Rethinking Bretton Woods | Mon, Nov 25, 2013
This article analyzes the potential financial impacts for developing countries of proposals for a trade facilitation agreement at the upcoming WTO Ministerial Conference in Bali, December 2013.
In a recent publication by South Centre, experts warn of the impacts that a trade facilitation agreement would have on the financial situation of member countries. The report, “WTO Negotiations on Trade Facilitation: Development Perspectives,” drew upon discussions at two Expert Group Meetings on the Multilateral Trading System organised by the South Centre. It comes at a time when the 9th WTO Ministerial Conference, to be held in Bali, Indonesia, draws close. An agreement on trade facilitation is one of the proposed outcomes for that conference.
The report argues that such a trade facilitation agreement would lead mainly to facilitation of imports by the countries that upgrade their facilities under the proposed agreement: “While the trade facilitation agreement is presented as an initiative that reduces trade costs and boosts trade, benefits have been mainly calculated at the aggregate level. Improvements in clearance of goods at the border will increase the inflow of goods. . . . However, poorer countries that do not have adequate production and export capability may not be able to take advantage of the opportunities afforded by trade facilitation. There is concern that countries that are net importers may experience an increase in their imports, without a corresponding increase in their exports, thus resulting in a worsening of their trade balance.” In this regard, echoes the concerns voiced already by some developing countries, especially those with weaker export capability.
This is precisely what a report by UNCTAD found had taken place in Africa’s trade liberalization experience.[i] In this study the organization reviewed the export and import performance of the continent before and after trade liberalization. It identified “Africa’s weak supply response as the most important impediment to the continent’s export performance, suggesting that future export policies should focus more on ways to increase production for export.” Further, UNCTAD found in that study that to the extent that exports had improved, it was mainly due to value increases rather than volume increases, which reinforced the conclusions about the weakness of the export response.
Consistent with this, that report concluded that policies that could help Africa to refocus its development priorities on structural transformation in order to increase the continent’s supply capacity and export response should be prioritized.
It is worth noting that the findings are in line with what economists such as Santos Paulino and Thirlwall predict for openness in developing countries: both imports and exports would be stimulated, but the former much more than the latter, driving a negative trade balance.[ii]
Other costs to developing countries come from meeting obligations under the proposed agreement, which include human resource expenses, equipment and information-technology systems, as well as other significant infrastructure expenditures. “Meeting these costs,” South Centre’s report says, “will necessitate an allocation in the national budgets and could divert limited resources from public services, such as health care, food security and education to customs administration.”
Trying to assuage such concerns, the IMF and World Bank joined donors and several multilateral financial institutions on statements last July[iii] and again last month,[iv] asserting their “strong commitment to support developing countries, and in particular least-developed countries, in the full and effective implementation of a WTO Trade Facilitation Agreement.” In the latest statement they mentioned to have disbursed USD 22 billion since 2008 in concessional support for economic infrastructure and building productive capacity in developing countries.[v]
But those figures do not even begin to address the existing needs,[vi] let alone those that may be created if a binding agreement is established. This is the most troubling aspect of the idea of an agreement on trade facilitation. It is not so bad that countries are encouraged to facilitate trade if and when they find that will bring advantages in their particular situation. However, a trade facilitation agreement would have binding disciplines that could be adjudicated under the WTO Dispute Settlement mechanism. A non-complying member risks being subject to trade sanctions. Thus, such agreement may force the required investments at a pace that would be far from appropriate. One could envision the not far-fetched possibility that investments in trade facilitation infrastructure, being required by a WTO agreement, end up receiving priority in access to the limited available resources over the very investments needed for supply-side and productive infrastructure that would support a stronger export response.
In addition to the limited extent to which the foreseeable “concessional” funding in offer can address demand, it is worth clarifying that “concessional” funding is not exempt of debt-creating effects. In fact, recently, in justifying some changes to its rules for borrowing countries’ debt limits, the IMF explained that several countries were seeing their concessional loans add more to their debt than “non-concessional” ones.[vii] According to current OECD-DAC rules funding with a 25 per cent grant element already qualifies as concessional. The OECD’s ongoing review of what qualifies as concessional, amidst expectations that donors will be able to deliver less aid (this because of their compromised fiscal situations[viii]), gives reason to expect the grant element needed for loans to be considered concessional will go down, not up.
The WTO Round of negotiations started in Doha in 2001 born great hopes that it would be a “Development” round, one to redress imbalances that hampered developing countries in previous rounds. Most observers lost hope on the feasibility of concluding the Round, and on the extent to which it may deliver on such promises, over the following 12 years. Relaunching with an agreement that will so severely hit and distort finances in developing members is not the most advisable path to regain an image as a bona fide multilateral negotiating space.
[vi] Infrastructure spending needs in Africa alone are estimated at some USD 93 billion a year (see http://inec.usip.org/blog/2011/oct/24/could-infrastructure-gaps-fragile-states-be-addressed-using-public-private-partners)