A. Market Access Negotiations

Agriculture

8. WTO members remain sharply divided over further reforms and liberalization of agriculture. Draft papers on modalities for agricultural liberalization prepared by the chairman of the negotiating committee have failed to bridge the gap. The focus of agricultural exporters, primarily the United States and the Cairns Group³, is on substantial improvements in market access, the elimination of export subsidies and reductions in domestic supports (see Table 1). Their proposals envisage a flattening of peak tariffs—requiring high-tariff countries to make bigger cuts. The EU, Japan, and Switzerland, among others, favor proportional cuts and emphasize nontrade concerns, such as the environment, food safety, cultural factors, as well as geographical indications.⁴ They also propose to subject export credits and food aid, as well as the state trading practiced by some of the Cairns Group countries, to the same disciplines as export subsidies. With regard to domestic support, there are differences over the use of so-called “Blue Box” subsidies—which the EU regards as only mildly trade-distorting but necessary to promote nontrade concerns—and the de minimis provisions⁵ favored by the United States, but viewed as a loophole by others.

Table 1.

Summary: Market Access Negotiations—Key Negotiation Positions

¹The EU is proposing a special safeguard instrument for developing countries in order to ensure food security.

²In the current Agreement on Agriculture there are no limits on spending on “Blue Box” subsidies. The U.S. proposal to include “Blue Box” subsidies in the de minimis calculations will effectively reduce “Blue Box” support.

Table 1.

Summary: Market Access Negotiations—Key Negotiation Positions

Agriculture
Proposals have been received from all the major players and can be summarized as follows:
The main elements of the EU proposal are:
•	Reducing the average tariff by 36 percent, with a minimum reduction per tariff line of 15 percent;
•	Reduction in export subsidies by an average of 45 percent across different products, while accepting the phase-out of some export subsidies;
•	Reductions in the “Amber Box” category of trade-distorting domestic support by 55 percent;
•	The extension of the level of protection of geographical indications (GIs) in the agriculture talks, with the aim to include an index of additionally protected GIs in the Agreement on Agriculture;
•	As regards developing countries, a “food security box” to facilitate the implementation of further tariff reductions and to meet the developing countries’ concerns on sensitive agricultural crops.1
The main elements of the U.S. and Cairns Group proposal are:
•	A formula approach to tariff cutting that would reduce all developed country agricultural tariffs to below 25 percent;
•	Elimination of all forms of export subsidies phased in over a short implementation period;
•	Substantial reduction, with a view to elimination, of trade-distorting domestic support. The United States proposes that domestic support should not exceed 5 percent of the value of agricultural production;
•	The United States proposes that “Blue Box” trade distorting support linked to production limitations should be included in the calculation of de minimis limits of 5 percent of agricultural production.2
Other important proposals have come from different groups of developing countries, particularly in the area of SDT, and include the following:
•	Under SDT developing countries should be allowed to draw up a positive list of products that would be subject to tariff commitments;
•	A proposal for a “development box” that would capture SDT for developing countries in the Agreement on Agriculture.
Industrial Goods
Detailed proposals have been received by the main players and can be summarized as follows:
•	u.S. proposal: The elimination of duties on all industrial goods by 2015, starting from applied rates or the Uruguay Round bound rate, whichever is lower, and binding all final rates.
1	eu proposal: The application of a formula-based mechanism for tariff reduction that would considerably reduce all industrial tariffs by compressing them into a flatter range. The compression should start from bound rates or applied rates for unbound tariffs.
Services
Services is a heterogeneous negotiating area. Key themes under consideration depend on the mode of supply and the type of service.
•	Developed countries emphasize in particular further liberalization of rules on access, mainly through commercial presence, in important sectors and insist on the need for further market opening. Proposals published thus far indicate an interest in telecommunications, financial services, transport, business (including professional), and distribution services.
•	Developing countries attach particular importance to the liberalization of temporary cross-border movements of natural persons and seem to be interested in market openings for professional services, tourism, audiovisual, distribution, and computer services. They also attach importance to the development of disciplines in areas such as emergency safeguards.
Financial Services
Some of the main proposals received have been from the United States, the EU, and some developing countries, such as Colombia and Korea.
•	u.S. proposal stresses that further liberalization should be based on two pillars—verifiable benchmarks for further liberalization and transparency rules set specifically for the financial sector.
•	eu proposal places priority on the further liberalization of rules on commercial presence in financial services trade, including the elimination of ceilings on foreign ownership in the financial sector, the authorization for foreign financial institutions to adopt the legal form of their choice, and nondiscriminatory access to the domestic payment system of the host country.
•	Developing countries are concerned about the pace of possible future liberalization of trade in financial services, insisting that the pace of liberalization be consistent with a member’s level of development. They argue that increased competition and capital mobility as a result of liberalization might destabilize their financial sectors.

