Introduction
Pakistan has done less well in international commerce than most rapidly growing economies of Asia. Its share in world trade has declined over the years and it remains
committed to developing external markets in the sectors in which, although it has comparative advantage, it faces stiff competition. This is the case with textiles. It is also concentrating a great deal on political and bureaucratic efforts in improving access to the textile and garment markets in the United States. However, these markets are subject to internal political compulsions and the preferences of a few large buyers that can be affected by perceptions about the security of supply. In other words, by choice Pakistan's exporters are operating in an extremely volatile environment. Could this be changed?
Pakistan's approach to trade diplomacy was influenced by the structure of its industry, not necessarily by the long-term potential of the economy. If Pakistan were to rely more on its unique agricultural endowment and the advantages presented by a large and young workforce, its stance in international politics of trade would be different. What should be this stance and how can it be developed within the context of the World Trade Organization, WTO? This article attempts to answer this question by providing a brief history of the evolution of WTO, the main issues being discussed in the WTO-sponsored trade negotiations known as the Doha Round, the progress made between Doha and Hong Kong, the sites of the two main rounds of trade discussions and what is likely to happen since Hong Kong.
Creation of WTO: Global Economic System
The multilateral financial, economic and trading system took half a century to form. The work on it began even after the Second World War was over and continued until 1995. In the first phase, agreement was reached to form two institutions each with a well specified objective. The International Monetary Fund was set up to ensure that the world would not suffer from the type of financial crises that did so much damage before the world went to war. The International Bank for the Reconstruction and Development was establishment to aid the rebuilding of war-torn Europe and Japan and assist the development of the countries that were on the verge of gaining independence from centuries of colonial rule and domination. However, agreement could not be reached on the creation of the third institution, a world trade organisation. That had to wait for another 50 years; it was only after the Uruguay Round of trade negotiations that the international community agreed to set up the World Trade Organisation to regulate international commerce.
That it took 50 years to create the third leg of the system to regulate economic relations among nations was not surprising. It was largely due to the reluctance of governments to accept some encroachment on their authority on matters relating trade. International commerce was too political a subject to be let into the control of a bureaucracy. However, by the mid-1990s, the process of globalisation had advanced sufficiently to lead to some worry that some aspects of it had to be subject to regulation. Accordingly, at Marrakech, Morocco, the world's major trading nations the European Union, Japan and the United States agreed to create a framework that would not only regulate trade but also create a mechanism for the resolution of disputes.
Regulating trade meant essentially prescribing the tariffs that could be levied by the members of WTO and governing the use of non-tariff barriers to trade. The most important organising principle for WTO is the 'Most Favoured Nation' approach according to which access given to one country -- MFN -- had to be shared with all other. Members could not discriminate among themselves; however, some margin was left for giving 'favored treatment' to groups of countries. This is the way the countries regarded as 'developing' were allowed to maintain higher tariffs and other constraints on trade than allowed to developed nations.
All countries that were the contracting parties of the General Agreement on Trade and Tariffs, GATT, were invited to become members of WTO as long as they signed the treaty concluded at Marrakech in the final round of the Uruguay negotiations. Those that had not joined GATT but wished to become the members of WTO had to agree to the conditions set by the existing membership. These could be extremely rigorous and took a long time to negotiate as happened in the case of China and is now happening in the case of Russia. A country such as Pakistan, having joined the GATT, was not subject to this additional conditionality.
Once the WTO was up and running, it was clear that another set of negotiations was needed to smoothen out the various wrinkles that remained in the international trading system. Three of these were important. One, some of the sectors of vital interest to the developing world had been left out of the Marrakech treaty. Most important of these was agriculture. To bring this sector in line with other sectors, some of the protectionist policies pursued by the developed world had to be abandoned. This was politically not easy since the voting blocks in America, Europe and Japan that benefited from these policies had considerable political clout. Second, some of the rapidly growing developing countries now had a place in international commerce that did not justify the continuation of preferential treatment that was initially given to this group. Brazil, China, India and South Africa belonged to this group of countries. Third, some of the more rapidly growing parts of the global economy were not under the purview of WTO. The ICT information and communication technology was foremost among these. To fill these gaps there was agreement among developed countries that a new round of trade negotiations had to be inaugurated. This was resisted by the developing world for as long as it was not promised what it termed as 'fairer treatment' in international commerce.
The Doha Round
The Doha round of negotiations had an inauspicious beginning. The first attempt to begin the dialogue in 1991 ran into stiff resistance from a variety of non-governmental groups. They arrived at Seattle, the site of the meeting, determined to stop the start of a new set of discussions among worlds' trading nations. Those who were against the launch of yet another round of negotiations had several grievances. They ranged from the belief that the previous round -- the Uruguay Round -- concluded in 1995, created a world trading regime that was of no use for the world's poor. In fact, according to this line of thinking, the world trading order that resulted from the Marrakech Treaty created an un-level playing field, tilted away from the developing world. The tilt was particularly sharp in two sectors of enormous interests for the developing world, agriculture and textiles.
