|Pakistan and the Emerging Trading System|
|Written by Fasih Uddin|
Policy Perspectives, Vlm 4, No.2
[The present trading system as embodied in the World Trade Organization (WTO) Agreements has evolved through successive rounds of multilateral trade negotiations. The current, Doha, Round is suspended owing to deadlocks on critical issues of agriculture and market access in non-agricultural products. The three key areas of the Doha Round are phasing out of protection and support programs for agriculture; expanded market access for non-agriculture exports; and further liberalisation of trade in services. Pakistan, with its specific export potentials, liberalisation policy and active participation in trade negotiations, including groups of developing countries with similar interests, can gain much from progress in the Doha Round, provided its government, business and academic stakeholders can collaborate in identifying profitable offers and requests of commitments, and the country can strengthen and position its domestic economy to withstand new competition and win markets abroad. While it is unlikely that the Doha Round will conclude in 2007, an eventual compromised agreement is expected after which WTO will probably emerge stronger – Author]
The present trading system, as embodied in the World Trade Organization (WTO) Agreements, is embedded in the General Agreement on Tariffs and Trade (GATT) (1947) and has evolved through successive rounds of multilateral trade negotiations during the second half of the twentieth century. The system will undergo further changes following the Doha Round of Trade Negotiations (originally set for 2001-2004 and currently suspended). It is expected that these changes will remain within the framework of basic principles of the system, such as most favored nation (MFN), reciprocity, binding commitments, freer movement of goods and services, predictability, transparency and resolution of dispute through consultations and dialogue, and that the negotiations will result in lowering of trade barriers, improved market access in agricultural and non-agricultural products and services, and a better trading environment. A critical element of the Round will be specific commitments by nations to open up further their markets for products and services of others. These commitments will largely be governed by the reciprocal exchange of concessions through ‘formula’ approach as well as bilateral and plurilateral negotiations that will be multilaterally applied.
This paper attempts to visualise the likely outcome of Doha Round and discusses the possible opportunities and challenges that Pakistan may face in the future.
The current Doha Round, which was launched in November 2001 by the WTO Ministerial Meeting — the highest decision-making body—is mandated to advance the trade liberalisation process, in particular, by improving market access in agriculture and non-agriculture products and services. The negotiations faced problems from the very start due to inflexible positions adopted by the key players on critical issues of agriculture and market access in non-agricultural products. The talks encountered a serious setback at the next Ministerial Meeting, held at Cancun, Mexico, in September 2003, due to wide differences among members on major issues, in particular, agriculture. The position was somewhat retrieved by the WTO General Council in July-August 2004 with the adoption of framework agreements for advancing negotiations in agriculture and non-agriculture products. The next Ministerial Meeting, conducted in Hong Kong in December 2005, was able to improve the environment and bring the Negotiations back on track with the understanding that negotiations would be completed in 2006. However, this meeting left some critical matters, particularly in the areas of agriculture and market access in non-agricultural products, for resolution by 30 April and 31 July 2006. These two landmark dates have passed without tangible progress; in fact, negotiations had to be suspended in July 2006 to save the situation from further deterioration. The mechanism of informal consultations, especially among leading players, has since been resorted to in order to bring the negotiations back on track (The Cairns Group meeting held in Lahore in mid-April 2007 was one of such attempts). Agriculture remains the main contentious and thorny issue, followed by market access for non-agricultural products. As negotiations on all issues are seen as a ‘package,’ progress on other non-contentious matters is also on hold, awaiting the outcome of the contentious areas.
Critical Areas of Negotiations
Agriculture: The long-term objective of negotiation is to establish a fair and market-oriented trading system through a program of fundamental reforms encompassing strengthened rules and specific commitments on “support” and “protection” in order to correct and prevent restrictions and distortions in world agricultural markets. The main issues to be addressed include enlargement of “market access,” elimination of “export subsidies” and reduction in “domestic support measures.” The framework for establishing modalities in agriculture and the timeframe for elimination of export subsidies (by 2013) were agreed at the General Council on 1 August 2004 and Ministerial Meeting in December 2005; however, progress on establishing negotiation modalities and schedules of commitment remains elusive. The deadlines of 30 April 2006 and 31 July 2006 agreed for completion of these actions have passed without any progress. The main hurdles are agreement on elimination of export subsidies (for which a timeframe of 2013 has been agreed in Hong Kong) and reduction in the trade distorting domestic support programs for agriculture, primarily those of the USA and EU.
A host of other technical issues are also yet to be resolved. Intensive efforts are being made to break the deadlock and bring the negotiations back on track but the gulf between major trading partners persists.
Being an exporter of agricultural products, Pakistan has an interest in liberalisation of trade in agriculture and reduction and elimination of export subsidies and domestic support in major markets. Since it is not providing any trade distorting export subsidies or domestic support to its own agriculture sector, its position in the negotiations is relatively comfortable. It is, therefore, collaborating with other agriculture exporting countries in various groups, such as the Cairns Group and Group of 33, in seeking greater market access and elimination of export subsidies and domestic support measures in the USA, EU and other highly protected markets.