¹The EU is proposing a special safeguard instrument for developing countries in order to ensure food security.

²In the current Agreement on Agriculture there are no limits on spending on “Blue Box” subsidies. The U.S. proposal to include “Blue Box” subsidies in the de minimis calculations will effectively reduce “Blue Box” support.

View Table

Table 1.

Summary: Market Access Negotiations—Key Negotiation Positions

Agriculture
Proposals have been received from all the major players and can be summarized as follows:
The main elements of the EU proposal are:
•	Reducing the average tariff by 36 percent, with a minimum reduction per tariff line of 15 percent;
•	Reduction in export subsidies by an average of 45 percent across different products, while accepting the phase-out of some export subsidies;
•	Reductions in the “Amber Box” category of trade-distorting domestic support by 55 percent;
•	The extension of the level of protection of geographical indications (GIs) in the agriculture talks, with the aim to include an index of additionally protected GIs in the Agreement on Agriculture;
•	As regards developing countries, a “food security box” to facilitate the implementation of further tariff reductions and to meet the developing countries’ concerns on sensitive agricultural crops.1
The main elements of the U.S. and Cairns Group proposal are:
•	A formula approach to tariff cutting that would reduce all developed country agricultural tariffs to below 25 percent;
•	Elimination of all forms of export subsidies phased in over a short implementation period;
•	Substantial reduction, with a view to elimination, of trade-distorting domestic support. The United States proposes that domestic support should not exceed 5 percent of the value of agricultural production;
•	The United States proposes that “Blue Box” trade distorting support linked to production limitations should be included in the calculation of de minimis limits of 5 percent of agricultural production.2
Other important proposals have come from different groups of developing countries, particularly in the area of SDT, and include the following:
•	Under SDT developing countries should be allowed to draw up a positive list of products that would be subject to tariff commitments;
•	A proposal for a “development box” that would capture SDT for developing countries in the Agreement on Agriculture.
Industrial Goods
Detailed proposals have been received by the main players and can be summarized as follows:
•	u.S. proposal: The elimination of duties on all industrial goods by 2015, starting from applied rates or the Uruguay Round bound rate, whichever is lower, and binding all final rates.
1	eu proposal: The application of a formula-based mechanism for tariff reduction that would considerably reduce all industrial tariffs by compressing them into a flatter range. The compression should start from bound rates or applied rates for unbound tariffs.
Services
Services is a heterogeneous negotiating area. Key themes under consideration depend on the mode of supply and the type of service.
•	Developed countries emphasize in particular further liberalization of rules on access, mainly through commercial presence, in important sectors and insist on the need for further market opening. Proposals published thus far indicate an interest in telecommunications, financial services, transport, business (including professional), and distribution services.
•	Developing countries attach particular importance to the liberalization of temporary cross-border movements of natural persons and seem to be interested in market openings for professional services, tourism, audiovisual, distribution, and computer services. They also attach importance to the development of disciplines in areas such as emergency safeguards.
Financial Services
Some of the main proposals received have been from the United States, the EU, and some developing countries, such as Colombia and Korea.
•	u.S. proposal stresses that further liberalization should be based on two pillars—verifiable benchmarks for further liberalization and transparency rules set specifically for the financial sector.
•	eu proposal places priority on the further liberalization of rules on commercial presence in financial services trade, including the elimination of ceilings on foreign ownership in the financial sector, the authorization for foreign financial institutions to adopt the legal form of their choice, and nondiscriminatory access to the domestic payment system of the host country.
•	Developing countries are concerned about the pace of possible future liberalization of trade in financial services, insisting that the pace of liberalization be consistent with a member’s level of development. They argue that increased competition and capital mobility as a result of liberalization might destabilize their financial sectors.

¹The EU is proposing a special safeguard instrument for developing countries in order to ensure food security.

²In the current Agreement on Agriculture there are no limits on spending on “Blue Box” subsidies. The U.S. proposal to include “Blue Box” subsidies in the de minimis calculations will effectively reduce “Blue Box” support.

9. For developing countries, some of the proposals envisage substantial flexibility in the pursuit of food security objectives and quota- and duty-free market access for LDCs. The EU and the African Group, among others, argue that significant most favored nation (MFN) liberalization and the resulting erosion of tariff preferences would expose the weakest developing countries to intense competition in OECD markets, primarily from Cairns Group exporters. At the same time, opening LDC markets might subject them to price volatility and food insecurity. This has been questioned by others who view competitiveness as a supply-side problem, based on evidence that few LDCs or ACP countries have been able to take advantage of preferences to raise their exports in the past, and food security as a function of incomes rather production, as protection diminishes purchasing power and thus security.