There were also reasons for the opposition by the non-government organisations to another global trade round. Many people believed that by creating an elaborate system of international trade rules, the Marrakech Treaty provided considerable space to the large transnational corporations (TNCs) that dominated the world production system. This space was used to exploit the poor. Some NGOs that appeared at Seattle were concerned that the outsourcing of production that was resulting from the process of globalisation and had the support of the World Trade Organisation resulted in poor working conditions and low wages for the workers employed by the TNCs.
Several other were troubled by the fact that the Uruguay process had provided considerable authority to the world's rich nations to protect patents or intellectual rights even at the cost of not providing cheap medicines to the sick in the developing world. For instance, the drugs needed for slowing down the progress of AIDs could be produced in the developing world at a fraction of the cost charged by the large pharmaceutical companies. This was demonstrated by some pharmaceutical companies in India who defied the rules and supplied cheap AIDs drugs to the poor countries of Africa. This could not be done more openly since any infringement of patents could be severely punished by the WTO.
There were also NGOs who went to Seattle to make the point that the rules governing the international production system allowed considerable latitude to the TNCs to exploit physical resources in a way that caused grievous harm to global environment. These corporations had to be constrained and made accountable to the civil society since the world governments had failed to draw up a program for protecting the environment. For these and other reasons the demonstrations in Seattle turned violent and blood flowed in the streets of this attractive city on the America's west coast. The ministers who had assembled at Seattle slipped out of the city without coming to any agreement.
They met again at Doha, the capital of Qatar in November 2001. They succeeded this time in launching a new round for two reasons. The Qataris were able to use the limited access to their capital to keep out potential trouble makers from the city. And, the terrorist attacks of September 11, 2001 on the United States had convinced Washington that something quite significant had to be done to reduce the level of resentment that existed in the Muslim world against the West -- particularly against the U.S. There was a widespread feeling not only in Muslim countries but in all parts of the developing world that the global trading system discriminated against them.
This discrimination had taken at least three different forms. The tariffs against the exports from the developing world were considerably higher than on the trade between developed countries. In some cases the use of tariffs was coupled with the use of quotas against the developing world's exports. This was the second cause of developing countries' resentment. The quotas were directed mostly at clothing and textiles. Even before the launch of the Uruguay Round, industrial countries had operated a system called the Multi-Fibre Arrangement, or MFA, that allowed limited exports of various items of textiles and clothing from poor to rich countries to come under quotas. The developing countries agreed to the conclusion of the Uruguay Round and the establishment of the World Trade Organization only after it was promised that the MFA would be phased out over a ten year period and by January 1, 2005 the MFA would be completely eliminated. This was done and the textile industry in the developing world began to quickly restructure and grow.
The third area of unhappiness among the developing countries were the subsidies given by rich counties to their farmers and the constraints placed on developing countries' exports to the markets in rich countries. Under the European Union's Common Agricultural Policy (CAP), large amount of subsidies were given for the production of agricultural products, such as rice, sugar and dairy products, in which the developing world had a distinct comparative advantage. The United States also operated a farm support program in which the items entering world trade fetched relatively low prices because of the subsidies given by Washington. The subsidies to the cotton producers were by far the most important policy that had a negative impact on the incomes of farmers in the developing world.
These unfriendly policies toward the developing world had one important consequence: they hurt the poorest people in the developing world. They hurt the semi-skilled workers employed in the developing countries' textile sector, a high proportion of whom were women. They hurt the poor cotton farmers of West Africa whose incomes fell because of the low price in the international market that resulted from cotton subsidies in the United States. They hurt those parts of the developing world in which farmers could produce such high value crops as fruits and vegetables for export to the high income markets but market access was denied to them for various reasons. Phyto-sanitary regulations regulations against plant products were the most often used non-tariff barrier to keep out exports from the developing world.
It was the decision by the developed world -- the United States in particular -- that the new round of negotiations would pay special attention to the demands of developing countries that led to the agreement to launch the Doha round. The United States, traumatised by the terrorist attacks on its territory on September 11, 2001 identified continuing slow growth, persistent poverty and deteriorating income distribution in the developing world as the reasons of the alienation of the youth and the direction of their anger at Washington. Trade, therefore, became one of the many weapons the United States was prepared to use in order to win over the hearts and minds of the people of the developing world.
However, trade is one area where good intensions seldom translate into intended actions. The decision to focus the Doha round on the issues of interest to the developing world had the backing of economic theory. By addressing these issues, rich nations, wedded to the principles of free markets, would be removing a number of serious distortions in international trade that hurt the developing world. It was calculated by a number of individuals and institutions that by removing these distortions, the developed world would be transferring incomes to the developing world that would be many times more than the official aid they provided. By taking this step, rich countries would also be sending additional incomes directly into the pockets of the people. Administration of aid required governments as intermediaries and governments were often inefficient and corrupt. By allowing the poor to trade openly in world markets, incomes would flow to them without much intermediation.
