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Pakistan and the Emerging Trading System PDF Print E-mail
Written by Fasih Uddin   

Policy Perspectives, Vlm 4, No.2

 

Abstract

[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]

Introduction

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.

 

Background
The General Agreement on Tariffs and Trade, 1947, and its successor, the World Trade Organization, 1994, set out the basic principles and framework for the conduct of global trade. They envisaged periodic multilateral negotiations for successive liberalisation of trade and relaxation of barriers. In the past sixty years, since the conclusion of GATT in 1947, eight such “Rounds” of negotiation have been conducted. The first seven Rounds were focused on reduction and binding of tariffs by members and elaboration of some rules, whereas the eighth (Uruguay) Round (1986-94) was wide-ranging, going beyond the traditional area of trade in non-agricultural goods to other areas such as agriculture, services and intellectual property rights. An important aspect of this Round was the phasing out, by 2005, of barriers on trade in textiles and clothing that had been introduced under the Multifibre Arrangement (MFA) in 1974 and under which Pakistan’s exports of textiles and clothing were also restricted in advanced markets, in particular USA and the European Union (EU). The Uruguay Round’s most distinctive contribution was the conversion of GATT into the World Trade Organization.

 

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
The Doha Development Agenda is wide ranging and also includes some new areas, such as trade facilitation. The Round has also subsumed negotiations that began earlier under provisions of related agreements, such as the Agreement on Agriculture (1994) and General Agreement on Trade in Services (1994). The main areas of the Doha Agenda are discussed below.

 

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.

These groups are also devising a common strategy on such matters as indicators for selection of Special Products (i.e. products on which there is no duty reduction) and a Special Safeguard Mechanism for developing countries. With substantial export potential in agriculture, Pakistan should benefit from successful conclusion of the negotiations. Simultaneously, it will have to desist from adopting any policy relating to export and domestic support to agriculture that contravenes WTO commitments. Under the Uruguay Round, Pakistan has bound its import tariff on agricultural products at 100 percent, whereas the prevailing tariff is 25 percent. Under the Doha Round, it has to further improve market access for other trading partners by reducing tariffs and eliminating non-tariff barriers. This warrants strengthening of the agriculture sector so it can withstand external competition, as well as devising a mechanism to safeguard sensitive agricultural products. In order to exploit the market opportunities, Pakistan also has to adopt compatible international systems and practices.

 

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:
  • The possibility that the Doha Round will conclude in 2007 is remote. The original deadline of 2004 and the revised deadline of 2006 agreed at the Hong Kong Ministerial Meeting in December 2005 have both passed, yet resolution of critical issues is not in sight. The mandate for negotiation of the US Administration will expire in July 2007, whereupon it may have to seek fresh mandate from the Congress authorising it to continue with the negotiations.
  • Contrary to the views held by some analysts, the WTO is likely to emerge stronger rather than weaker after the Round. This is borne out from past experience; successive negotiations added to the strength and significance of GATT/WTO.
  • The talks are not likely to resolve all issues, although there will be compromised agreement on some contentious issues like agriculture. Some issues may be carried forward while many new ones will arise in the course of negotiations, which may have to be taken up in subsequent negotiations.
  • Trade barriers are likely to ease and binding commitments will be made by all members, including developing countries (although their commitments will be mild and staggered). These commitments will cover all the three important areas of agriculture, market access for non-agricultural products and services. There will be improvement in discipline and operation in other areas as well. The magnitude and nature of commitments may differ in each case.
  • No immediate and large opening up of markets for agriculture in developed countries should be expected. It is difficult to visualize the complete phasing out of barriers, subsidies and support programmes in EU, USA and Japan. Process could be painfully slow. The phasing may be gradual, with a built-in mechanism to protect sensitive areas and prevent a sudden surge in imports. Commitments by advanced countries will most probably be conditioned on domestic policies. Caveats will be built into the system to safeguard their interests.
  • Special and differential treatment will mainly be available to Least Developed Countries. Other developing countries, in particular those that are large and fast growing, are not likely to benefit from such treatment. The principle of reciprocity will be adhered to —though not in full — and no significant special treatment is likely to be extended to developing countries ex gratia. They will be required to reciprocate by expanding market access for others.
  • Improvement in commitments in services trade is expected. However, no substantial concessions are expected in Mode 4 —Movement of Natural Persons — in which developing countries have potential. Even the marginal commitments given will remain subject to such conditions as qualifications, economic need tests and visa restrictions.
  • The WTO framework is likely to be used in greater measure by members for protection of their trade interests and for dispute settlement. The number of anti-dumping and other cases referred to WTO Dispute Settlement Bodies will increase.
  • Regional and free trade arrangements will continue to expand, though not as vigorously as at present, along with multilateralism. These arrangements are being presented as precursors and facilitators of multilateralism.
  • Civil society has emerged as an important actor on global issues. Protests and demonstrations, coupled will intellectual input in terms of analysis of the impact of globalisation and WTO arrangements on poverty, social distress and asymmetry in sharing of gains, are influencing the approaches of negotiators. This influence will gain greater significance in the future.

