g u LIRETIO NS IN DE*VE LO PMEN T Th-e Uruguay Round Widening and Deepening the World Trading System ; '/ W | WILL MARTIN L. ALAN WINTERS Itv - -£ *._ ,~# n h l[.... 4i f , DIRECTIONS IN DEVELOPMENT The Uruguay Round Widening and Deepening the World Trading System Will Martin and L. Alan Winters The World Bank Washington, D.C. 1995 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, NW WVashington, DC 20433 All rights reserved Manufactured in the United States of America First printing October 1995 The findings, interpretations, and conclusions expressed in this study are entirely those of the authors and should not be attributed in any man- ner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. ISBN 0-8213-3488-3 The authors are grateful to all those who helped in producing this summa- rv: the authors and discussants at the conference "The Uruguay Round and the Developing Economies," January 1995; the reviewers of earlier drafts: M. Abreu, M. Ahmed, C. Bach, H. Corbet, A. Enders, J. M. Finger, N. Kirmani, S. Lateef, P. Lloyd, P. Low, A. McCalIa, C. Michalopoulos, H. Nordstorm, S. Page, S. Rajapatirana, D. Robertson, M. Selowsky, R. Snape, and T. N. Srinivasan; and the editors, Vince McCullough and Bruce Ross-Larson. Contents Foreword v Abbreviations vii The Uruguay Round: Creating a global trading system I A turning point for the world trading system 2 $200 billion a year in gains 4 Big reductions in the protection of manufacturing 9 Few reductions in agriculture-but greater transparency and a framework for the future 14 For services, rules but few reductions in protection 20 Trade-related intellectual property rights-TRIPs 24 Legalized backsliding 26 Developing countries-into the fray 29 References 30 Foreword The outcome of the Uruguay Round is a milestone for developing coun- tries. However, this initial step of integrating developing countries into the global economy opens a new range of challenges and opportuni- ties. This booklet evaluates the outcome of the Round and outlines ways we can move forward. It also suggests strategies for implementing the agreement, proposes how it can be extended, and provides part of the analytical base for future multilateral negotiations aimed at accel- erating the integration of developing countries into the world economy. This process is important for everyone. For example, U.S. and Canadian exports to developing countries are already larger than exports to the European UJnion or Japan. By the end of the next decade, we expect developing countries to take over a third of industrial country exports, an increase from approximately a fifth today. This booklet is a synopsis of the papers, feedback, and discussion from the World Bank's second conference on The Uruguay Round and the Developing Economies, held January 26-27, 1995. The Bank's first conference on the Uruguay Round was in Bangkok more than eight years ago, shortly after the opening of the Round. It was clear even then that the developing economies would play a much more impor- tant role in this Round than previously. Developing countries not only participated in formulating new rules for the world trading system. They also made important market access offers in the conventional area of reducing tariff protection on manufactures trade, as well as in areas new to the trade liberalizing process, such as in services and in agricultural products. Why should the Development Economics Vice Presidency of the World Bank be concerned with this agenda? First, developing countries are increasingly open, and they depend heavily on the health of the international trading environment. The international economy is the source of supply for some consumption goods, and for numerous investment and intermediate goods and services; investment funds and new technologies; the competitive pressure that keeps both firms and governments efficient; and demand for exports and for income flows from migrants. In short, an open economy has a strong and direct inter- est in the world economy and its trading rules. ', vi THE LIRLIGlIAY ROUND: WIDENING AND DEEPENING FHE WORL[) TRADING SYSTEM Second, protected developing economies frequently request World Bank advice and assistance to become more open. The World Bank seeks not merely to reiterate received wisdom and generalities, but also to pro- vide detailed and practical advice, often based on analyses like those summarized in this booklet. Third, experience shows that even relatively open economies are sub- ject to backsliding-the gradual and piecemeal erosion of open markets through policies such as inappropriate use of safeguards and antidump- ing actions. One of the greatest dangers in the post-Uruguay Round trad- ing system is the high vulnerability to these types of protection. Understanding the rules that apply to such policies and the costs that they impose is important, both for national policymakers and for their international advisers. Fourth, liberalization in most developing countries must be extended from manufactures and raw materials to agriculture and services. In assessing progress in these directions, policymakers need to grasp the implications of the Uruguay Round, the modalities it provides for future liberalization, and the extent of the task ahead. The World Bank has a long tradition of offering analysis and advice on intemational trade. Indeed it can justifiably take some credit for the dra- matic swing to openness during the last decade. The Bank's advice is mostly country-specific, albeit based on cross-country experience, but the Bank also contributes on systemic issues. The conference results summarized here are the first to be based on quantification of the actual outcome of the Round rather than on gen- eral statements of intent. By making such high-quality research accessi- ble, this report aims to enhance international trade policymaking in developing countries, reaching out to policymakers and coherently pre- senting these vital issues from the perspective of developing countries. Michael Bruno Vice President Development Economics and Chief Economist Abbreviations GATS General Agreement on Trade in Services GAFT General Agreement on Tariffs and Trade MFA Multifibre Arrangement MFN most-favored nation TPRM trade policy review mechanism TRIMs trade-related investment measures TRIPs trade-related intellectual property rights WIPO World Intellectual Property Organization WTO World Trade Organization vii The Uruguay Round: Creating a global trading system The Uruguay Round has produced the most fundamental reform of the world trading system since the establishment of the General Agreement on Tariffs and Trade (GATT) in 1947. It introduces disciplines to a wider coverage of products and countries and testifies to a wider and deeper commitment to trade liberalization. The establishment of the World Trade Organization (WTO) will contribute to a necessary strengthening of the global trading system, with stronger procedures for settling dis- putes, a mechanism for reviewing country trade policies, and greater involvement of ministers in decisionmaking. The Round is likely to generate global income gains of up to $200 bil- lion a year, with somewhere between a quarter and a half of the gains going to developing countries, primarily to the ones that have reduced their own protection and locked in the benefits of earlier reforms. The reductions in the protection provided to manufactures were gener- ally substantial, with deep tariff cuts and the outlawing of important non- tariff barriers-such as voluntary export restraints and the Multifibre Arrangement. If this success does not greatly intensify the pressures on other routes to protection-such as antidumping and safeguard mecha- nisms, which were not significantly changed bv the Round-it will gener- ate strong benefits. Where a complete framework of rules had to be nego- tiated, as in agriculture and services, less progress was made on actual pro- tection. In agriculture the agreed reductions in protection were attenuated by the way nontariff barriers were converted to tariffs, while in services almost no liberalization occurred. The Round went far beyond what had been achieved in previous rounds, in involving developing countries in the multilateral trading sys- tem, in extending disciplines to agriculture and services, and in covering new aspects of trade such as trade-related intellectual property rights (TRIPs) and trade-related investment measures (TRIMs). The General Agreement on Trade in Services (GATS), although achieving little in immediate reductions in protection, is a landmark in creating trade dis- ciplines in virgin territory. The TRII's agreement, which will have greater direct effect, will eventually increase the protection of intellectual prop- erty rights worldwide. A turning point for the world trading system The Uruguay Round produced the most profound institutional reform of the world trading system since the GATI's