06 Institutional issues and reform
To improve its effectiveness and legitimacy, the WTO needs to raise member compliance with notification requirements – and above all rethink ‘special and differential treatment’ of developing countries.
As previously mentioned, some of the structural and long-standing challenges for WTO governance have concerned the principles of consensus and a single undertaking. The move towards bilateral, regional and plurilateral agreements has offered ways to circumvent those challenges.
More recently, the US and others have raised concerns regarding institutional issues in two other areas: (1) transparency and notification; and (2) developing- country status.
Transparency and notification
One of the principal functions of the WTO, in addition to providing a forum for trade negotiations and for the settlement of disputes, is to monitor and implement agreements. In order to do this, the various WTO agreements contain transparency and notification requirements. However, compliance has been chronically low and late.78 In particular, the failure by many members to notify their trading partners (via the WTO) of subsidies has been a serious systemic problem for years. This lack of compliance not only undermines trust in the rules-based international trading system; it also has implications for future negotiations, as it becomes difficult to agree new rules and disciplines when there is uncertainty around compliance with existing ones.
To address these concerns, the Trump administration first issued a proposal on enhanced transparency in 2017.79 In November 2018 the US, together with four other WTO members (including the EU), submitted an updated and more comprehensive proposal on enhancing transparency and strengthening notification requirements.80
That updated proposal sets out a multi-pronged approach, including incentives for compliance and penalties for non-compliance. Among the key ideas are the following:
- WTO members experiencing difficulties in fulfilling their notification obligations are encouraged to request technical assistance and support for capacity-building.
- Measures to name and shame non-compliant WTO members should be introduced. Depending on the length of the notification delay, the suggested penalties range from the offending party being required to offer an explanation for the delay to being designated an inactive member of the WTO.
- Members are encouraged to provide counter-notifications (i.e. contesting the accuracy of another WTO member’s notification).
While the proposal takes into account the challenges that developing countries face in meeting transparency and notification requirements, it has been criticized for not adequately addressing capacity constraints and for its punitive dimension.81
The current focus on addressing the historically lax compliance with transparency and notification requirements is a very welcome step, as are the joint efforts by some WTO members. The US is actively engaged in this important area, with developments to date illustrating that members have not given up on the WTO.
Developing-country status
The second – and thornier – structural issue is that of developing-country status. There is no agreed definition of what constitutes a developing country at the WTO; countries can self-declare their status.82 Because developing countries receive so-called ‘special and differential treatment’ – consisting of more favourable terms or extra time to fulfil their commitments – it is not surprising that approximately two-thirds of WTO members claim developing-country status.83 While the status and special treatment are warranted for some countries, it is questionable whether some of the world’s largest economies legitimately qualify as developing countries. The fact that eight of the G20 countries84 – including China and India – currently claim developing-country status at the WTO is a major point of contention. Brazil and South Korea (as well as non-G20 members Singapore and Taiwan) announced in 2019 that they would no longer seek the special and differential treatment reserved for developing countries at the WTO.85
The effectiveness of special and differential treatment in supporting developing countries to trade and grow economically has been called into question.86 It is not clear that simply giving WTO countries a pass on some of their obligations is in fact helping them.
Because developing countries receive so-called ‘special and differential treatment’ – consisting of more favourable terms or extra time to fulfil their commitments – it is not surprising that approximately two-thirds of WTO members claim developing-country status.
The status and treatment of developing countries at the WTO have been controversial for years – with both the US and the EU raising concerns. According to the EU, ‘the demand for blanket flexibilities for two thirds of the WTO membership dilutes the call from those countries that have evident needs for development assistance, leads to much weaker ambition in negotiations and is used as a tool to block progress in, or even at the beginning of, negotiations’.87
Under President Obama, the US did not accept China’s claim to developing-country status. But under the Trump administration, the US has for the first time taken concrete steps to address the issue more broadly. In July 2019, the administration issued a memorandum ‘toward changing the WTO approach to developing-country status such that advanced economies can no longer avail themselves of unwarranted benefits despite abundant evidence of economic strength’.88
The Trump administration established a 90-day ultimatum for any country that improperly declares itself a developing country to drop the status or face adverse consequences. The memorandum also instructs the US Trade Representative to ‘publish on its website a list of all self-declared developing countries that USTR believes no longer deserve such treatment for purposes of WTO rules and negotiations’.89 It remains to be seen how this will be implemented.
The US has also proposed four categories of WTO member that should forgo special and differential treatment in current and future negotiations:90
- A member of (or a country that has begun the accession process to) the Organisation for Economic Co-operation and Development (OECD);
- A member of the G20;
- A WTO member that is classified as a ‘high-income’ country by the World Bank; or
- A WTO member that accounts for no less than 0.5 per cent of global merchandise trade.
More than 30 countries would fall into at least one of these categories.91
Many countries currently claiming developing-country status reject the US proposal. Led by China and India, a group of countries has defended the self-declaration of developing-country status as ‘a fundamental rule in the WTO, [that] has proven to be the most appropriate classification approach to the WTO’.92 They also stress that ‘per capita indicators must be given the top priority when assessing the development level of a country’.93
While clear and objective benchmarks would be a step in the right direction to limit WTO members’ excessive use of self-declared developing-country status, the US proposal has shortcomings. The G20 – a grouping whose own legitimacy has come under criticism for its arbitrary membership – does not serve as a helpful reference point for establishing development status within the WTO. Using a country’s share of global trade as a yardstick is also flawed because being a major importer or exporter can reflect the size of a country’s population as much as its level of development.
