Mahoshada

This is being written while the outcome of the World Trade Organization (WTO) Ministerial meeting in Hong Kong remains uncertain. What is certain is that, as in a number of developing countries, there are a significant number of people in this country that view the WTO as a major impediment to economic growth and development. Many of these people see the WTO as a tool of multinational corporations and the rich countries to be used to exploit poor developing countries.

As noted, one of the main benefits of being in the WTO is sharing a common set of rules governing trade with the 148 other member countries. Sri Lanka’s exports should be able to compete with those from other countries on a level playing field. It also means that Sri Lanka should treat imports from other members equally and according to the rules. For example, member countries are committed to maintaining common, consistent customs procedures for determining the value of imports on which duties are calculated.

There is, however, one "rule" which has stood above all others – the principle of non-discrimination.

To reasonably assess the potential benefits of WTO membership, it is necessary to briefly look back to the original basis for setting up a global mechanism to help govern the rules of international trade. Following World War Two there was a strong desire to avoid a repeat of the trade wars that contributed so much to the Great Depression of the 1930s. So an international treaty was established – the General Agreement on Tariffs and Trade or the GATT. This group became the WTO in 1995.

The central pillar of the rules governing global trade was the principle of non-discrimination between member countries. With few exceptions, if trade concessions were given to one country, they had to be given to all other member countries on an equal basis. Being a member generally meant that you got the best possible access to the markets of other member countries. (That is why this was known as the Most Favoured Nation or MFN principle.) It was, of course, possible for member countries to discriminate against non-members; for example by imposing higher tariffs or maintaining import quotas.

But today the MFN non-discrimination principle, once the foundation of the system of global trading rules, is seriously damaged if not yet fully destroyed. There has been rapidly growing pressures for increasing discriminating among member countries in terms of providing market access. For example, within the WTO itself there are calls to provide differential market access for the least developed countries. Since Sri Lanka is not among the LDCs, such a move would tend to put this country’s exporters at a competitive disadvantage.

But the virtual abandonment of the MFN non-discrimination principle can also be seen in the enormous expansion of regional and bilateral trade agreements that have emerged in recent years. Sri Lanka already has free trade agreements with India and Pakistan while an agreement covering all SAARC countries is scheduled to come into effect in a few weeks. Preferential trade agreements have also been sought or implemented with the EU, the US, the BIMST-EC countries and Singapore, among others. In many respects, the proliferation of these agreements globally reflects a widespread dissatisfaction with WTO system.

Since the early 1950s, under the GATT/WTO there have been a series of negotiations aimed at reducing trade barriers among all members – the Doha Development Round now being discussed in Hong Kong is only the latest in this series. When the MFN non-discrimination principle was effectively in force, the benefits of being a member of the GATT/WTO were much more easily identifiable. Any reductions in trade barriers agreed during the negotiations were automatically available to all members. This was especially important for small countries with little or no economic clout and correspondingly limited opportunities for undertaking bilateral trade negotiations with many countries – such as Sri Lanka.

In a world without the MFN non-discrimination principle, there are still the benefits of being part of a common system of rules and dispute mechanism available to members. But without the assurance that market access will be on the best terms available, the value of these benefits are now a great deal less than they once were.

Perhaps the greatest potential cost associated with being a WTO member is the tendency for some countries to distort their trade policies in an attempt to gain advantage in the negotiating process. For example, there are countries that have kept tariff rates high in order to have something to give up in negotiations – despite the fact that keeping tariffs high has imposed substantial costs on their economies. But few countries would admit to such a ploy and these indirect costs are largely hidden and difficult to quantify.

The direct costs of being a member of the WTO are generally limited to the administrative and technical resources devoted to participating in the ongoing negotiation processes. Like many countries, Sri Lanka maintains a delegation based in the headquarters of the WTO in Geneva. There is also a department within the Ministry of Commerce that focuses primarily on WTO related matters. But technical and financial resources are scarce and using them on supporting the country’s WTO membership means that they cannot be used in other ways. Whether or not utilizing these human and financial resources in this way makes sense for the country is difficult to say. It should be noted, however, that it is not a requirement for member countries to maintain a permanent delegation in Geneva or to devote substantial staff to attend to WTO matters.

This author would argue that as a small country with a very limited domestic market, expanding international trade is essential if the economy is to grow and develop. It is certainly difficult to imagine how the government’s target of 8 percent growth can be achieved unless there a substantial boost in international trade. And expanding trade will require reducing barriers to imports at home and improving market access for exports abroad. Both are required. Efforts to reduce trade barriers should also be comprehensive and include agriculture, services as well as manufactured goods.

It is very much in the country’s interest to pursue any and all opportunities for increasing trade, including through the WTO. It would, however, be a mistake to expect that the WTO process will result in all of the trade policy reforms required to accelerate economic growth. It is slow, cumbersome and not fundamentally committed to the reforms required.

In addition, the government ought to aggressively pursue alternative channels for reducing trade barriers here and with existing and potential trading partners. Two regional agreements, SAFTA and BIMST-EC are moving forward and offer opportunities. Other bilateral agreements can also be developed. But this strategy will be effective only if the agreements entered into are consistent and fit within a larger, coherent framework.

However, the foundation on which any efforts to expand trade must be built is a commitment to substantially reduce trade barriers here. It is a grave mistake to think that it is possible to maintain high trade barriers against imports while improving access in markets elsewhere. This sort of mercantilist view of the world not only makes no economic sense, it does not work. Keeping tariffs and other import trade barriers high only ends up imposing what amounts to a hidden tax on exports, making it much difficult to compete in overseas markets.