establishment in 1947. Trade rules were reformed across the spectrum and brought under the aegis of the newly created World Trade Organization, now responsible for overseeing the implementation of reforms under the 1994 General Agreement on Tariffs and Trade (GATT 1994), the General Agreement on Trade in Services (GATS), and the trade-related intellectual property rights agreement (TRIPs). The Round's agreements remove several distortions that previously weakened the integrity of the trading system-abolishing the pernicious voluntary export restraints and phasing out the perverse Multifibre Arrangement. The dramatic increase in tariff bindings in developing countries, both in agriculture and in manufacturing, intensifies the importance of the global trading system for regulating national trade pol- icy. The reincorporation of agriculture into the GAIT is particularly important, not so much for the reductions in protection-they were gen- erally small-as for getting it back under multilateral discipline and lay- ing the foundations for future negotiations. The incorporation of services expands the scope of the system and thus the scope for further gains from negotiation. But the GATS architecture presents difficulties both in enforcing the current agreement and in extending it to new areas. The WTO's dispute settlement procedures are substantially stronger than those of the previous GATT, whose dispute resolution process could be blocked at the stage of forming a panel or of adopting a panel's report and could be delayed interminably. Under the new system, the right to a panel is virtually automatic, and the panel's report may be rejected only if there is a consensus among WATO members to reject it. Moreover, all procedures must now follow a strict timetable. The permanent establishment of the trade policy review mechanism (TPRM), with a broad mandate to review the trade policies of member countries in goods and to extend its purview to services, should increase the transparency of national trade policies. The interest groups that ben- efit from protection are typically very well informed about the measures that affect them directly, but the opacity of many forms of protection 2 A TURNING POINT FOR FIlE WORLD TRADING SYSTIM 3 and the complexity of their effects has made it difficult to build opposi- tion to such measures. The greater transparency deriving from TPRhl reviews is beginning to change this. In many areas, the Round's agreements clarify the rules of the game. Replacing the plethora of nontariff barriers in agriculture with bound tariffs is clear progress in refining the rules, as is incorporating a com- mon definition of subsidies in the agreements on subsidies and coun- tervailing duties. The full impact of the Round on the strength of the global trading sys- tem is difficult to gauge, however. The fact that it was introduced as a sin- gle undertaking-with almost all its disciplines applying to all mem- bers-is a big advance on the Tokyo Codes approach, under which many disciplines were optional and many developing countries did not sign on to some of them. But since international law is limited by the will- ingness of sovereign nations to accept its disciplines, implementation of the Round's agreements must walk a fine line between being too restric- tive for countries to accept and being too lenient to be effective. The VVTO will undoubtedly be challenged. If the implementation of agree- ments does not proceed as agreed, many of the gains it makes possible will be in jeopardy. Box 1. WTO and the environment One key new challenge for the WrO is to manage its work program on trade and the environment. The work program laid out by the Uruguay Round agreement has extremely broad terms of reference, including: * the relationship between trade and environmental measures in promot- ing sustainable development - the relationship between the multilateral trading system and trade mea- sures used for environmental purposes * the environmental effects of trade liberalization * the relationship between the dispute settlement mechanisms of the WFO and those in multilateral environmental agreements. Developing an effective agreement on trade and the environment addresses a series of difficult and delicate issues. Environmental concems are increasingly important, and significant environmental extemalities arise from phenomena such as the greenhouse effect. So it is dear that markets may fail to deliver best outcomes. The key question is whether introducing restrictions on international trade is the best way of tackling these: whether the environmental benefits of intervening through the multilateral trade sys- tem will exceed the trading costs. $200 billion a year in gains The Uruguay Round will produce significant increases in world income and distribute them widely among industrial and developing countries. These gains will naturally require countries to make adjustments, but the needed restructuring is generally likely to be much smaller than that required to accommodate the normal processes of growth and structur- al change. Moreover, the impact on real wages will generally be positive, particularly in developing countries. The Round's agreements on merchandise trade are expected to gener- ate substantial income gains because they result in sizable reductions in protection on manufactures and because the relatively small reductions in agricultural protection occur in a highly protected sector where very sizable efficiency gains are possible. A number of recent studies point to significant gains in global incomes from the increases in market access for agricultural and indus- trial products negotiated under the Round (table 1). The studies differ in detail because their methodologies differ, but together they constitute strong evidence of the benefits of the Round. The WFO modeling team (Francois, McDonald, and Nordstrom) esti- mated the gains from merchandise trade liberalization with firms assumed to produce differentiated products under imperfectly competi- tive conditions, and consumers assumed to exhibit a preference for vari- ety in the goods available to them. The estimated benefits come to $94 billion a year in 1992 U.S. dollars. When induced increases in the capi- tal stock are also incorporated, the gains rise to $214 billion a vear, or 0.94% of global output. Almost half of this gain is estimated to accrue to developing countries, where the gains constitute a higher percentage of base GDP (about 2%). One World Bank team (Harrison, Rutherford, and Tarr) preferred a model in which economies of scale allow for a rationalization of firms as markets expand. They assume the capital stock will adjust to keep the return on capital constant and recognize that new investment allows greater substitution possibilities between uses of resources than is found in the short run. That led to income gains of $171 billion, or 0.74% of global GDP, with roughly a third to developing countries. 4 $200 BILLION A YEAR IN GAINS 5 A second World Bank team (Hertel, Martin, Yanagishima, and Dimaranan) focused primarily on manufactures and incorporated the pro- jected growth and structural change over the period up to full implemen- tation of the Round in 2005. This tends to increase the estimated gains because the world economy is larger and, without the Round, would be more distorted in 2005 than in 1992. The greater distortions arise because of faster growth in developing countries, where current average protection rates are higher, and the increased restrictiveness of the Multifibre Arrangement. In this model, the estimated income gain from the Round is $258 billion a year, or about half of 1% of GDP in 2005, even without economies of scale or Round-induced capital accumulation. Another important issue affecting the level and distribution of bene- fits from liberalization is the performance of labor markets. If unem- ployment exists because real wages are tied to the cost of living, trade liberalization can provide a substantial stimulus to employment and output by lowering living costs and hence the cost of employing labor. An OECD/World l3ank team (Goldin and van der Mensbrugghe) added this consideration to their model and found the gains to be $235 billion a year, with $52 billion going to developing countries. Which to believe? None too literally. The idea is merely to give some indication of the range of gains likely. Table 1. Estimates of the benefits of Uruguay Round trade liberalization (billions of LI.S. dollars a year in 1992 prices) Increase itl real income Model/Variant Year World Industriala Developing' RUNS (OECD/World Bank- Goldin and van der Mensbrugghe) Full employment 2002 48 32 16 Model with unemployment 2002 235 179 56 GTAP (Hertel and others) Liberalization in projection to 2005, perfect competition 2005 258 172 85 BANK (Harrison, Rutherford, Tarr) Static, perfect competition 1992 93 75 18 Static, imperfect competition 1992 96 77 19 Induced investment, imperfect competition 1992 171 115 55 WTO (Francois, McDonald, Nordstrom) Static, perfect competition 1992 40 30 10 Static, imperfect competition 1992 94 75 19 Induced investment, imperfect competition 1992 214 121 93 a. Classifications vary slightly by model. 