Non-agriculture products: With respect to non-agricultural products, the negotiations aim at reducing or eliminating tariffs, including tariff peaks, high tariffs and tariff escalations, as well as non-tariff barriers, especially where the products are of export interest to developing countries. The negotiations are required to take into account the special needs and interests of developing countries, including less than full reciprocity in reduction commitments. On 1 August 2004, the General Council adopted the negotiating framework for non-agriculture market access. Subsequently, the Ministerial Meeting held in Hong Kong on 13-18 December 2005 adopted the Swiss Formula, inter alia, to reduce/eliminate tariffs, in particular on products of export interest to developing countries. It further agreed to establish negotiating modalities by 30 April 2006 and draft schedules of concessions by 31 July 2006. Agreement is yet to be reached on the coefficient that should be used in reducing tariffs by developed and developing countries. No meaningful progress has been made and the target dates have passed.
Following the principle of reciprocity, Pakistan has bound about 25 percent of its tariff lines at rates ranging from 100 to 20 percent under the Uruguay Round. These bound rates are higher than the prevailing rates (i.e. 25 percent). Although this difference in bound and actual rates provides some elbow room for negotiations, the commitment under the current Round should take into account the position of individual domestic industries, implications of the Swiss Formula (which implies deeper cuts on high tariffs), and the market access that other trading partners would provide to it. In the context of Swiss Formula, the critical element is the coefficient that may be agreed for tariff reduction by developing countries like Pakistan. The government, in collaboration with industry, may examine the impact on domestic industry of tariff reduction using different coefficients. Pakistan should seek elimination of tariff peaks, tariff escalations and non-tariff barriers on products of its export interest (like textiles and clothing, leather goods, rice and fruits) in other markets.
Services: Under the General Agreement on Trade in Services (GATS), members have liberalised services trade, assuming general obligations such as most favored nation (MFN) treatment to services of other partners, and making binding commitments on specific services. Negotiations initiated under the Doha Round aim at progressively higher liberalisation of such trade. Guidelines and procedures for negotiations were agreed in 2001 and members were required to exchange ‘requests’ seeking concessions from other members and ‘offers’ indicating willingness to extend concessions followed by actual negotiations. The process of exchanging requests and offers remained slow and negotiations have not started.
Under the Uruguay Round, Pakistan assumed MFN general obligation with seven exemptions in the finance and telecommunication sectors and made specific commitments in six service sectors (including 42 sub-sectors). In the current negotiations, it has submitted an “initial offer” list based on requests received from trading partners envisaging further improvement in existing commitments and inclusion of some new areas, such as education. It has submitted its “request list,” prepared in consultation with domestic stakeholders, seeking commitments from trading partners in areas of its export interest. In addition, plurilateral requests have been submitted in association with other countries that have a similar export interest.
As Pakistan is following a policy of liberalisation and deregulation, extending concessions in the services sector should not pose any serious problem. The basic issue is the opening that it should be able to obtain from the trading partners, in particular for export of manpower in which it enjoys a relative advantage. Pakistan may adopt a three-dimensional strategy for the promotion of services exports, including (i) enhancing production, productive capacity and quality of services; (ii) negotiating with trading partners to secure expanded market access in areas of export interest in exchange for the openings that Pakistan is offering to them; and (iii) strengthening public and private collaboration aimed at realising these objectives.
Other Issues: Negotiations in other areas, like intellectual property rights, environment, trade facilitation, dispute settlement, etc., are aimed at improving the trading environment and facilitating movement of goods and services. These negotiations are overshadowed by lack of progress in agriculture and non-agricultural products.
Pakistan should strive for improved systems with special and favourable treatment being accorded to developing countries in these negotiations.
Likely Scenario after the Doha Round
Based on the current state of the game, it is possible to sketch the following likely scenario of the global trading system after the conclusion of the Doha Round:
Opportunities and Challenges for Pakistan
While negotiations and commitments under the Round are being conducted at the government level, business and industry will be the main actors. The competitiveness of a nation depends on the capacity of its industry and firms to continuously upgrade their production, processes, skills and management through investment and innovative approaches. The responsibility to avail the opportunities and face the challenges rests squarely on the government and the business community of Pakistan. Besides, researchers and academicians can play a catalytic role in this process through analysis of issues and research inputs. Greater interaction and intimate collaboration among these three groups can help in preparing the country to share in greater measure the gains of the newly emerging trading environment.
WTO. 1999. Legal Texts – The Results of the Uruguay Round of Multilateral Trade Negotiations. Geneva.
2005, December 18. Ministerial Declaration (Doha Work Programme). Adopted at the Sixth WTO Ministerial Conference held in Hong Kong on December 13-18, 2005). (Available: http://www.wto.org/ English/ thewto_e/minist_e/min05_e/final_text_e.htm.)
Uddin, Fasih. 2007. “Pakistan’s Trade Potential in Services.” Policy Perspectives (Vol. 4, No. 1, January-June). Islamabad: Institute of Policy Studies.
The Swiss Formula is: AX/(A+X)= new tariff, where A is the coefficient that defines the maximum final tariff and X is the present tariff rate. A has to be agreed for developed and developing countries.