10. Developing countries, an increasingly heterogeneous group, express concerns about the proposals of all the major players. Many point out that the EU proposal would not entail a significant improvement in market access, except for LDCs. The U.S. proposal is viewed by some countries as lopsided, as it is overly permissive of the types of support favored by the United States, while targeting those favored by others. Several contend that the U.S. and Cairns Group proposals pay insufficient attention to special and differential treatment for net food-importing developing countries and to increasing market access for LDCs.⁶ Nevertheless, it is clear that developing countries—some of which are members of the Cairns Group, while others are net food importers that benefit from price-depressing OECD subsidies, and others still enjoy market access privileges in OECD markets—do not have a unified position on agriculture. Disagreement over the meaning of a “development orientation” in agriculture may complicate the search for a compromise.

11. The March 31 deadline on agreeing modalities for the agriculture negotiations was missed. While WTO members agreed to continue discussions, it may well be left to ministers to break the deadlock at Cancún. Securing a broadly acceptable outcome on agriculture would provide significant momentum to the entire round, as countries are delaying progress in other areas contingent on developments in the agriculture negotiations. Progress in the negotiations is partly dependent on the internal EU debate over the Mid-Term Review of the CAP. Passage of the core elements of the European Commission’s proposals, including the decoupling of agricultural supports⁷, would increase the leeway of EU negotiators for concessions on both subsidies and market access. According to most observers, any compromise would also require the recognition of nontrade concerns, with protection for geographical indications perhaps first in line. At the same time, a broad consensus is unlikely to emerge, unless developing country fears over food security are addressed.

Industrial Goods

12. The negotiations over industrial goods have been moving along well, and most observers believe that there will be convergence on negotiating modalities by May, barring negative repercussions from the agriculture talks. Most members appear to favor the combination of a formula-based approach with bilateral request/offer reductions, starting from bound tariffs, phased in stages, and with less than full reciprocity for developing countries. Such an approach has the potential to eliminate tariff peaks and compress tariff escalation, thus improving the conditions for exports of low-technology products of particular interest to developing countries (e.g., textiles and clothing, leather products, and processed foods). As shown in Table 1, the U.S. proposal is more ambitious than those of the EU and others, but it appears that differences have narrowed.

13. Initial developing country concerns over the depth of proposed tariff reductions have become less pronounced. But many are now linking progress on industrial tariffs with the agriculture negotiations. The LDCs are requesting that all developed countries provide them with duty- and quota-free access to their markets under Generalized System of Preferences (GSP) schemes. More controversially, some have called on industrial countries to ensure that preference margins are not eroded by MFN tariff reductions.

Services

14. In services, the process of exchanging bilateral requests and offers has been proceeding broadly on schedule. Nevertheless, reflecting in part cross-linkages with the agriculture talks, offers from only a few countries had been received by the March 31 deadline. While developing countries have been more active participants than they were during the Uruguay round, this has been mostly on account of the larger middle-income countries.⁸ A number of others have sought to gain acceptance for a monitoring mechanism to ensure that there is effective implementation of Article IV of the General Agreement on Trade in Services (GATS), dealing with increasing participation of developing country members in world services trade, and Article XIX.2, which contains SDT-related provisions for developing countries.⁹

15. Some observers suggest that progress in these talks is driven by the limited overlap between sectors of primary interest to both developed and developing countries.

This is seen to provide scope for mutually beneficial compromises. However, it is difficult to assess the nature of the bargains being struck, given the complex modalities of the services negotiations. In these negotiations commitments follow a positive list approach, there is no standard set of restrictions that can be monitored (such as tariffs in goods trade), and the restrictiveness of individual impediments to trade is difficult to gauge.

16. There is significant tension between developing country aspirations and political constraints in the advanced countries with regard to Mode 4 supply of services (the temporary movement of natural persons). This is an area whose economic potential, according to some estimates, could eclipse those of other topics under negotiation. India and other developing countries have targeted a range of restrictions in developed country markets related to economic needs tests, the processing of visa applications, residency requirements, recognition of educational qualifications, and social security contributions.

17. The EU has submitted bilateral requests covering a variety of sectors, and the European Commission has developed a services offer for discussion by EU member states. While envisaging market access commitments in a variety of sectors, it is understood that the offer seeks to protect the provision of public services within the EU, and emphasizes the right of the EU to design its own appropriate regulatory frameworks.¹⁰ According to EU negotiators, the proposal accommodates requests made by developing countries on Mode 4 services.¹¹ Despite the improved offer from the EU, some developing country commentators complain that recognition of education requirements will be a major barrier to entry, unless mutual recognition agreements are signed across a wide range of professions or current recognition agreements are open to the accession of developing countries.