6 IDIE LIRLIC.lAY ROLIND: WIDENING AND DEEPENING I HE WORLD TRADING SYSTEM Prizes for nearly everyone Authors also disaggregated the effects of the Round on real incomes and real wages by region (table 2, based on Harrison, Rutherford and Tarr). The results for each region depend on the efficiency gains from each country's liberalization, terms of trade effects, and the implications of abolishing the Multifibre Arrangement (increasing efficiency and reduc- ing excess profits). The regions whose liberalization imply larger reductions in the domestic prices of imports generally enjoy larger gains in real income (figure 1, based on Hertel and others). Consumers can buy what they need from the most efficient source. Producers can scale back on the production of goods made more efficiently in other countries and increase the output of goods produced most efficiently at home. The government collects its remaining trade taxes on a larger trade volume. Further gains can be achieved by greater exploitation of scale economies in production-and from improvements in the range and quality of spe- Table 2. Real income gains from the Uruguay Round Welfare gains W41elfare gains Real wages (billions of 1992 dollars) (percent of GDP) (percent) Australia 3.26 1.10 1.2 New Zealand 1.43 3.62 2.8 Canada 2.61 0.46 0.3 tlnited States 26.68 0.45 0.4 Japan 22.73 0.64 0.9 Republic of Korea 7.45 2.50 6.1 European lUnion 49.93 0.74 0.0 Indonesia 2.61 2.12 6.1 Malaysia 5.03 8.78 9.0 Philippines 2.38 4.35 3.4 Singapore 0.73 1.70 6.8 Thailand 12.63 10.93 8.8 China, Hong Kong, Taiwan (China) 1.99 0.27 1.0 Argentina 2.35 1.01 0.7 Brazil 4.27 1.12 0.8 Mexico 2.29 0.67 0.4 Other Latin America 4.70 1.72 1.1 Sub-Saharan Africa -0.69 -0.40 0.1 Middle East and North Africa 1.54 0.26 -0.2 Economies in transition 1.16 0.14 -0.1 South Asia 6.74 2.03 2.6 Rest of the world 8.81 0.73 na World 170.63 0.74 na Souirce: Harrison, Rutherford, and Tarr. $200 BILLION A YEAR IN GAINS 7 cialized products available to producers and consumers. In addition, countries can gain from reductions in protection by their trading part- ners, particularly if this increases the demand for their exports and improves their terms of trade. . The largest gains accrue to East Asian WTO members, such as Indonesia, the Republic of Korea, Malaysia, and Thailand. They commit- ted themselves to fairly rigorous liberalization in both agriculture and manufactures; they also tend to be competitive and highly restricted exporters of textiles and clothing, and so gain from abolition of the Multi- fibre Arrangement. Since these countries are expanding their production and export of labor-intensive goods, their demand for labor grows strong- ly and real wages increase sharply-between 6% and 90,'o a year. * The South Asia region is also estimated to benefit substantially, for much the same reasons as East Asia. * China, Hong Kong, and Taiwan (China) have in common the fact that they undertook essentially no liberalization. China and Taiwan (China) are not yet W'TO members, while Hong Kong had essentially no protec- tion to remove. The small benefits to this nonliberalizing region arise from the abolition of the Multifibre Arrangement and from improved access to other markets. * Significant gains are estimated for the Latin American countries, pri- marily from their liberalization of manufactures and agriculture. This region tends to be less competitive in the production of textiles and apparel, and hence to gain less from the abolition of the Multifibre Arrangement. * The Middle East and North Africa region and the economies in tran- sition have small GDP gains, primarily because they undertook few commitments to liberalize under the Round. Indeed, manv of these countries are not yet members of the WTO. * The loss to Sub-Saharan Africa reflects the lack of liberalization, the small increases in world prices for some foods, and the higher prices of Figure 1. Cuts in border protection and welfare gains from the Uruguay Round (percent) Income gains 7 6 5 4 3 U 2 2 3 4 5 6 7 8 9 -1 Average redLuct on in import prices Source Hertel, Martin, Yangagishima, and Dimaranan. 8 THE URUGUAY ROUND: WIDENING AND DFFPENING THE WORLD TRADING SYSTEM imported textile and apparel products. Highly efficient textile and apparel exporters restricted by the Multifibre Arrangement are currently forced to divert their products away from import markets that are under the arrange- ment and to sell them elsewhere at low prices. An offsetting long-run advantage to Africa, not captured in these welfare estimates, is that the abolition of the Multifibre Arrangement takes away the threat of the arrangement's restrictions on efficient new exporters. * Among the industrial countries, the largest percentage gains in income and in real wages occur in New Zealand and Australia, which took greater advantage of the opportunity provided by the Round to lock in their reductions in protection. * The gains to Japan and to the European Union were larger as a share of GDP than those to the United States and Canada because Japan and the European Union had much higher levels of agricultural protection and, despite their initial reluctance, began the process of liberalizing this protection. The European Union and the United States also benefit greatly from the abolition of the Multifibre Arrangement. Despite their large absolute size, the gains for the industrial country blocs are generally small as shares of GDP, whereas for the developing countries undertaking substantial liberalization, the benefits account for much larger shares of GDP. Big reductions in the protection of manufacturing What lies behind these big gains? Tariffs on manufactures imports into industrial countries were reduced from a trade-weighted average of 6.3% to 3.80/o, a cut to be phased in over five years. The reductions were not uniform, but were the outcome of a series of bilateral request-and-offer negotiations whose results were extended to all Round participants. For industrial countries, tariffs were reduced by an average of 45% on imports from other industrial countries and by only 30% for imports from developing countries. For developing countries, the reductions in tariff rates on manufactures averaged 28% on products from industrial countries and 29% on those from developing countries. Commitments under the GATT take the form of bindings-commit- ments not to levy a duty exceeding a particular (bound) rate. The pro- portion of industrial countries' tariffs on industrial products subject to bindings rose from 94% to 99% as a result of the Round. With 18% of their imports already bound duty-free, tariff reductions were feasible on only 82% of imports. Tariffs were, in fact, reduced on 64% of imports-with the remaining 18% divided between bindings without reduction and no offer. The proportion of developing countries' imports of industrial prod- ucts subject to bindings rose from 13% before the Round to 61% after it. This increase in the coverage of bindings was very widespread, with substantial increases in all regions. With only 1% of their manufactured imports initially bound duty-free, there was scope for tariff reductions on1 99% of imports. Bindings involving tariff reductions were offered on 32% of imports, while bindings without reductions (ceiling bindings) were offered on a further 26%; no offers were made on the remaining 42%. So, developing countries made very substantial progress with their tariff bindings and reductions, but clearly much remains to be done. If the average tariff cut in the Round had been uniform, it would have had the economically desirable feature of implying a larger reduction in the tariff-inclusive price of more highly protected goods. But there was only a very weak relationship between the initial rate of protection and the price reduction achieved (figure 2). For industrial countries' imports from developing countries, the two sectors with the highest tariffs 9 10 H llURUCGlAY ROlIND: WIDENING AND DEEP'ENING THE WORLD TRADING SYSTEM (textiles and clothing, and footwear) experienced smaller price reduc- tions than did many other sectors. For developing countries' imports from industrial countries, there is no evidence of a consistent relationship between the initial tariff level and the reduction in the domestic prices of imported goods (figure 3). What is clear, however, is that the average depth of the tariff-induced price cuts from the Round was greater in developing countries than in industrial countries. While the proportional tariff cuts were smaller in developing countries, the price cuts are larger because they apply to higher initial tariffs. Tariff escalation