WTO meeting and Pakistan
By Shahid Javed Burki
Dawn-03-01-2006


LAST week, I provided an overview of the process that led to the discussions at Hong Kong aimed at further improvements in the multilateral trading system. At issue were a series of actions the developed world had promised it would take to create a system that did not discriminate against the world’s poorer nations.

For most of developing countries what mattered most was the elimination of protective measures that kept the farmers in rich countries in agriculture producing the products in which the developing world had a clear comparative advantage.

What was the outcome of Hong Kong? This question has produced two answers. According to Prof Jagdish Bhagwati of Columbia University who is a leading exponent of multilateralism in trade, the summit was a great success. It was a success for the simple reason that it did not produce a deadlock among so many different trading interests represented at Hong Kong.

Bhagwati is also pleased that one of the decisions taken at Hong Kong was the agreement to create a new global financing facility that would provide “aid for trade”. He has argued for the establishment of such a facility for a long time suggesting that one way of appeasing the potential losers from the furtherance of multilateralism is to help them adjust to free and open trade.

The other view to which I subscribe is that only small steps were taken at Hong Kong; the objective was to save the talks from collapse and hope that time will narrow the considerable differences that remain among important trading nations. This is unlikely to happen in the time available. The current dialogue must be concluded by the end of 2006 since the authority given to President George W. Bush to negotiate a deal will expire in the middle of 2007 and is not likely to be renewed. I don’t believe much can be achieved in the short time that is available unless Europe, America and large developing countries are prepared to accept some fundamental changes in their trading systems.

How would Hong Kong’s conclusions affect Pakistan? What was the position taken by Pakistan at the meetings and why did it differ from the one assumed by much of the developing world? Pakistan went to the trade summit with the belief that its economic future depends on its ability to create a larger market share in textiles and that in textiles the United States and the European Union will remain the dominant markets for many years to come. I question both assumptions. It is not a sound economic strategy to put all economic eggs in the textile basket and it is equally imprudent to ignore the fact that the fastest developing markets in the world are in Pakistan’s immediate neighbourhood and not in distant Europe and America. Reading global economic trends from a static angle and not from a dynamic perspective is a big mistake. Looking at the world from a more dynamic perspective should have resulted in Pakistan pursuing a different approach at Hong Kong than the one it actually followed. Before indicating what should have been that approach I will provide a quick account of the mini-steps that were taken at the meeting in order to save the talks from total collapse.

The previous rounds of negotiations had made significant progress in reducing the level of tariffs on industrial products particularly among developed countries. Developing countries were permitted to maintain higher tariffs in order to give them the time to prepare their industries for competition with rich countries. Before Hong Kong, there was pressure on ‘more developed’ developing countries to lower their tariffs if not for the goods produced in developed countries than at least for the products of less developed countries. There was a demand that countries like Brazil, China, India and South Africa that had well developed industrial sectors should grant preferential access to less developed countries.

However, rich countries did not make much progress in further splitting the developing world. There was agreement that developed countries would not demand from the developing world more than they were prepared to give themselves. Rich countries, given the way they had handled trade in textiles and clothing for more than four decades, were playing on a weak wicket. Developing countries forced them to concentrate their attention on the opening up of the sector of agriculture.

After a series of whole night sessions that engaged most of the ministers who were present at the meeting, Pascal Lamy was able to come out of Hong Kong with a declaration that provided nothing more than a hint of progress. The only achievement was to keep the talks alive. Another failure after the debacle at Seattle in 1999 and Cancun in 2003 would have killed the Doha round of negotiations and probably also killed the World Trade Organization. The ministers made little tangible progress.

Those representing developing countries were able to secure a promise from the developed countries that agricultural export subsidies would be abolished by end 2013. There was an additional promise that a substantial part of the subsidies would be scrapped before 2011 and that there would be a parallel elimination of indirect subsidies. The choice of the timetable was forced on Hong Kong by the budgetary cycle followed by the European Union. The EU now follows a seven-year budgetary cycle. Instead of going through the pain of agreeing on a budget every year, it adopts fiscal parameters every seven years. This was done at a summit of the EU leaders held shortly before the meeting in Hong Kong which in itself is an indication that for Europe promoting integration in Europe has a much higher priority than promoting multilateralism in trade. The EU could have waited for the outcome of the Hong Kong meeting before setting its own budgetary policy. Instead, it chose to dictate to the WTO its own timetable. Since the next round of budgetary talks will take place in Brussels only in 2012, the EU was not prepared to accept any WTO deadline that came before that time. Hence the choice of 2013 as the deadline for the removal of agricultural subsidies.