18. The United States is seeking increased market access in 11 major service sectors and is requesting that countries remove nontransparent and discriminatory barriers to the commercial presence of U.S. firms. The United States is also seeking increased access for temporary entry and stay for professional employees. The U.S. offer “locks in” liberalization that has taken place at the state and federal level since 1994.¹² Importantly, this could include developments such as the passage of federal legislation to modernize financial services, banking and insurance sectors. As regards horizontal commitments, notably for Mode 4 services, the U.S. offer deals mainly with salespersons and intra-corporate transferees.

19. WTO Members recently agreed on modalities for the treatment of (mostly unbound) autonomous liberalization measures taken unilaterally since the previous multilateral negotiations. Liberalization has at times proceeded in the context of Fund programs, and developing countries have expressed concerns about a loss of negotiating leverage resulting from such liberalization. The modalities establish criteria for assessing the value of autonomous liberalization measures, as well as the principle that credit for such measures is to be advanced through bilateral negotiations. With regard to developing countries, it is emphasized that the modalities shall be used “as a means of promoting economic growth and development in developing countries and their increasing participation in trade in services.”¹³

B. Negotiations on Trade Rules

Special and Differential Treatment

20. For many developing countries, a successful outcome to the Doha Round requires obtaining significant concessions on SDT. The Doha Declaration spelled out the hope of an “early harvest” of SDT and implementation issues by July 2002. However, two deadlines were missed, and the General Council has suspended formal discussions and encouraged members to conduct informal consultations.

21. While there is a broad array of SDT and implementation proposals, in substance most seek either to exempt eligible countries from WTO disciplines (or soften them) or deal with capacity shortfalls in meeting such disciplines. Many developing countries argue that WTO disciplines, for example, with regard to subsidies, trade-related investment measures or balance of payments safeguards, can unduly constrain development policies. Others contend that disciplines are, quite to the contrary, supportive of economic development by reducing uncertainty and limiting the scope for capture by vested interests. They point out that there is little evidence to suggest that—outside a narrow set of contexts— development interests are served by protection. There is broader agreement on the need to help countries develop the capacity to implement common rules, although there are differences over the establishment of a duty to provide such assistance. A further key point of contention is the criteria for eligibility—at present developing country status in the WTO is conferred through self-declaration.¹⁴ As indicated in Table 2, prospects for compromise appear currently to be limited to certain agreement-specific proposals.

Table 2.

Summary of Negotiations on Trade Rules: Negotiating Areas and Key Negotiating Positions

Table 2.

Summary of Negotiations on Trade Rules: Negotiating Areas and Key Negotiating Positions

Antidumping (AD) measures

The negotiations are being driven by the “Friends of Antidumping Negotiations” Group, India, and the United States. The main elements of their contributions are as follows:

• The “Friends” consider that:

(1) the AD rules are being abused as a protectionist tool; (2) there is a need for a clearer definition of the key concepts in the AD Agreement, improvements in the margin calculations, and greater transparency in AD investigations.

• The United States:

(1) opposes most changes sought by the “Friends”; (2) emphasizes the need to focus on procedural issues in AD investigations, their transparency, trade-distorting practices, and circumvention.

Non-agricultural subsidies

Cross-sectoral disciplines

The relatively few submissions to date propose expanding the category of prohibited subsidies, improving the serious prejudice provisions, and clarifying the rules in respect of tax-based subsidies, indirect subsidies, and natural resource pricing, as well as special and differential treatment for developing countries. In addition, some participants have suggested covering work on steel subsidies taking place at the OECD.

Fishery subsidies

The major players are the EU, Japan, Korea, and the informal group “Friends of Fish” (which includes the United States). The main elements of their positions are:

“Friends of Fish” strongly advocate significant disciplines on fisheries subsidies. • Japan and Korea strongly oppose sector-specific cuts in subsidies and contend that trade distortions caused by subsidies should be addressed as a cross-sectoral issue. • The EU has indicated that it is moving increasingly in favor of reduced fisheries subsidies.

Regional trade agreements (RTAs)

The negotiations focus on clarifying and strengthening rules on RTAs. Main contributors so far have included the EU and Australia.

• EU has emphasized that the negotiations should focus on clarification of existing WTO rules on RTAs and ways to improve their review in WTO bodies.

• Australia has advocated more fundamental reiorm ot the rules governing Rl As. Specifically, it has sought a tightening of the rules on permissible derogation in RTAs from WTO commitments, ways of regulating existing RTAs multilaterally, and notification disciplines.

Special and differential treatment (SDT)

Strongly divisive debate between developing countries (led by India, Brazil, the African group, and other LDCs) and the developed countries.

• Developing countries have sought a considerable widening of SDT provisions and improving their precision and effectiveness, including changing the language in existing WTO agreements, to make SDT mandatory, rather than relying on “best endeavor” provisions.