in iidustrial country markets-tariff rates increase with the stage of processing-is a long-standing concern of developing Figure 2. Initial tariffs and price reductions for industrial countries' imports from developing countries (percent) 16 14 Initial tarift Price nhange 12 1 0 8 6 4 2 0 Textiles Foot- Fish Chem- Manu- Electric Trans- Wood Non- Mineral Metals wear icais factures mach- portation produc- electric produc- ines equip- tion mach- tion ment nes Figure 3. Initial tariffs and price reductions for developing countries' imports from industrial countries (percent) 25 * Initial tariff 20 Price change 1 5 10 5 0L Trans- Fish Textiles Wood Metals Chem- Foot- Non- Electric Manu- Mineral portation produc- icals wear electric mach- tactures produc- eqIIp- tion mach- ines tion ment ines Source. Abreu. SIC. REDIICTIONS IN TDIF PSRIEPCHON DlI MANLIFA('IRINC I I countries because it discourages the export of processed raw materials. Tariff cuts under the Round reduced the absolute degree of tariff escala- tion on imports of manufactures, although some escalation clearly remains (figure 4). Excising some of the insidious nontariff barriers A key feature of the Round was the substantial progress made in dealing with the "gray area" measures that had sprung up to circumvent the dis- ciplines imposed by GATT rules and tariff bindings. Voluntary export restraints must be abolished within four years, and the Multifibre Arrangement (MFA) is to be phased out over ten. The abolition of the MFA can be expected to generate considerable benefits not just to exporting countries but also to the importing coun- tries that imposed this peculiar and perverse form of protection. For the United States and Canada, a typical mature industrial region, the abolition of the MFA means that textile output will cease to grow, while apparel output contracts (figure 5). The ten-year phase-out under the Round allows plenty of time to achieve an orderly restructuring of these industries into more specialized entities and for productive factors to find alternative uses. For South Asia, a typical dynamic developing region, abolition implies a very substantial expansion in the output of textiles and an increase in apparel output of more than 200%. Effecting such an expansion will require policy reform and infrastructure support to realize the full potential of these labor-intensive industries. The growth rates of the heavy machinery and transport equipment sectors in South Asia will slow as resources find more profitable outlets in textiles and clothing, but the sectors will nevertheless remain substantial at 6% and 5% a year, respectively. Similar pattenis of output adjustment are Figure 4. Tariff escalation in industrial countries remains, but at lower levels (percent) 10 * Pre-Round Post-ROnLir 6 4 2 Raw materials Semimianutactures Fin shed products Source GATT 12 THE URUGUAY ROUND' WIDENING AND DEEPIENING THE WORLD TRADING SYSTEM observed in other developing country regions undertaking liberalization. As with the Multifibre Arrangement, voluntary export restraints violated the spirit of two of the most fundamental principles of the GA1F-the pro- hibitions against imposing quantitative restrictions and against discrimi- nating between suppliers (the most-favored-nation principle). These pro- tection measures bought the compliance of exporters by giving them the opportunity to retain some of the artificial scarcity rents they created. They were of doubtful legality (or worse) under the GATT. The Uruguav Round agreement removes any ambiguity, prohibiting voluntary export restraints and measures with a similar effect. Since the protectionist pressures that gave rise to these measures will remain strong, however, outlawing them is likely to increase the pressures for other forms of contingent protection. The agreements to abolish nontariff barriers on manufactured products will require careful monitoring and implementation, lest these barriers be replaced by equivalent (or wvorse) measures under the guise of safeguards or antidumping. Some commentators argue that the abolition of the MFA will require particular attention, since the quotas will be phased out pro- gressively according to schedules determined by the importers, with almost half the quotas, and typically the quotas on the most sensitive items, remaining in place (though growing at accelerated rates) until the tenth year. Strong political pressures for delay are likely. Gains and losses from abolishing the Multifibre Arrangement Industrial country importers, at whose insistence the MFA was intro- duced, will benefit from its abolition for three reasons. First, they will be able to source imports efficiently, buying the best products at the best prices, instead of being forced to purchase imports from suppliers that happen to have sufficient MFA quotas or that have escaped the MFA Figure 5. United States and Canada: industrial restructuring (percent) 80 VVWithout the Round 60 With the Round 40 20 0 -20 -40 -60 Agr- Food Natural Textiles Apparel Light Heavy Trans- Jtilitles Other culture resouIrces manu]- manu- portation serv ces factiring facturing equip- mHnene Source. Hertel ano others. BIG REDUCTIONS IN THE PROTECHON OF MANIIFACFTlRjNG 13 quota net. Second, they will be able to rationalize their own production and consumption decisions-substituting imports for domestic produc- tion where this is appropriate, and avoiding the distortion of consumer choices away from apparel. Third, they will avoid having to pay higher import prices to their export suppliers, who must currently include the price of MFA quotas in their asking prices. All the evidence shows that abolishing the arrangement will generate enormous benefits for the importing countries-$9 billion a year for the European Union, $10-12 billion for North America, and upwards of $25 billion a year for both markets by 2005, gains that will be magni- fied by scale economies. Whether developing country exporters gain or lose from the abolition of the MFA is a more complex question. Since the quotas raise the prices received by exporters with access to quotas, it is possible for the quota system to make some of the restricted exporters better off. But there is no guarantee that this will be so. Relatively new, and tightly restricted, exporters of textiles and cloth- ing-such as China, the ASEAN exporters, and the more competitive South Asian exporters-seem most likely to gain from the abolition of the MFA. Given the restrictions on their exports, they must now divert some of their exports to non-MFA import markets-such as Japan, Hong Kong, Australia, the Middle East, and Sub-Saharan Africa-where import prices are low. Once the MFA quotas are removed, these suppliers can be expected to increase their total exports and to shift their emphasis toward the currently MFA-restricted markets. By one estimate, China could gain more than $2 billion a year, while the major ASEAN exporters (Indonesia, Thailand, Malaysia, and the Philippines) could together gain around $2.8 billion a year in the long run. By another esti- mate, the gains to China could be $5.4 billion a year, and those to the big four ASEAN exporters $4 billion a year. South Asia is also projected to gain by $2 to $3 billion a year. Two groups of exporters are likely to suffer-those whose quotas are now large relative to their comparative advantage and those that may have been induced by the MFA to enter the production of textiles and clothing without possessing a comparative advantage in these goods. Some of the newly industrialized countries in Asia probably fall into the first group, but their losses in this part of the Round are heavily out- weighed by their gains from tariff and other liberalization elsewhere. Exporters in the second group are found in Latin America. A third group of countries that may be hurt includes Japan in apparel and Sub-Saharan Africa in textiles. Both now gain from low-cost exports diverted from the restricted markets, and they will pay higher import prices when the restrictions are eliminated. Of course, the domestic tex- tile and apparel industries will become stronger and, in Sub-Saharan Africa, will be able to contemplate future export-led growth without the threat of restrictions on sales. Few reductions in agriculture- but greater transparency and a framework for the future Before the Round, multilateral trading rules for agriculture were largely ineffective, witlh a plethora of nontariff barriers being used to provide high and variable rates of protection, both in industrial and in develop- ing countries. Export subsidies were a particular source of discord, with competitive export subsidies by the European Union and the United States depressing and destabilizing world prices and hurting farmers in developing countries. The disappointing overall achievements of the Round in increasinig market access for agricultural products need to be weighed against the major