Given how contentious the issue of developing-country status is, combined with the difficulty of establishing and agreeing a set of criteria, a better path forward would be to create more flexibility in the system. Among the steps that could be taken are:
- Encouraging ‘graduation’. WTO members could decide to follow the examples of Brazil, Singapore, South Korea and Taiwan in forgoing special and differential treatment. However, this approach will only be amenable to a limited number of WTO members. It is unlikely that most developing countries will give up their status, or the benefits of special and differential treatment. China, for instance, has made it very clear that it will not relinquish its developing-country status.94
- Determining status on a case-by-case basis. Instead of an across-the-board approach, a slimmer version could consist of WTO members graduating to developed-country status using an agreement-by-agreement approach. The implementation of the WTO’s Trade Facilitation Agreement could serve as a useful blueprint.
- Increasing the use of plurilateral agreements. This could provide additional flexibility. Because the relevant commitments would only apply to countries ready to join a given plurilateral coalition, the negotiation format could accommodate differences between WTO members without relying on definitional criteria.95
- Individualizing commitments. Finally, drawing inspiration from the Paris Agreement on climate change, WTO members could consider an approach based on individualized implementation schedules and practicable commitments.96
These steps would not only improve the credibility of the WTO, but would also help to further integrate developing countries into the global trading system.
Overall, the approach to developing countries within the WTO needs to be turned on its head. Current arrangements promote the perception that the global trade rules hinder economic development, and that developing countries thus need an exemption to them. A reformed approach should instead reflect the reality that a rules-based international trade system helps development.
78 See the WTO Secretariat’s ‘Annual Report on Notifications’ provided to the Council for Trade in Goods. The most recent version is the following: World Trade Organization (2020), ‘Updating of the Listing of Notification Obligations and the Compliance therewith as Set out in Annex III of the Report of the Working Group on Notification Obligations and Procedures’, Revision 27, 11 February 2020, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/G/L/223R27.pdf&Open=True (accessed 14 Jul. 2020).
79 World Trade Organization (2017), ‘Procedures to enhance transparency and strengthen notification requirements under WTO Agreements’, Communication from the United States.
80 World Trade Organization (2018), ‘Procedures to enhance transparency and strengthen notification requirements under WTO Agreements’, Communication from Argentina, Costa Rica, the European Union, Japan, and the United States, 1 November 2018, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/Jobs/GC/204.pdf&Open=True (accessed 14 Jul. 2020). Other WTO members have since joined the efforts.
81 World Trade Organization (2018), ‘Goods Council considers revised transparency proposal to “reinvigorate” the WTO’, 12 and 13 November 2018, https://www.wto.org/english/news_e/news18_e/good_12nov18_e.htm (accessed 14 Jul. 2020).
82 World Trade Organization (undated), ‘Who are the developing countries in the WTO?’, https://www.wto.org/english/tratop_e/devel_e/d1who_e.htm (accessed 14 Jul. 2020). It should be noted, however, that other WTO members can challenge a member that uses the ‘special and differential treatment’ provisions available to developing countries. Also, a country can decide to forgo special and differential treatment, but still hold on to developing-country status.
83 World Trade Organization (undated), ‘Understanding the WTO: Developing Countries’, https://www.wto.org/english/thewto_e/whatis_e/tif_e/dev1_e.htm (accessed 14 Jul. 2020).
84 The eight countries are Argentina, China, India, Indonesia, Mexico, Saudi Arabia, South Africa and Turkey.
85 Baschuk, B. (2019), ‘Here’s What It Means to Be a WTO Developing Country’, Bloomberg, 14 November 2019, https://www.bloomberg.com/news/articles/2019-11-14/here-s-what-it-means-to-be-a-wto-developing-country-quicktake (accessed 14 Jul. 2020).
86 See, for example, Ornelas, E. (2016), ‘Special and Differential Treatment for Developing Countries’, CEP Discussion Papers No 1415, Centre for Economic Performance, London School of Economics and Political Science, March 2016, http://cep.lse.ac.uk/pubs/download/dp1415.pdf (accessed 14 Jul. 2020).
87 European Commission (2018), concept paper on ‘WTO modernisation’.
88 White House (2019), ‘Memorandum on Reforming Developing-Country Status in the World Trade Organization’, 26 July 2019, https://www.whitehouse.gov/presidential-actions/memorandum-reforming-developing-country-status-world-trade-organisation/ (accessed 14 Jul. 2020).
89 Ibid.
90 World Trade Organization (2019), ‘Draft General Council Decision, Procedures to Strengthen the Negotiation Function of the WTO’, 15 February 2019, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/GC/W764.pdf&Open=True (accessed 14 Jul. 2020).
91 González, A. (2019), ‘Bridging the Divide between Developed and Developing Countries in WTO Negotiations’, Trade and Investment Policy Watch, Peterson Institute for International Economics, 12 March 2019, https://www.piie.com/blogs/trade-investment-policy-watch/bridging-divide-between-developed-and-developing-countries-wto (accessed 14 Jul. 2020).
92 World Trade Organization (2019), ‘The Continued Relevance of Special and Differential Treatment in Favour of Developing Members to Promote Development and Ensure Inclusiveness’, Communication from China, India, South Africa, the Bolivarian Republic of Venezuela, Lao People’s Democratic Republic, Plurinational State of Bolivia, Kenya, Cuba, Central African Republic and Pakistan, 4 March 2019, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/GC/W765R2.pdf (accessed 14 Jul. 2020).
93 Ibid.
94 Lee, A. (2019), ‘China refuses to give up ‘developing country’ status at WTO despite US demands’, South China Morning Post, 6 April 2019, https://www.scmp.com/economy/china-economy/article/3004873/china-refuses-give-developing-country-status-wto-despite-us (accessed 14 Jul. 2020).
95 González (2019), ‘Bridging the Divide between Developed and Developing Countries in WTO Negotiations’.
96 Centre for International Governance Innovation (2019), CIGI Expert Consultation on WTO Reform, p. 27.