The World Bank estimated in a study published in 2002 that freeing international trade of all barriers and subsidies would lift 320 million people above the US$2 a day poverty line1. This could be achieved by 2015, the year set by the United Nations for achieving what were designated as the Millennium Development Goals (MDGs) by the world leaders in their 2000 summit held in New York2. The Bank's estimate was vindicated by William Cline, a highly respected economist who had worked in several think tanks, in a widely read book among the policy circles in the United States, Cline reached a higher figure 440 million of the number of people who would be helped by free trade, in particular free trade between poor and rich nations3.
From Doha to Hong Kong
While the principles on which the Doha round was to proceed were supported by theory, politics had its own goals. Most developed countries found it difficult to overcome the opposition of the small number of people in their countries who would have been temporarily hurt by the removal of farm subsidies. Also opposed to the easing of some of the constraints were the influential pharmaceutical companies who were not prepared to lose their patents and reduce the price of their drugs even if that meant not delivering relief to the poor people facing certain death from such communicable diseases as AIDs. For these reasons, as the ministers planned their trip to Hong Kong, the site of the December 2005 ministerial meeting connected with the Doha round, there was not much hope of success. Pascal Lamy, the new Director General of WTO, feared that the Hong Kong meeting could result in a total impasse unless the ministers from the developed countries were prepared to make some commitments that would meet the goals of the Doha round when it was initially launched.
Pakistan did not go to Hong Kong with a great deal of hope. Humayun Akhtar Khan, the Pakistani commerce minister, had carved out good space for himself as a designated negotiator for G-20, a group of large and influential developing countries who by virtue of their size carry considerable weight in international trade matters. The group had worked hard to develop a common position which would have positive consequences for its members. Non-agricultural market access, or NAMA, was the area of greatest interest to this group of countries. But in pursuing this line, the G-20 faced two conflicting interests. There was the interest of the countries such as Brazil, the world's most efficient producer of agricultural products, to gain an even playing field in trade in agriculture, undistorted by subsidies and other forms of state assistance. If this were to happen, large agriculture exporting countries such as Brazil would most certainly benefit while countries such as Pakistan that had begun to rely on importing commodities such as cotton for providing inputs to a rapidly growing industry would pay a higher price for the needed raw materials.
There was one another contentious issue the G-20 had to deal with. This concerned the willingness on the part of the developed world to permit duty free imports of textile and clothing from the least developed countries while levying heavy tariffs on the producers in the relatively more developed developing countries that included Pakistan. How to reconcile these opposing interests? How to ensure that the evolving global trading system moved forward even after the shaky push received at Hong Kong and that it would bring benefits to Pakistan which was only now, nearly sixty years after becoming a state, beginning to draw developmental benefit from international trade?
What was the outcome of Hong Kong? The question has produced two answers. According to Professor 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 was 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'4. He had 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 trade5.
Another view [to which the author subscribes] 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 to the negotiators. These talks 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. Not 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. Both assumptions are questionable. 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 neighborhood 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 the 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, a quick account of the mini-steps that were taken at the meeting in order to save the talks from total collapse is essential.
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 from rich countries. Before Hong Kong, there was pressure on more advanced developing countries to lower their tariffs, if not for the goods produced in rich countries, then 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 will 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.
Moving Beyond Hong Kong
After a series of all 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 Organisation. 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 will 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 by the EU 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 will 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 meaning 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 sizeable market access for various fruits, 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 program for cotton producers.
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 3 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 will be intensified bilaterally between various groups of countries to liberalise trade in services. At Hong Kong, the Europeans pressed for liberalisation 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 such as banks and insurance companies. Instead, developing countries want greater access for their workers to the service sector even on a temporary basis.
Conclusion
The way Pakistan is approaching the WTO, it will benefit only marginally from what is likely to happen to the multilateral trade framework. 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 favor 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.
I have also 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 the countries that have large and young populations, a category of countries that includes Pakistan 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 Asian Free Trade Area, SAFTA, with greater substance than it presently has and to obtain better access to China in the context of the bilateral agreement on which it is presently working.
(Shahid Javed Burki is former Vice-President, World Bank and former Finance Minister of Pakistan)
End Notes
1. The World Bank, International Trade and Global Poverty, Washington DC., 2002
2. Human Development Report 2002, (UNDP, New York: Oxford University Press, 2002).
3. William Cline, Trade Policy and Global Poverty, (Washington DC.: International Institute of Economics, 2004).
4. Jagdish Bhawati, 'From Seattle to Hong Kong', Foreign Affairs, (Special Edition, December 2005).
5. Jagdish Bhagwati, In Defense of Globalization, (New York: Oxford University Press, 2004).
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