progress in improving the rules for agricultural trade. The intro- duction of virtually universal tariff bindings is a signal achievement. Much of the slippage occurred during the one-off process of converting from nontariff barriers to tariffs. With tariffication completed, this will not recur, so the Round has provided the foundation for more extensive liberalization in the future. From nontariff barriers to bindings-a major achievement The agreement to convert virtually all agricultural nontariff barriers into tariffs subject to agreed maximum rates (tariff bindings) provides trans- parency and stability in protection rates that previously were opaque and volatile. In one stroke, the agreement on agriculture leapt beyond what had taken 45 years of negotiations in manufactures: bindings were introduced immediately on almost all agricultural tariff lines. The agreement involved substantial cuts in import tariffs on agricul- tural products: an average of 36% in industrial countries over six years, with at least a 15% reduction on each individual tariff line. Developing countries committed themselves to reductions of 24% over ten years, while least developed countries were exempted from reduction commit- ments. In some cases, tariff bindings were set below the rate of protection previously applied, and will require actual liberalization. But in many others, bindings were set above the previously applied tariff equivalents 14 FEW REDUCTIONS IN AGRICUITURE 15 (see below). Even these bindings, however, can have important liberal- izing implications when protection rates vary over time. By reducing the high rates of protection that occur periodically, bindings reduce average levels of protection. They reduce the average cost of protection even more sharply because the high rates of protection ruled out by bindings are the most costly The export subsidy rules, while not outlawing export subsidies, intro- duce some discipline in an area where the general CATr principle of banning subsidies had not been effective. The new rules prohibit new export subsidies and require that countries reduce their existing export subsidies. The new rules on a country's total agricultural support go beyond the general GATT rules in imposing some restraint, with the total value of internal and border support to be reduced by 20% from its level in 1986-88. But the disciplines on domestic support are weakened by exemptions such as those for direct payments linked to land retire- ment programs in industrial countries and general programs of assis- tance to encourage rural development in developing countries. There is no requirement to reduce support for individual commodities, so assistance to some commodities may increase if reductions occur else- where. Minimum market access conditions were also introduced to provide specified levels of access at favorable tariff rates (tariff quotas); this was to ensure that market access would not be reduced even if the tariffs introduced following the Round were more restrictive than the measures previously applying. There is, of course, a risk that such measures might generate a con- stituency in support of continuing the agricultural protection which makes the tariff quotas valuable. Many of these tariff quotas have been used to replace the market access previously provided under preference schemes such as the European Union's arrangements for African, Caribbean, and Pacific countries. In only a few cases, such as Japanese rice, do these arrangements provide additional market access relative to that already ruling before the completion of the Round. But the bindings are dirty The agriculture agreement was less impressive than the announced cuts would suggest because base levels for these cuts were frequently inflated in three ways: the choice of base period, the methods used to measure the protection existing before the Round, and the use of "ceiling' bind- ings in developing countries. For industrial countries, the agreed tariff rates frequently incorporate two steps up from the average rates prevailing before the Round. The first step is from the choice of 1986-88 as the base years for which to calculate the degree of protection permitted. These were years of low 16 THE tlRtiG(IAY ROUND: WIDENING AND DEEPENING TIHE WORLD TRADING SYSIEM world prices and generally high rates of agricultural protection. The sec- ond step is from the way the tariff equivalents of nontariff barriers were calculated, which frequently placed tariffs well above base levels of pro- tection-so-called dirty tariffication. The agreed reductions in protection are from these high levels, not from actual levels in 1994 or from his- torical averages (figure 6). Developing countries were allowed to convert unbound tariffs into "ceiling bindings" unrelated to previous rates of protection, and many countries used this freedom to set rates well above those that previously applied. In developing countries taking this option, a pattern of "one step up and one step down" is evident, with the final tariff bindings fre- quently above the average rates of protection prevailing before the Round. The effect for industrial and developing countries is broadly the same: the tariff bindings resulting from the Round are now frequent- ly higher than the average rates of protection before the implementa- tion of the Round. If countries choose to use their freedom to set high tariffs, the costs to their economies could be very large. Even if they do not, the discretion they have for setting tariffs below the tariff bind- ings reduces the gains from increased transparency of the trade regime. In the European Union dirty tariffication-that is, tariff bindings higher than the protection in 1994-occurred in six of seven major product groups. And for four of these groups, even the final bound rates (after the reductions agreed in the Round) are above the 1986-88 (exceedingly high) levels of protection. The largest differences between the agreed rates for 1995 and those in the base period are for rice (207 percentage points), milk (112), butter (72), sugar (64), and wheat (64). The United States exhibits dirty tariffication for five of nine prod- ucts, although to a much milder degree, while Japan does so on none, having offered tariff equivalents well below 1986-88 levels. Many of Japan's levels of agricultural protection are still huge after the Round, Figure 6. Agricultural protection: Two examples (percent) EU wheat: Mexico wheat: two steps up and one step down one step up and one step down 180 80 160 70 140 60 1 20 50 100 80 40 60 30 40 20 20 1 0 0 ol0 79-93 86-88 LR base UR 2000 82-93 UR base UR final Source: Ingco. FEW REDLICFIONS IN AGRICULlIRE 17 however, with wheat having 152% protection, coarse grains 149%, and sugar 58%. The use of ceiling bindings has greatly attenuated the agreed reduc- tions in agricultural protection in developing countries. For wheat, a major importable in many developing countries, agreed tariff offers exceed historical tariff equivalents in India (by 98%), Pakistan (171%), and Morocco (210%). Several rice-importing countries introduced bind- ings above current levels of protection, notably in Bangladesh, Colombia, and Mexico, and the same occurred in coarse grains in Colombia, Indonesia, Jamaica, the Republic of Korea, Mexico, and Morocco. Bangladesh offered a uniform ceiling binding of 200%; Pakistan a range from 100-150%; in Sub-Saharan Africa, Nigeria and Zimbabwe bound most rates at 150%. Not all developing countries missed this opportunity to discipline their agricultural policies, however. Some developing countries bound their agricultural protection at fairly modest rates: for example, Bolivia 40%, Honduras 350,', Madagascar 30%, and Suriname 20% (table 3). The export subsidy disciplines require that industrial countries reduce subsidies on each commodity by 36%,/o in nominal terms over six vears, and the volume of subsidized exports by 21%. Developing countries must reduce their subsidies by two-thirds of these amounts over ten years, while least industrial countries are exempt from the reductions. These disciplines seem likely to be more effective than the restrictions on import protection. Since the agreement introduces limits on the value of export subsidies and the volume of subsidized exports, and since it does not require estimation of tariff equivalents or allow ceiling bindings, there was less opportunity for the types of slippage that occurred under the tariffication process. The agreed reduction of 20% in total domestic support provided by industrial countries is from very high base levels, and with many excep- tions that weaken the discipline imposed. This may nevertheless encour- age a shift away from production subsidies to direct income support not linked to production, with lower internal prices and thus lower export subsidy requirements. The slippage in the agriculture agreement-from setting high tariff rates and from weak