• Developed countries are generally opposed to dealing with cross-cutting SDT issues through amending the text of WTO agreements, binding technical assistance commitments, or providing automatic derogations to WTO rules. However, they seem prepared to discuss the agreement-specific SDT proposals that have been advanced by developing countries in the relevant negotiating bodies.

TRIPS and public health

An area of great importance to many developing countries, particularly LDCs, this remains deadlocked because of differences between the U.S. position and that of developing countries.

• The United States insists that compulsory licensing (i.e., allowing the use of a patent without the consent of the patent-holder) and the right to import generics should apply only to a limited and specified set of diseases.

• Developing countries, in contrast, are insisting on an open-ended list of diseases.

View Table

Table 2.

Summary of Negotiations on Trade Rules: Negotiating Areas and Key Negotiating Positions

Antidumping (AD) measures

The negotiations are being driven by the “Friends of Antidumping Negotiations” Group, India, and the United States. The main elements of their contributions are as follows:

• The “Friends” consider that:

(1) the AD rules are being abused as a protectionist tool; (2) there is a need for a clearer definition of the key concepts in the AD Agreement, improvements in the margin calculations, and greater transparency in AD investigations.

• The United States:

(1) opposes most changes sought by the “Friends”; (2) emphasizes the need to focus on procedural issues in AD investigations, their transparency, trade-distorting practices, and circumvention.

Non-agricultural subsidies

Cross-sectoral disciplines

The relatively few submissions to date propose expanding the category of prohibited subsidies, improving the serious prejudice provisions, and clarifying the rules in respect of tax-based subsidies, indirect subsidies, and natural resource pricing, as well as special and differential treatment for developing countries. In addition, some participants have suggested covering work on steel subsidies taking place at the OECD.

Fishery subsidies

The major players are the EU, Japan, Korea, and the informal group “Friends of Fish” (which includes the United States). The main elements of their positions are:

“Friends of Fish” strongly advocate significant disciplines on fisheries subsidies. • Japan and Korea strongly oppose sector-specific cuts in subsidies and contend that trade distortions caused by subsidies should be addressed as a cross-sectoral issue. • The EU has indicated that it is moving increasingly in favor of reduced fisheries subsidies.

Regional trade agreements (RTAs)

The negotiations focus on clarifying and strengthening rules on RTAs. Main contributors so far have included the EU and Australia.

• EU has emphasized that the negotiations should focus on clarification of existing WTO rules on RTAs and ways to improve their review in WTO bodies.

• Australia has advocated more fundamental reiorm ot the rules governing Rl As. Specifically, it has sought a tightening of the rules on permissible derogation in RTAs from WTO commitments, ways of regulating existing RTAs multilaterally, and notification disciplines.

Special and differential treatment (SDT)

Strongly divisive debate between developing countries (led by India, Brazil, the African group, and other LDCs) and the developed countries.

• Developing countries have sought a considerable widening of SDT provisions and improving their precision and effectiveness, including changing the language in existing WTO agreements, to make SDT mandatory, rather than relying on “best endeavor” provisions.

• Developed countries are generally opposed to dealing with cross-cutting SDT issues through amending the text of WTO agreements, binding technical assistance commitments, or providing automatic derogations to WTO rules. However, they seem prepared to discuss the agreement-specific SDT proposals that have been advanced by developing countries in the relevant negotiating bodies.

TRIPS and public health

An area of great importance to many developing countries, particularly LDCs, this remains deadlocked because of differences between the U.S. position and that of developing countries.

• The United States insists that compulsory licensing (i.e., allowing the use of a patent without the consent of the patent-holder) and the right to import generics should apply only to a limited and specified set of diseases.

• Developing countries, in contrast, are insisting on an open-ended list of diseases.

22. Another issue viewed as critical by developing countries is the public health clause of the TRIPS Agreement. While the Doha Declaration confirms the authority of governments to suspend intellectual property rights on medicines in confronting threats to public health, there is disagreement over the circumstances under which a country may import generic drugs from third parties. A proposal that would have granted developing country authorities significant discretion in determining eligible public health emergencies has been blocked by the United States, which has called for a more narrow definition. In view of the emotionally charged debate over this issue, it is possible that this will be one of the principal challenges facing Ministers in Cancún. There is some concern that delays beyond Cancún could prove disruptive to the entire round.

Antidumping, Subsidies, and Regional Trade Agreements

23. Efforts are being made by an informal group of countries (the “Friends of Antidumping Negotiations”)¹⁵ to meet the Doha mandate to clarify and improve disciplines in the WTO Antidumping Agreement (see Table 2). The number of antidumping (AD) investigations has grown rapidly over the 1990s, and there is widespread concern over their use for protectionist purposes, as the WTO increasingly constrains recourse to more traditional forms of protection. The “Friends” contend that AD rules are being abused, accusing some countries of manipulation in calculating dumping margins, of arbitrary injury determination, and inaccurate causation analyses. Accordingly, the group advocates a clearer definition of the key concepts in the AD Agreement and improvements in the methodology for margin calculations, with a view to restricting discretion in antidumping investigations. The United States has taken a narrower focus in the debate—on transparency, procedures, and circumvention—and has not yet indicated a willingness to consider a more substantial agenda.

