the Andean Pact — which got tariff preferences, as well as enhanced textiles and clothing quotas.

India was not included, but challenged the EC scheme after hesitation when the benefits were extended to Pakistan, hurting Indian textiles and clothing exports to the EC.

The WTO panel that heard the dispute upheld the Indian case that except for preferences and benefits for LDCs, the benefits of any GSP scheme should be available on a generalised, non-discriminatory and non-reciprocal way to all developing countries. The panel said that the preference-giving country could not discriminate among developing countries through its Drug Arrangements.

Appellate Body ruling

However, the Appellate Body (AB) in its ruling on key points reversed some of the panel rulings without clearly explaining the reasons. The AB has said that the Enabling Clause in fact enabled the preference-giving countries to frame preferences for a group of developing countries (subject to the conditions about transparency and objective criteria) without having to extend it to all other developing countries.

Developing countries tariff benefits, whether scheduled tariff concessions or in applied tariffs, are curently available on an MFN-basis to all developed countries. This will continue to be their obligation in future too. But it will not be so in future, in respect of concessions they negotiate and obtain from a developed country. The developed country can now discriminate and differentiate among developing countries, using the 1979 Enabling Clause. The latter was originally intended to enable developing countries to get tariff concessions from a developed country that need not be provided to other developed countries.

For example, if India negotiates with the EC or the U.S. a tariff concession which is bound by the EC or the U.S. in their schedules, and India in turn provides some other concession, this latter will remain unaltered, and available on an MFN basis to all developed countries. Only, any Indian tariff concession to other developing countries under the Global System of Trade Preferences or its own GSP schemes favouring Least Developed Countries need not be available to developed countries.

But the reverse will no longer be true. If India negotiates, say, a 15 per cent tariff concession, from the U.S. or the EC in a particular product, hereafter there is nothing to prevent the U.S. or the EC to erode that benefit by the grant to a competitor of India from a developing country, access at a lower tariff rate.

The only tariff concession that India could negotiate with a developed country (and be assured of its certainty and benefit) would be to obtain a zero-tariff concession from the developed country, or ask the developed country to combine all its tariff reduction commitments in its schedule of concessions into a WTO/GATT scheduled commitment that it will not make use of the right that the Appellate Body has now conferred upon the developed countries, and provide preferential tariffs. Otherwise, the market access concessions would be worthless.

The AB has now enabled the U.S., the EC and others to take away the existing market access rights of one set of developing countries and give them to others — robbing Peter to pay Paul in the trade arena. The developed countries could now create `sub-categories' of developing countries, and `discriminate' in tariff/market access concessions to them through preference schemes, designed to meet their "development, financial and trade need.''

The only condition set by the AB is that first, the "need'' should be based, not on mere assertion of the preference-granting or the beneficiary country, but on "an objective standard'' recognised in WTO multilateral agreements or "in multilateral instruments adopted by international organisations.'' Second, there should be a sufficient nexus between the preferential treatment provided and its likelihood of alleviating the relevant `development, financial or trade need.' Third, the preference-giving country must assure availability of identical treatment to all "similarly'' situated beneficiaries.

Transparent criteria

In calling for transparent classification schemes based on an "objective standard,'' the AB has in fact extended the ability of the developed countries to import into the trading system, non-trade concerns whether environment standards, ILO standards, or for that matter human rights standards, if the standards or norms are in an international agreement.

As Brazil and India pointed out at the DSB, at no time in the negotiations or in the Enabling Clause provisions itself, did the developing countries agree to forego or derogate from their Most-Favoured-Nation Rights vis-a-vis other developing countries, except the LDCs.

The Enabling Clause was only to enable the developed countries to give preferential concessions to developing countries (on generalised, non-discriminatory, and non-reciprocal basis), without having to extend it to other developed countries.

The result of the ruling now is that (a ) a developed country could discriminate between developing countries in terms of market access; (b ) when a developing country, say India, negotiates market access with a developed country, and agrees to provide some concession in return for a tariff concession from the developed country (bound in its tariff schedules), there is no certainty that the developed country would not under-cut the benefit by giving market access at a lower tariff to a developing country competitor of India through a preference scheme.

As India told the WTO Dispute Settlement Body, the trade benefits that a developed country can now provide under its preference scheme to a developing country would invariably inflict costs on other developing countries.

The AB ruling, as Brazil said, has enabled developed countries to use the WTO as an instrument of their foreign policy, and extend trade concessions or benefits to developing countries on the basis of foreign (or other non-trade policy goals) of the developed country.

Setback to trade negotiations

The entire future and process of WTO/GATT tariff negotiations has now been upset, and the Doha negotiations on market access in agricultural and non-agricultural products, have been derailed.

If this ruling becomes the WTO jurisprudence, as it will unless the Ministerial Conference or the General Council adopts an authoritative interpretation reversing the ruling, developing countries will be unable to negotiate any tariff concessions with the assurance that the concessions they got would not be eroded by discriminatory preferences that developed country can provide to its competitor.

For, developing countries compete with each other in the markets of the GSP preference giving countries, and any discriminatory treatment means taking away benefits of one developing country and giving it to another.

Until and unless this situation is clarified, developing countries including India would do well not to negotiate any market access agreements in agriculture or non-agriculture market access, or at best only negotiate zero-tariff concessions by the developed country or its commitment that none of its scheduled commitments would be undercut by a new preference scheme.

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