disciplines on domestic support-reduces the gains generated by the Round. An estimate by the OECD/World Bank team (Goldin and van der Mensbrugghe) puts the gains from the Round at more than two-and-a-half times greater ($137 billion, com- pared with $48 billion) if the agreed cuts in agricultural protection had been from the levels prevailing before the Round, rather than from the inflated levels resulting from the choice of a high base peri- od, and if the cuts in domestic support had not been weakened by exemptions. Table 3. Border protection for selected agricultural goods (percent) Wheat Sugar cane Milk Meat Post-UR, Post-UR, Post-UR, Post-UR, Pre-UR bouitnd Pre-UR bound Pre-UR bounld Pre-UR bouind actual base final actual base final actual base final actutal base final 1986-88 1995 2000 1986-88 1995 2000 1986-88 1995 2000 1986-88 1995 2000 European Unlioni 106 170 82 234 297 152 177 289 178 96 96 76 United States 20 6 4 131 197 91 132 144 93 3 31 26 Japan 651 240 152 184 126 58 501 489 326 87 93 50 Brazil 98 45 45 na 55 35 -21 53 46 -52 25 25 Mexico -1 74 67 -58 173 156 -3 66 54 42 50 45 Other Latin America -17 34 34 41 85 80 na 75 69 na 51 47 Nigeriaa 249 - 150 32 - 150 na - 150 na - 150 South Africa 10 75 47 98 124 105 30 189 89 40 150 81 Other Sub-Saharan Africaa 10 - 133 44 - 100 na - 100 na - 100 Maghreb 36 196 151 64 220 165 50 113 87 na 303 213 Mediterranean 25 169 152 -13 107 93 na 166 150 na 166 149 Note: Negative rates of protection result where exports are taxed or imports are sLubsidized, either directly or through state trading. a. Nigeria and other Sub-Saharan Africa countries were allowed, if they wished, to bilid only il the final period. Souirce: Ingco. I-EW REDUCTIONS IN ACRICLIIIRI[ 19 Terms of trade losses? Not many The limited agricultural liberalization under the Ilruguay Round implies that the resulting terms of trade changes are likely to be much smaller than previously expected for developing countries. The world prices of most major agricultural commodities are expected to rise by less than 2% relative to the average price of OECD exports of manufactures. The Round should reduce the prices of some commodities undergoing rela- tively little liberalization, such as oilseeds and tropical beverages, rela- tive to the manufactures export price-a reasonable outcome given the substantial liberalization in manufactures trade. Although the prices of some commodities, such as sugar and beef, are projected to increase substantially during 1992-2002, the Round is only a small contributing factor (figure 7). Figure 7. The Uruguay Round will have only minor impacts on world food prices (percent change) Price changes 1992-2002 60 * Without the Round 50 With the Round 40 30 20 10 -10 -20 -30 -40 m a)~ 0 a) 0 Note The data for wool and for !ce without the Round are too slight to show up In the figure Source World Bank commodity projections, Goldiri and van der Mensbrugghe For services, rules but few reductions in protection The basic principles of the GATS are similar to those of the GATT. Both are based on fundamental goals of national treatment (treating imports and domestic supplies equally inside a national market) and most- favored-nation (MFN) treatment (nondiscrimination between exporters). In addition, GATS shares with the GATT a prohibition on the use of quantitative restrictions. It goes beyond the GATT in including specific commitments on market access. The stakes involved in a comprehensive liberalization of trade in ser- vices are very high-potentially the same order of magnitude as the gains from liberalizing merchandise trade. And with services trade grow- ing considerably faster, and the remaining protection in the manufac- tures sector coming down, the gains from liberalizing services trade can only become more important. Progress in the rules The GATS breaks new ground relative to the GAIT by disaggregating market access commitments across four basic modes for international supply: cross-border supply not requiring the movement of the provider or the consumer (the simple export/import analogy of goods trade); trade involving international movement of the consumer (such as tourism); trade involving temporary international movement of suppli- ers (such as consultancy services); and trade involving provision of ser- vices through commercial presence. Because services trade is typically restricted by regulations rather than by tariffs, negotiators proceeded on the basis of all-or-nothing commit- ments to liberalize services trade for particular sectors, modes of supply, and protective instruments. In contrast to merchandise trade, no quan- titative measure of trade restrictiveness comparable to a tariff rate has been developed to allow bargaining over degrees of liberalization for services sectors. GATS negotiations revolved around which sectors were to be included in the liberalized set. Each country's GATS schedule gives a positive list specifying the sectors and modes of delivery in which the national treatment and market access 20 FOR SERVICES, RlJLES BllT FEW RE[)DUIONS IN PROTECIlON 21 principles will be applied. Within the sectors and modes of supply listed in a schedule, a negative list approach is used to specify trade-restricting measures in violation of national treatment and market access principles that may be maintained-that is, unless a measure is listed, it may not be used. A negative list approach is also used for the MFN principle-that is, MFN applies to all services except those specifically exempted. The MFN principle was intended to be a general commitment but, in the end, more than 60 countries listed exemptions, primarily in audio- visual services, financial services, and transportation-possibly, some argue, to provide leverage for future negotiations. The exemptions are intended to last no longer than ten years and will be subject to renego- tiation in future trade liberalizing rounds. Market access commitments apply only to listed services, and market access is not even explicitly defined. Instead, certain barriers to market access are prohibited: limitations on the number of service suppliers allowed, the value of transactions or assets, the total quantity of service output, the number of people who may be employed, the type of legal entity through which a service is provided, and the maximum foreign share or the value of foreign investment in a supplier. Unfortunately, possibly even fatally, measures equivalent in effect to the listed measures are not proscribed. The national treatment condition is designed to ensure that foreign suppliers are treated no less favorably than domestic suppliers, except in ways specified in the schedules. But national treatment does not require identical treatment of domestic and foreign firms-since identical treat- ment (such as a requirement that insurance firms hold reserves locally) may actually worsen the conditions of competition for foreign firms. The GATS includes other provisions to facilitate trade in services, although some of these apply only to the sectors specifically listed in the agreement. The agreement aims to provide greater transparency by requiring all members to establish inquiry points for information on laws, regulations, and administrative practices. It also requires that members establish disciplines to ensure that qualification requirements, technical standards, and licensing procedures are based on objective and transparent criteria, and do not constitute a restriction on supply. Procedures for recognition of licenses, education, and experience grant- ed by a particular member must be transparent and reasonable. Members are also required to refrain from applying restrictions on inter- national payments relating to their specific commitments. The GATS contains "safeguard" provisions that roughly parallel the provisions under the GATT for merchandise trade. These include balance of payments provisions, exceptions on grounds such as health, safety, security, or morals, and modifications of schedules. Negotiations on emergency safeguards are foreshadowed in the agreement, but no provi- sion is made for antidumping or countervailing duties. The dispute set- tlement body of the WTO is responsible for dispute resolution under the 22 1HE LIRUCLI(A ROtUND: WIDENING; AND DEEPENSINC THE WORI D TRPADINC. SYSTEM GATS as well as GATT and TRIPs. Where agreement cannot be reached, retaliation or cross-retaliation between goods and services is permitted. This provision may prove to be important-the markedly greater enthu- siasm for the GATS in industrial countries may balance developing countries' greater enthusiasm for the abolition of the MFA. Almost no immediate reduction in protection The GATS approach of listing sectors and measures does not allow cal- culation of a simple summary measure of liberalization corresponding to an average tariff rate. Since the CATS covers 155 sectors and 4 modes of supply, there are 620 sector-mode