Opportunities and Challenges for Pakistan
The Doha Round entails opportunities as well as challenges for Pakistan. Some issues that need attention are set out below:

  • The thrust of policies in Pakistan continues to be on liberalisation and deregulation and it is thus in line with WTO principles. However, instead of following these policies autonomously, as has been done in the past, it will be beneficial to link them with WTO negotiations — Pakistan can seek concessions from other members in exchange for the market openings being provided to them as part of the liberalisation process.
  • Pakistan is required to assume additional obligations and commitments in terms of providing market access and national treatment for products and services of other members, which may pose challenges and competition to the domestic economy. In return, Pakistani products and services will have greater access to other markets. Fruitful exploitation of the opportunities of the liberalised market will depend on building the capacity of the domestic economy to avail external markets and to withstand competition from others in the domestic market.
  • The Doha Round is to enter the most critical phase in coming months, with specific commitments and targeted easing of trade barriers. Pakistan has been participating actively in talks being held at group levels to unlock the current impasse in negotiations. It should continuously reassess its position in light of post-Hong Kong developments, and evolve an overall strategy focusing on prioritise areas of interest, such as agriculture, market access in non-agriculture products, manpower services, and special treatment for developing economies. At this juncture, it would be advisable to intensify consultation with stakeholders as well as academicians and independent thinkers. The focus in each area should be on (i) what we are expected to offer, and (ii) what we should get in return. The analysis should be quantitative as well as qualitative and should be based on emerging scenarios.
  • It is in Pakistan’s interest to align its laws, rules and regulations with WTO and international conventions and practices. This will help in improving both its image as well as its competitive position.
  • Opportunities created by the Doha Talks will mainly be availed by those countries that have equipped themselves with new investment, technology and managerial inputs, innovative approaches and a competitive environment. Pakistan has much to do in this area. The firms and industry have a singular role to play.
  • Some very legitimate concerns, relating to such areas as environment, poverty, economic disparity and food security, are being raised by the civil society organisations. These concerns should also be addressed while conducting negotiations.

Conclusion
Although the fundamentals of the world trading system will, by and large, remain unchanged, the conclusion of the Doha Round is likely to improve the rules of the game and expand the ‘level playing field.’ It will set greater responsibilities, challenges and opportunities for members. The relevance of WTO in global transactions and interaction will be enhanced. Nations that are preparing for the challenges, availing the expanding market opportunities and developing their competitive domestic environment stand a better chance to benefit from Doha results.

 

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.

 

References

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.

WTO, 1999.

The General Agreement on Tariff and Trade was signed by 23 countries, including Pakistan, in September 1947 and entered into force in January 1948.

WTO, 2005.

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.

For details please refer to Uddin, 2007.

 
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