WTO and its Implications for Pakistan
By Dr. Zafar Mueen Nasir(The writer is Chief of Research and Dean Business Studies Pakistan Institute of Development Economics (PIDE) Islamabad)
The World Trade Organization (WTO) is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in late 40s. Along with International Monetary Fund (IMF) and International Bank for Reconstruction and Development (commonly known as World Bank) for freer and predictable trade between countries. It tries to provide market access to countries for their products and services and promotes friendly investment policies by eliminating trade distortions between countries, trimming down tariff and non-tariff barriers, removing quotas and abolishing subsidies in a phased manner. It also has rules that protect local businesses and industry from foreign goods and services using unfair practices like dumping or transfer pricing mechanisms. The WTO has rules to address quality issues, labor standards, environmental aspects, government regulation, and legal frameworks. It is important to understand the evolution of WTO and how its rules affect developing countries such as Pakistan.
The need for an institution to promote rule based trade was felt when in 1930s world suffered through the Great Depression and World War II. The Great Depression had profound effect on the people and nations who lived through it. This economic mayhem started with the 1929 Stock Market Crash wiping out savings of people and creating unemployment of the highest level in Western World. That great Depression resulted into WWII and destroyed many European countries. After the WWII, reconstruction of the Europe was top most priority of the US and that promoted, along with other steps, to create some international institutions to facilitate and promote trade and development. In January 1948, 23 nations organized the General Agreement on Tariffs and Trade (GATT) in Geneva providing opportunity to start the tariff negotiations. This first round resulted in 45,000 tariff concessions affecting $10 billion (about 1/5th of the world trade). In the next 47 years, the basic legal text of the GATT remained the same as it was in 1948, with some additions in the form of “plurilateral” — voluntary membership — agreements and continual efforts to reduce tariffs in a series of “trade rounds” till the inception of World Trade Organization on 1st January, 1995 in the 8th round at Uruguay. The agendas of the eight rounds of the GATT from 1947 to 1994 can be glanced through the following table.
The WTO is an institution with the broader legal and constitutional elements that incorporate and standardize the strategies for global economic integration. Its basic objective is to create a liberal and open trading system under which business enterprises from respective member countries can trade with one another in a fair and undisclosed competitive system with an agenda to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effect demand and developing the full sense of the resources of the world and expanding the production and exchange of goods. These objectives are to be achieved by following the optimal use of the world's resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner which is consistent with their respective needs and concerns at different levels of economic development. In other words, the WTO facilitates the implementation, administration and operation, and further the objectives of the Multilateral Trade Agreements, and also provides framework for the implementation, administration and operation of the Plurilateral Trade Agreements. It provides the forum for negotiations among its members concerning their multilateral trade relations in matters dealt with under the agreements and a framework for the implementation of the results of such negotiations, as may be decided by the Ministerial Conference. The WTO administers the Understandings on Rules and Procedures governing the Settlement of Disputes. It administers the Trade Policy Review Mechanism (TPRM). With a view to achieving greater coherence in global economic policy-making, the WTO cooperates, as appropriate, with the International Monetary Fund (IMF) and with the International Bank for Reconstruction and Development (World Bank) and its affiliate agencies. The four basic rules of WTO are
1. Protection to Domestic Industry through Tariffs.
GATT requires the member countries to protect their domestic industry/production through tariffs only. It prohibits the use of quantitative restrictions, except in a limited number of situations.
2. Binding of Tariffs
The member countries are urged to eliminate protection to domestic industry/ production by reducing tariffs and removing other barriers to trade in multilateral trade negotiations. The reduced tariffs are bound against further increases by listing them in each country's national schedule and the schedules are an integrated part of the GATT legal system.
3. Most Favored-Nation (MFN) Treatment
The rule lays down the principles of non-discrimination amongst member countries. Tariff and other regulations should be applied to imported or exported goods without discrimination among countries. Exceptions to the rules are to regional arrangements subjected to preferential or duty free trade agreements, Generalized System of Preferences (GSP) where developed countries apply preferential or duty free rates to imports from developing countries.
4. National Treatment Rule
The rule prohibits member countries from discriminating between imported products and domestically produced goods in the matter of internal taxes and in the application of internal regulations.