supply combinations on which offers could be made (table 4). Industrial countries listed just under half their service trade categories in their market access commitments, including more than a quarter for which i-narket access is completely unimpeded. When sectors with mar- ket access commitments subject to some policy exemptions are counted with a weight of one-half, the measure of guaranteed market access is 36%. Developing countries were more reluctant than industrial countries to make offers, with only 16.2% of sectors in developing countries listed in any fashion, and only 6.9% listed with no policy exemptions. Llsing pol- icy weights, the developing countries listed 10.3% of their sectors. Many developing countries made virtually no use of the opportunity to com- mit themselves to an open trading regime for services: four countries listed only one of the 155 service sectors (the minimum required for membership of the WTO) and five others listed only two. Importantly, however, the large developing economies (those with GDP above $40 billion) proved more willing to make GAT'S commitments, listing almost 40% of total sectors, including 15% with no policy restrictions. A major weakness of the initial CATS outcome was that it resulted in very few commitments that require the elimination of current restrictive measures. Countries generally listed their current regulations and restric- tions, committing at best to only a "standstill" in which the introduction Table 4. Sectoral coverage ratios of GATS market access commitments (percentage of maximum possible listing) Industrial Developing Large developinig countr-ies couritries countries Sector-modes committed with no restrictions 27.1 7.3 14.9 Weighted coverage index 35.9 10.3 22.9 Total listed coverage 47.3 16.2 38.6 Nore: Coverage ratios are not weighted by sector size. Souirce: Hoekman. FOR SERVICES, RULES BtII FEW REDUCTiONS IN PROTECTION 23 of new measures has been ruled out. While this has value, given the like- lihood that some of the proscribed measures would have been intro- duced in the absence of the GATS, that value is limited, and the benefi- cial effect is further reduced by the restricted range of sectors and modes of supply offered by many members, and particularly by developing countries. The fact that the GATS imposes a standstill only on the sectors and modes of supply currently listed, and then subject only to listed policy exemptions, is a potential problem. Restrictions can be introduced- perhaps as "negotiating chips" for future negotiations-in any sector not listed. This is a (perhaps unforeseen) consequence of the use of the pos- itive-list approach to the enumeration of service sectors. If a negative-list approach had been used, it would not have been possible to introduce new protection instruments to unlisted sectors. The ability to specify different restrictions for different modes of sup- ply raises the risk that incentives will be created for service sectors to relocate to avoid restrictions. If, for instance, national treatment is allowed for the supply of a service through the establishment of a local entity, but not for cross-border supply from a foreign establishment, incentives may be powerful for trade barrier-hopping investment. Trade-related intellectual property rights-TRIPs The TRIPs agreement means that developing countries will no longer be able to free ride on other countries' intellectual property rights. While this will impose some costs in the short run, it is likely to stimulate investment in knowledge-based industries in both developing and industrial countries. The agreement applies the basic principles of national treatment and most-favored-nation treatment to intellectual property rights. But it goes far beyond border issues and thus needed a considerably different archi- tecture than either the GATT or the GATS. The agreement covers such intellectual property rights as patents, trademarks, copyright, industrial designs, and geographical indications. It provides for minimum stan- dards of protection, unlike the World Intellectual Property Organization (WIPO) conventions which focused on ensuring the implementation of national legislation. The TRIPs agreement also increases the country cov- erage of such conventions from around 90 countries to all 123 signato- ries of the Uruguay Round's Final Act. While many of the additional sig- natories are small, such important economies as Hong Kong, Indonesia, Singapore, and Thailand are now under multilateral disciplines-and TRIPs will ensure the addition of such other major economies as China and Russia when they join the WTO. In some areas, such as copyright, the agreement broadly applies the principles of the relevant agreement, in this case the Berne Convention. In other areas the agreement provides for higher stan- dards than were previously required. In patents, for example, it extends protection to all areas of technology, including pharmaceuticals, requires a life of at least 20 years for patents, restricts the scope for compulsory licensing of patent rights, and strengthens the protection of patent rights. Industrial countries have only one year to implement the agreement. Developing countries have an additional four years to provide the basic requirements and a further five years' delay in introducing product patents in areas not protectedl at the date of the agreement application. Least industrial countries are allowed 11 years before being required to provide full protection of intellectual property rights. 24 TRADE-RELATED INTELLECIlIAL PROPERTY RIGHTS-TRIPs 25 The economic effects of intellectual property rights involve a tradeoff between the incentives they create for innovation and the inefficiencies that arise from granting a monopoly over the use of the patented good or technique. Intellectual property rights have become increasingly important with the growth in production and trade of high-technology goods. Moreover, protection standards for intellectual property rights have progressively become stronger in industrial countries, suggesting a widespread assessment that higher standards are economically desir- able. Overall, developing countries as a group will likely suffer some short- term losses from the TRIPs agreement, losses mitigated by the long phase-in period allowed under the Round. In the long run, however, these countries should gain from accelerated rates of technical change and the development of their own knowledge-based industries. Legalized backsliding The GATT includes several mechanisms through which a country can suspend the market access it has previously granted, including safe- guards, antidtimping actions, and countervailing duties. Safeguards-not so safe Before the Round, GATT safeguards could be applied only on a most- favored-nation basis (that is, to all countries, not one or some) and were subject to such conditions as a requirement to notify the GATT Secretariat and to consult with principal suppliers. When safeguards were introduced, the principal suppliers had a right to retaliate if they felt they had not been adequately compensated. These conditions proved to be more stringent than those applying to other forms of dis- cretionary protection, particularly antidumping. A conscious effort was made in the Round to make safeguards more usable in the hope that this would reduce the use of alternative discre- tionary protection measures such as antidumping. One major change is to allow discriminatory application of safeguards. Another is to remove the exporting country's right to compensation during the first three years. While countries are encouraged to use nondiscriminatory and price-based measures, quantitative restrictions are allowed subject to several constraints. A time limit of four years was introduced, with only one extension of four years allowed, except that no extension is per- missible for discriminatory measures. Progressive liberalization is required on any measure lasting more than one year. Safeguards cannot be reintroduced within two years or the life of the previous measure, whichever is longer. Despite these constraints, there is a danger that safeguards could become a major source of protection, given the pres- sure created by the abolition of voluntary export restraints and the fact that discriminatory quantitative safeguards are permitted and can be administered by the exporting country in the same manner that volun- tary export restraints were previously. 