Agricultural subsidies take several forms including export credits, food aid and trading through state enterprises. It was agreed that in the coming months, WTO member nations will agree on the value of indirect subsidies since at Hong Kong they were unable even to define state policies that could be described as subsidies. Governments pledged that they would also draw up a timetable for phasing out subsidies.

The Europeans, led by France, had declared that any attempt to force them to drastically reduce subsidies could mean the end of the Doha round. At Hong Kong, the Europeans agreed to a three tier classification which placed them at the top, the United States in the middle and all other nations at the bottom. The members with the highest subsidies — the Europeans — agreed to cut the trade distorting subsidies the most.

Having agreed to this qualification, governments will need to determine the size of the cuts and to devise rules to stop them from reclassifying subsidies into categories that could shelter them from future cuts. This is an area in which Pakistan could benefit if it changed the structure of its economy to reflect fully its natural advantage.

A multi-tier formula agreed at Hong Kong set bigger cuts in higher tariff, smaller cuts for “sensitive” products produced in developed countries and exemption for “special” products grown in developing countries. A mechanism was also agreed upon that would allow poor nations to raise duties in case there was a surge in imports following the implementation of the tariff structure at the conclusion of the Doha round. These agreements notwithstanding, a great deal of work remains to be done in 2006. WTO members must decide in the coming months on the size of tariff cuts and on the number and treatment of “sensitive” and “special” products. For a country such as Pakistan the Doha round must produce a sizable market access for the various fruit, vegetables and flowers it can grow for export to developed country markets.

The Hong Kong negotiators dealt with the sensitive subject of cotton subsidies by giving concession only to African countries and to least developed nations but not to countries such as Pakistan. They agreed to eliminate subsidies in 2006 and grant unrestricted access to the countries in these two categories. The United States will further cut its $4 billion subsidy to cotton growers and also promised to reduce its farm support programme for cotton producers.

The process begun at Hong Kong aimed at bringing trade in agricultural products into the multilateral framework was perhaps the most notable achievement of the trade talks. Pakistan adopted a different posture; it decided to pursue market access in textile as its main objective. As such it showed little interest in the development of trade in agriculture. To neglect the opportunities agriculture offers and to concentrate entirely on developing long-distance foreign markets in textiles is to neglect Pakistan’s real comparative advantage in favour of a sector that is over-crowded with competitors and the development of which in Pakistan was the result of faulty policies adopted in the past rather than the exploitation of the country’s real potential.

Before they met in Hong Kong, WTO members had agreed to extend the deadline for the poorest countries to comply with intellectual property rules. Another concession to the least developed countries included giving market access to them for 97 per cent of their product lines. At the urging of Pakistan and some developed countries, textiles were included in the three per cent “tariff lines” left over that would not have duty free access. As was to be expected, Pakistan’s stance was not appreciated by the least developed nations who had gone to Hong Kong in the hope of gaining free market access for the entire list of their products.

Before the Hong Kong meeting there was agreement that talks would be intensified bilaterally between various groups of countries to liberalize trade in services. At Hong Kong the Europeans pressed for liberalization targets and that position was opposed by most developing countries that fear that their underdeveloped service industry would be swamped by such developed country institutions as banks and insurance companies. Instead, developing countries want greater access for their workers to the service sector even on a temporary basis. I have always found it hard to understand the strong protectionist sentiment in the developing world in the service sector.

Instead of seeking protection and long periods of time for opening the sector, the developing world — in particular countries like Pakistan which have large and young populations — should ask for opening the markets in the developed world for services such as airlines and shipping.

As already indicated above, I believe that Pakistan should work harder to define its position in global trade talks in a way that helps it to secure a better access in agricultural products. It should spend less energy on improving access for textiles. In textiles Pakistan has considerable potential in the rapidly growing markets in Asia. For opening these markets it should focus on providing such regional arrangements as the proposed South Asia Free Trade Area, Safta, with greater substance than it has at present and to obtain better access to China in the context of the bilateral agreement on which it is presently working.