Pakistan and WTO
Pakistan joined WTO in 1995 when the organization came into being. As a developing country Pakistan has enjoyed the extra time given for preparations to abide by the Agreements of WTO upto 2005. The implications to adopt the free liberalization under WTO has many pros and cons but until now there has been no comprehensive study to capitulate the total impact in economic terms focusing overall and individual sectors of the economy in particular. To enter into the intricacies of WTO Agreements and applying them on sectors of the economy is a huge and difficult task and out of scope of this essay. In simple terms, WTO negates anything which blocks the way of free movement of goods and services from one market to another on a basic assumption of improving the human lifestyle. It demands open market access for foreign goods and services in the local market without any discrimination by creation of tariff or non-tariff barriers. Pakistan is required to provide a Most Favored Nation (MFN) status to all trading partners which means non-discriminatory treatment among the members implying on any imports or exports origination from respective countries. If Pakistan provides an MFN status to India for example, then Pakistan has to provide an equitable treatment to all imports originating from India which will restrict Pakistan to impose any kind of qualitative or quantities restriction on Indian products. Now this implies to the question why like India Pakistan is not reciprocating to given the same MFN status. The major reason is that the total GDP of Pakistan is approximately $80 billion and if India can subsidize all its imports of an equal amount this will create havoc for the Pakistani industry. In case of GATT, it requires all countries to reduce their respective rates to a given limit, and here WTO provides special preferential treatment to the developing and least developed countries by giving them more time and more flexibility to adjust to the global trade liberalization system. But in reality, with specific reference to Pakistan under IMF conditionality and structural adjustment program, Pakistan has to reduce its tariff from 65% to 30% gradually, and WTO also requires the same. Under WTO it is partly the mutual consent of the negotiating parties to determine tariff bind and tariff bound rates but under IMF it is more enforcement of the loan requirements.
In case of a dispute the case is to be presented to the Dispute Settlement Body of WTO. This requires preparation of the case in context with the legalities of WTO rules. A developing country like Pakistan which does not have ample resources or know-how of the subject of WTO rules and references usually are trapped to pay hefty foreign exchange to international lawyers which are almost unaffordable. An ideal example is of Basmitti Rice, which was initially patented by a U.S. firm has been challenged by India, where Dispute Settlement Body favored India. Now, India having the sole patents refrains all Pakistani rice exports to be referred as "Basmitti" until the patents rights are paid for.
Take any industry or sector of economy i.e., textile, fertilizer, pharmaceutical, oil & gas, ship building, sugar, banks, insurance, leasing, and agriculture — WTO directly effects the local industry both at the import and export ends from the beginning to end focusing more on quality standards, hygienic conditions, and the very existence of a product or service through intellectual property clauses.
The Way Forward
The negotiation ground of WTO, we must be ready and fully prepared with complete set of briefings on impacts of WTO Agreements and its agenda on all sectors of Pakistani economy and industry. Pakistan should have a vision i.e. what it would like to achieve from other nations before reciprocating market access to respective countries. Like all other relations, trade relations are friend and foe oriented and are glued with the broader national goals of the country. Trade relations have become so influential that
they have become either source of normalization of other diplomatic relationships, or creating more belligerent associations with other countries. If Pakistan has to choose between the options international trade relationship can work wonders for Pakistan, making it possible for Pakistan to normalizing relationships with countries where the advantage is.
In additions, as it has been emphasized from the beginning that exports are function of domestic production strength. Pakistan should also develop an indigenous model of economic development based on local stakeholders rather than following blindly the policies and guidelines of WTO, WB and IMF. Ban gladesh is a key example in this respect which has achieved formidable success in developing socio-economic strategies focusing the Small and Medium Enterprises (SMEs) of the country. Gramine Bank and Gramine Telecom of Dr. Younas are an epic story of mobilizing the poorest fraction of the country especially women by providing credit loans to them to invest in local self-employment and business opportunities, and accessing market information using communication facilities.
To what extend the tariff should be bound, to what extend the subsidies to be provided, to what extend Pakistan can win preferential treatment, win anti-dumping and safeguard cases, secure intellectual property rights, to choose to give MFN status, to apply national treatment to foreign products, to acclaim developing country provisions, to ensure a level playing field for domestic industry — is not an easy task for Pakistani Mission to Geneva in WTO at least for now!
As regards agriculture, Pakistan being an agrarian economy is still a net importer of food items. The Agreement on Agriculture (AoA) is perhaps one of the most controversial aspects of WTO. The issues in AoA include subsidies, domestic support and market access. The developing countries and the developed world are at loggerheads over agriculture. The developing countries require an AoA that is fair just to meet both ends, while the developed countries require that they maintain their status quo to protect their handful of farmers through subsidies and domestic support. As far as Pakistan is concerned, Pakistan has comparative advantage in many primary commodities. But in order to fully utilize our comparative advantage, we need to focus on and solve the problems in supply side (domestic requirements).
Pertaining to TRIPS agreements, different varieties of plants and animal species and traditional pharmaceutical and herbal knowledge need to be registered to take full advantage of them. All valuable export brands like Basmati rice, varieties of mangoes, oranges, etc need to be protected under different provisions of TRIPS agreement. Furthermore we need to exploit our comparative advantage in the production of halal meat, dairy products, fruits, vegetables etc. Same is the case with the services which are the largest and most dynamic component of both developed and developing economies.
Source: WTO and Pakistan