24. The negotiations on non-agricultural subsidies have centered on cross-sectoral disciplines and fisheries subsidies, with the latter receiving most attention to date.

Recently the number of submissions addressing cross-sectoral subsidy issues has increased (Table 2). The push for sector-specific rules on fisheries subsidies is led by an informal group of developed and developing countries called the “Friends of Fish.”¹⁶ Essentially, the group is proposing a substantial cut in allowable fisheries subsidies of types which, in their view, lead to Overexploitation of fishery resources and damage competition. On the other hand, Japan and Korea, in particular, insist on a cross-sectoral approach to subsidies and argue that the case has not been made for the development of sector-specific subsidy disciplines in respect of fisheries. While it is broadly felt that freer and less distorted global trade requires improved disciplines on subsidies, it is too early to tell what approach might be taken, once the process moves into more active negotiation mode.

25. No progress of substance has been achieved in the talks on regional trade agreements (RTAs). The negotiations have so far focused on one issue—transparency. Some commentators suggest that this is disappointing, fearing that the proliferation of bilateral and regional agreements might undermine the multilateral system. They stress the importance of clearly defining the criteria according to which RTAs must cover “substantially all trade” in order to be permissible (Article XXIV of the GATT (1994)).¹⁷ The possibility that existing RTAs might be grandfathered may further reduce the practical value of any multilateral agreement. There is a view that the limited ambition shown by members (developed and developing) in tightening disciplines on RTAs can be explained by their own, fairly extensive plans, to conclude further RTAs in the near future.

Singapore Issues

26. The Doha Declaration envisages a decision “by explicit consensus” at the Cancún Ministerial on whether to pursue negotiations over the so-called Singapore issues—an international investment framework, disciplines on competition policy, transparency in government procurement, and rules for trade facilitation. Working groups were set up to develop the modalities for such negotiations. The EU, their main proponent, argues that disciplines in these areas are a logical complement to the liberalization of border restrictions. Furthermore, an international framework for investment would be simpler, more transparent and more comprehensive than (proliferating) bilateral investment treaties (BIT). It would not restrict national policy autonomy any further than the BITs, if it were based on a GATS-style positive list approach (see also below in Section V). Nevertheless, a number of developing countries have argued that the WTO architecture, which relies on binding and actionable commitments, is inappropriate to deal with what they view fundamentally as problems of development. Others stress the costs of implementing agreements in these areas and are questioning their priority from a national development perspective. After sharp initial disagreements, the more recent debate has been less heated and some see common ground emerging, particularly on competition and trade facilitation.

A. Financial Services Liberalization and Financial Stability

28. Discussions in the Committee on Trade in Financial Services have been broad in scope, and have included a number of areas of interest and relevance to the work of the IMF. Most prominent among them are the impact of liberalizing financial services on the capital account; the pace and sequencing of financial liberalization; and the links between prudential regulation, transparency rules, and financial services liberalization.

29. The overlap between financial services and capital account liberalization is not entirely a new issue for the WTO. Many WTO members had limited their commitments on financial services in earlier GATS negotiations on the grounds that rapid liberalization might result in destabilizing capital flows.¹⁹ Liberalization in the financial sector under the GATS was largely limited to binding of existing practices on the right of establishment and national treatment for foreign financial institutions, principally in the banking sector. Liberalization did not entail a more general elimination of restrictions on capital account transactions and did not constrain members in determining the appropriate pace and sequencing of capital account liberalization or in the use of capital account restrictions for macroeconomic or balance of payments reasons. In the past few months, a number of developing countries have again brought this issue to the fore and have indicated that clarification of the links between financial services and capital account liberalization would be a prerequisite to undertaking new and meaningful commitments in the GATS.

30. The link between market access agreements on specific financial services and their potential impact on the capital account is not well understood by all members.²⁰ In some cases, liberalization of trade in financial services can be synonymous with capital account liberalization.²¹ Liberalizing the cross-border provision of deposit taking activities, for example, is equivalent to allowing residents to move capital abroad. In other cases, the impact on the capital account may be negligible, e.g., liberalizing the provision of financial advisory services. In still other cases, liberalization of a particular service activity may later give rise to gray areas, as financial innovation outstrips the host country’s regulatory regime. For example, liberalization of market access for certain debt instruments could, as a side effect, result in the development of financial derivatives or trading activity based on these instruments outside the country of issue. As a result, there is uncertainty over the appropriate pace and sequencing of financial services liberalization, which may need to be addressed in the context of a careful assessment of individual circumstances.