26 LEGALIZED BACKSLIDING 27 Antidumping-more is less, less more The GAIT does not define dumping, but the term is most commonly associated with exporting goods at a price below their selling price in the home country. Were a large producer to use discriminatory pricing to drive competitors out of the market, there would be grounds for con- cern, but in practice such predatory dumping is extremely rare. Antidumping actions themselves have become a problem because the procedures used to determine antidumping duties tend to define nor- mal business practices as dumping, to overstate dumping margins, and to create trade-inhibiting uncertainty. Why the popularity of antidumping actions? They allow discrimina- tory action. The injury test tends to be weaker than that applied in safe- guard actions. The rhetoric of foreign unfairness helps build a case for protection. And the threat of antidumping action has frequently helped importers gain exporter acquiescence to voluntary export restraints. The llruguay Round agreement follows the approach of permitting antidumping actions and specifying the procedures under which they can be undertaken. Countries taking antidumping actions will need to publish information on the procedures adopted. The procedures must be transparent, and interested parties must be given the opportunity to present their views. Fxhortations are made against statistically invalid procedures-such as excluding sales at below estimated average costs in the home market and comparing the average price in the home market with individual sales in the export market. But based on past experience, such procedural requirements will not significantly restrain the biases inherent in current antidumping practice. Subsidies and countervailing duties-still lurking Before the tIruguay Round, the GATT provisions on subsidies and coun- tervailing duties contained many inconsistencies. Export subsidies were not explicitly defined and there was no consistency between the defini- tions of subsidies and measures that could be subject to countervailing duties. Export subsidies on agricultural goods were banned only if they led to achieving "more than an equitable" market share. Explicitly defining export subsidies, the Round's traffic-light approach categorizes subsidies as prohibited, actionable, and nonactionable. Prohibited subsidies are contingent on export performance or on using domestic rather than imported inputs. Nonactionable subsidies include a range of subsidies for research, for developing disadvantaged regions, and for meeting environmental requirements. Actionable subsidies are the rest, if they have adverse effects on other countries. WFO members may take action against other countries' prohibited or actionable subsidies either through the consultation and dispute settle- ment procedures or, after an investigation, through the imposition of 28 THE URUGUAY ROUND: WIDENING AND DEEPENING THE WORLD TRADING SYSTEM countervailing duties. While both avenues can be followed, only one form of relief may be introduced. In industrial countries, prohibited subsidies are to be phased out over three years. In developing countries, longer phase-outs are allowed. Subsidies conditional on the use of domestic inputs have a grace period of five years in developing countries and eight years in least industrial coun- tries. Subsidies conditional on exports have a grace period of eight years in developing countries, except for least industrial countries and countries with GNP per capita of less than $1,000, for which no reduction is required. Developing countries that reach export competitiveness-3.25% of world trade in a product-must phase out their export subsidies on that product within two years. The enhancements to the rules on export subsidies and countervailing duties for merchandise trade are a clear improvement. Agricultural sub- sidies are now subject to at least some discipline. The procedures for dealing with subsidies on industrial products have been clarified in a way that makes it much more likely that they will be effectively disci- plined. The restrictions on the use of subsidies by developing countries are an important innovation, even though they are subject to a long phase-in period. But the rules still provide considerable latitude for eco- nomically damaging subsidies. Trade-related investment measures- not investment measures Trade-related investment measures (TRIMs) distort trade by imposing performance requirements on multinational firms. Intended originally to reduce a wider range of these distortions, the final TRIMs agreement deals only with a narrow set of measures that directly affect trade in goods-not investment policies generally. The agreement outlaws local content requirements and trade and foreign-exchange balancing require- ments on the grounds that they are inconsistent with the national treat- ment principle of the GATT. It similarly outlaws restrictions that limit the imports of foreign firms and constrain their exports. The agreement gives industrial countries two years to comply, developing countries five, and least developed countries seven. The agreement is modest in that it attempts no more than to enforce existing GATT disciplines. But if it suc- ceeds in this, it must be counted as a significant improvement. Although far from a comprehensive investment agreement, TRIMs may provide the basis for negotiating such an agreement, desirable for several reasons. It would lock in the advantages of the widespread liber- alization of investment regimes in recent years and restrain the poten- tially costly international competition in such investment incentives as tax holidays. It would also remove the current asymmetry of having the WTO agreement provide rules for trade in both goods and services but for investment only in services. Developing countries-into the fray In the seven previous GATT rounds of multilateral trade negotiations, developing countries focused most of their attention on obtaining pref- erential access to industrial country markets; few of them participated actively in the core business of the negotiations-the exchange of mar- ket access concessions. By contrast, many developing countries were very active participants in the Uruguay Round, both individually and in coalitions with industrial countries. Not only did developing countries participate in formulating new rules for the world trading system, they also made important market access offers in the conventional area of tariff protection on manufactures trade and in areas that were new to the trade liberalizing process, such as trade in services and trade in agricultural products. Many developing countries had undertaken substantial liberalization outside the Round after the mid-1980s, and their commitments at the end of the Round allowed them to lock in at least part of their gains from this liberalization. While important, this is only a first step in the developing countries' journey to full participation in the global economy. Much remains to be done to reduce protection in developing countries and to improve the rules-oriented trading system in ways that better protect the interests of the smaller players in world trade. 29 References This report summarizes the findings of the World Bank Conference on the Uruguay Round and the Developing Economies, held January 26-27, 1995. The conference papers listed here are available in World Bank Discussion Paper 307, 77Te Uruguay Round and the Developing Economies. Revised versions are forthcoming in a volume to be published by Cambridge lIniversity Press. Abreu, M. "Trade in Manufactures: the Outcome of The Uruguay Round and Developing Country Interests." Anderson, K. "The Entwining of Trade Policy with Environmental and Labor Standards." Blackhurst, R., A. Enders, and J. Francois. "The Uruguay Round and Market Access: Opportunities and Challenges for Developing Countries." Braga, C. A. P. "Trade-Related Intellectual Property Issues: The Uruguay Round Agreement and its Economic Implications." Brown, D. K., A. V. Deardorff, A. K. Fox, and R. M. Stern. "Computational Analysis of Goods and Services Liberalization in the Uruguay Round." Finger, J. M. "Legalized Backsliding: Safeguard Provisions in the GATT." Francois, J. F., B. McDonald, and H. Nordstrom. "Assessing the Uruguay Round." Francois, J. F and W. Martin. "Multilateral Trade Rules and the Expected Cost of Protection." Goldin, 1. and D. van der Mensbrugghe. "The Uruguay Round: An Assessment of Economywide and Agricultural Reforms." Harrison, G. W., T. F. Rutherford, and D. G. Tarr. "Quantifying the Uruguay Round." Harrold, P. "The Impact of the Uruguay Round on Africa: Much Ado about Nothing?" 30 REFERENCES 3 1 Hathaway, D. E. and M. D. Ingco. "Agricultural Liberalization and the lIruguay Round." Hertel, T., W. Martin, K. Yanagishima, and B. Dimaranan. "Liberalizing Manufactures Trade in a Changing World Economy." Hoekman, B. "Tentative First Steps: An Assessment of the Uruguay Round Agreement on Services." Hoekman, B. "Trade Laws and Institutions: Good Practices and the World Frade Organization." Ingco, M. "Agricultural Trade Liberalization in the Uruguay Round: One Step Forward, One Step Back?" Low, P. and A. Subramanian. "T'RIMs in the Uruguay Round: An Unfinished Business?" Whalley, J. "Developing Countries and System Strengthening in the Uruguay Round." ----------- ~ ~ ~ ~ ~ ~ ~ ~ - ~- -- -----~ - ---- ---