Policy Space at the WTO: Developing Countries Should Reject Demands in Manufacturing Negotiations

Mehdi Shafaeddin

After a failure to initiate a new trade round in Seattle in 1999, the so-called Doha Development Round began before the end of 2001, in the midst of mistrust between developing and developed countries. In the text of the Doha Development Agenda, a lot of lip-service was paid to development issues. Since 2001, there has been one failure after another in reaching an agreement by the two parties.  Will the Round be concluded?  In my view, if developed countries insist on their anti-development stance, it should not.

The crisis in trade negotiation is a crisis of confidence in the intention of developed countries, which are basically concerned with their own interests rather than the mutual interests of both parties. According to Ms. Barshefsky, an ex-US trade representative: “[the] developing world is not hearing what we are saying and we’re not hearing what the developing world is saying. We’re passing like ships in the night”.

In my view, developing countries do, in fact, hear well what developed countries are saying; that is, we would like to limit your policy space so that you specialize in accordance with the principle of static comparative advantage. Such policy space limitation will lead to de-industrialization of low-income countries, locking them into the production and exports of primary commodities and at best some light, labour-intensive industries or assembly operations. To explain, developed countries have been pushing in so-called non-agricultural market access (NAMA) negotiations for:

• across-the-board liberalization of trade in manufactured goods by proposing the use of  the (non-linear) Swiss formula with low coefficients (Mehdi Shafaeddin, The Political Economy of WTO with Special Reference to NAMA Negotiations);
• thus pushing for cutting and binding tariff lines at a low level;
• limiting flexibility in the exemption from cutting some tariff lines and from leaving them unbound.

The combination of these proposals would imply that the tariffs structure of developing countries would be uniform and bound at low levels without the ability to increase them beyond a limited (bound) level. It will disarm them of an important policy tool for establishing new industries and/or upgrading their industrial structures.  They may get further access to markets of developed countries for products in which they have static comparative advantage. Nevertheless, binding tariffs at low levels deprives them of a policy tool to establish new industries in which they may wish to develop dynamic comparative advantage. The result will de-industrialization of countries which are at early stages of development. This has, in fact, been the consequence of across-the-board and uniform trade liberalization of the last quarter century in many low and middle income African and Latin American countries.

The experience of successful early and late industrializers, indicates that developing countries need a non-uniform, dynamic and flexible tariff structure. Such a structure, inter alia, will help them to establish and nurture various industries on a selective (targeted) basis during each phase of industrialization; it also allows them to upgrade their industrial structure over time starting with low-technology intensive industries and moving up the ladder of industrialization.

During each phase, there is a need for developing industrial products on selective basis because: supply response to relative prices is stronger than its response to a uniform price structure; resources, including the decision making capabilities of the government, are scarce in low-income countries; different industries involve different externalities and linkages effects. The process of industrialization requires creating supply capacity, operating it efficiently and ultimately upgrading the industrial structure. At the first phase some light industries are to be established, but intermediate goods and capital equipment are to be imported freely. As established industries gets near maturity, pressure is to put on them by various means, including gradual tariff reduction. At the same time, tariffs are to be imposed on the related intermediate products which can be produced internally and after a while be reduced. Such a dynamic process of imposing and relaxing tariffs over time should be repeated not only for various selected light industries and intermediate products, but also eventually for capital goods until the industrial structure is consolidated. A rigid tariff structure, will not allow such a dynamic strategy.

The irony is that developed countries try to impose a rigid tariff structure on developing countries, by using tactics such as time pressure, threats, blame games and even bullying. Yet, they tend to protect their technological development through TRIPs and their agricultural production and exports through subsidies and other incentives.

Of course the use of tariffs alone is not sufficient for successful industrialization. Nevertheless, a dynamic and flexible tariff structure is essential. Developing countries ought to make their choice. Reject NAMA, as it is proposed, or get locked into the production and export of primary commodities.