31. The prudential carve-out clause. Article 2(a) of the Annex on Financial Services to the GATS allows for restrictions on trade in financial services, which members can impose unilaterally on prudential grounds to safeguard the integrity of their financial system. At present, there is no formal agreement in the GATS on what constitute prudential measures, and members are not obliged to notify the WTO of restrictions imposed under this clause. Furthermore, there are no articulated, detailed criteria for assessing whether actions taken under the prudential umbrella are “essential” for averting a potential threat to the financial system. This blanket carve-out reflects the relative youth of the GATS, compared to the GATT, which has been negotiated over several decades. There is general agreement, however, that the use of the prudential carve-out must be justified on some grounds, and greater clarity on the use of the carve-out would come through cases brought for dispute resolution or as the GATS evolves.

32. Some WTO members are proposing to link liberalization to verifiable benchmarks and transparency rules. Although this proposal has not been fully fleshed out in the Committee on Trade in Financial Services, a rules-based approach would presumably bind members in their commitments to the extent that a perceived violation would be actionable under WTO dispute settlement procedures. Such an approach may have its merits, but it also raises a number of questions regarding verification and the relation with voluntary sets of standards and codes, including those promoted by the Fund.²²

33. The Fund has been advising its members and evaluating performance in each of these areas—financial liberalization, prudential regulation, and adherence to standards. In recent years, it has deepened its engagement in the assessment of financial sector performance and vulnerabilities under the Financial Sector Assessment Program (FSAP), undertaken jointly with the Bank. This offers scope for mutually beneficial cooperation, but also bears certain risks of overlap and the possibility of conflicting signals from two international institutions with a largely shared membership, and will need to be monitored closely. In particular, the binding nature of the WTO’s rules-based approach might raise concerns over how the IMF can play its role in promoting transparency and stability in the financial sector without becoming entangled in the legal aspects of future disputes.

B. The International Investment Framework

34. At Doha, ministers recognized the case for a multilateral investment agreement in the WTO, though negotiations will only start in earnest on the basis of explicit consensus at the Cancún Ministerial. The ambition for the WTO investment agreement, as stated in the Doha declaration, is “to secure transparent, stable and predictable conditions” for international investment. This may be particularly important for small low income countries with weak institutions. Proponents argue that, as in other areas of international trade, the WTO could serve as a commitment device and help enhance investor confidence by emphasizing transparent regulations, while leaving members the flexibility to determine the extent of liberalization of investment conditions.²³ According to some proposals, the agreement would also cover national treatment for potential investors. This would overcome the current disparity with investment in services sectors for which the GATS already provides certain disciplines for both pre- (i.e., market access) and post-establishment investment in the sectors included in members’ schedules of commitments.

35. For the time between the Doha and the Cancún ministerial meetings, the WTO working group on trade and investment has sought to clarify a number of technical aspects of a possible negotiating mandate. As yet, no consensus for investment negotiations has emerged, and agreement may be subject to progress in the entire range of negotiations presented in Cancún. Aspects of the negotiations, especially in case of a broad definition of investment, may potentially intersect with the Fund’s work and will be monitored closely by Fund staff as the mandate for WTO investment negotiations evolves.

36. Investments covered by an eventual agreement. The Doha Ministerial Declaration refers to “long-term cross border investment” as the object of the investment agreement. Accordingly, a number of WTO members have proposed a narrow definition of investment, most easily operationalized as foreign direct investment (FDI). However, others argue that the objective should be to protect established investors and encourage potential ones, and hence call for an “asset-based” investment definition.

37. An asset-based investment definition would be in line with modern practice in bilateral and regional investment agreements, which protect the assets of foreign owned companies, independently of how these assets had been financed. Its proponents draw a parallel with the GATS, in which WTO members have agreed to admitting those capital flows that are related to providing a service through commercial presence, should the sector in question be scheduled for this mode of supply. By contrast, a transactions-based approach (such as “cross-border” investment or FDI) would exclude finance other than from parent companies that the affiliates of multinational companies access both outside and within their host countries.

38. As views on scope and definitions still diverge, WTO members have proposed a “hybrid” approach. According to this approach, only a narrow set of investments would benefit from pre-establishment liberalization (i.e., the right to invest), and an asset-based approach would be applied to established investors. Clarifying the definition of investment in the WTO agreement may determine the agreement’s success in establishing itself as a benchmark vis-à-vis the multitude of bilateral and regional investment agreements.

39. A WTO investment agreement will also introduce new balance of payments safeguards. This could help to address the concerns of developing countries in the WTO who fear that investment liberalization, especially if based on a broad definition of investment, could substantially restrict their ability to control certain flows in emergency situations and prevent them from safeguarding the stability of their balance of payments. In the negotiations, members will have to consider issues such as the definition of an event that gives rise to safeguards, the scope of their application to current and capital account transactions (both inflows and outflows), and the duration of safeguards.

40. Apart from the Fund’s general role and interest in advising members on balance of payments matters, a WTO investment agreement might also raise specific issues of interaction with the WTO. One such issue is the Fund’s potential responsibilities in the context of balance of payments safeguards, an issue raised by a number of countries in the WTO Working Group on Trade and Investment. In this regard, the GATS may provide a reference point. According to GATS Article XII, safeguards imposed at the member’s initiative are narrowly circumscribed, and the member is required to consult in the WTO Committee on Balance of Payments Restrictions, which in turn will base its conclusions on the Fund’s assessment of the member’s balance of payments position. Another issue that may require clarification as negotiations progress is jurisdictional. The definition of investment under a WTO agreement could potentially overlap with aspects of current international transactions as defined in Art. XXX of the Fund’s Articles of Agreement (e.g., “moderate amounts ... for depreciation of direct investment”), and it will be necessary to ensure that no uncertainties emerge over the Fund’s jurisdiction.

C. The Revenue Implications of Trade Liberalization

41. Many developing countries, particularly low-income countries and small economies, continue to rely heavily on trade taxes as a source of government revenue.

With the ongoing Doha Round, and the increasing number of regional integration schemes, concerns have emerged that further trade liberalization might be constrained by fears of revenue loss and fiscal deterioration. The issue has been raised in the ongoing discussions in a number of WTO bodies, where some developing countries have identified it as a serious impediment to further tariff concessions.

42. Recent work by the IMF demonstrates that trade tax revenues have tended to decline in importance over the last decade, but still typically account for 15-25 percent of tax revenues in developing countries.²⁴ For certain groups of countries the ratio can be significantly higher, e.g., the small island economies of the Caribbean where it averaged 40 percent in the period 1990-99.

43. Nevertheless, potential revenue losses are empirically very small and three factors further mitigate the impact of tariff reductions on fiscal revenue:²⁵

• The ongoing Doha negotiations are based on bound rates, while revenue effects result from changes in applied rates. Therefore, if the changes in applied rates are more modest than the changes in bound rates, the revenue consequences may be less significant.

• To the extent that liberalization leads to the tariffication of quantitative restrictions and is accompanied by steps to rationalize the structure of tariffs, e.g. by reducing exemptions, it increases tariff revenue rather than reducing it.

• Average collected tariff rates by region, which often underlie empirical estimates of the revenue impact of further liberalization, may be misleading. Average collected rates obscure much variation, both across countries and products. For instance, reductions concentrated disproportionally in peak tariffs, as under some of the proposed formulas, might lead to an increase in revenue, if the current rates significantly constrain imports. More generally, tariff reductions can stimulate imports, which helps offset some revenue loss.

44. Countries that do face a genuine problem may be able to balance the loss of trade taxes with revenue from other sources. It is the overall tax revenue that is vital to the government’s fiscal position. Experience and economic theory both suggest that indirect taxes—excises and a sales tax levied on a broad range of commodities (increasingly in the form of a value-added tax (VAT))—have a critical role to play.²⁶ In principle, it is possible to reduce dependence on trade taxes and switch to taxes on domestic consumption, while preserving the efficiency gains from the reduction in trade distortions. A switch that leaves consumers no worse off might actually cause government revenue to increase. Such an outcome can be achieved by combining tariff reductions with increases in domestic commodity taxes that entirely offset the impact on domestic prices. The benefits are clear:

• consumers are unaffected by the change in tax policy, as they face the same prices for the goods they buy;

• the prices producers face are closer to world market prices, better aligning private incentives with the country’s comparative advantage; and

• the government now collects revenue at an unchanged total rate (tariffs plus commodity taxes combined) on a wider base, since domestic consumption (the base of the commodity tax) can be no less than imports (the base of the tariff).²⁷

45. Concerns about the practicality of such a strategy have been largely allayed by recent experience, often in the context of IMF technical assistance. Even poorer developing countries have demonstrated their administrative ability to implement VAT schemes within relatively short periods of time, although experience underlines that sequencing issues need to be addressed, as well as the importance of continued administrative effort after their introduction.²⁸

46. Possible revenue losses associated with tariff reforms should therefore not be seen as an impediment to further trade liberalization. Finance Ministries can facilitate progress under the Doha Round by pursuing tax reforms that reduce dependence on trade taxes. Fund staff was invited to elaborate on this message at a seminar directed at developing country negotiators in Geneva, and the Managing Director has expressed the Fund’s readiness to the WTO to assist members, on a case-by-case basis, in identifying revenue trade-offs and in designing remedial action.