The declaration of the World Trade Organization's 10th ministerial conference in Nairobi provides a leeway for "new issues" to enter the multilateral trade agreements. Some of these issues have appeared in mega Free Trade Agreements like the Trans-Pacific Partnership Agreement. WTO debated bringing some of these under its ambit in its Singapore ministerial in 1996, only to jettison most of them by 2004. But trade and investment, trade and competition policy, transparency in government procurement, "labour standards" and provisions around state-owned enterprises could make their way to multilateral agreements after the Nairobi meeting, posing serious challenges to developing and least developed countries.
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The World Trade Organization’s (WTO) 10th ministerial conference (MC10) in Nairobi has the potential of becoming a watershed in multilateral trade negotiations, which have made very slow progress since the initiation of the Doha Development Round in November 2001. The Nairobi Ministerial Declaration of 19 December 2015 notes that “less progress has been made in Agriculture and other central components of the WTO’s negotiating agenda, namely, NAMA [Non-Agricultural Market Access], Services, Rules and Development.” The declaration also points out that “while we concur that officials should prioritize work where results have not yet been achieved, some wish to identify and discuss other issues for negotiation.” This brings to the fore the possibility of “new issues” entering the multilateral negotiations, though all members have to agree to their inclusion.
It, therefore, becomes important to identify and analyse the new issues which may enter the multilateral negotiations. It is also important to assess their likely legal and economic implications for the developing countries as well as least developed countries (LDCs) and small states. Although detailed discussions on the implications of these issues are beyond the scope of this article, it raises some questions in the hope that the queries may help countries assess the opportunities or challenges associated with the new issues.
The Likely Issues
Many of the new issues currently being discussed by trade experts as likely candidates for the multilateral negotiations are actually not so new. Discussions on them began in the mid-1990s. At the ministerial conference in Singapore in December 1996, four new issues—trade and investment, trade and competition policy, transparency in government procurement, and trade facilitation—were introduced to the WTO agenda. They came to be known as the Singapore issues.
In 1997, WTO members were informed that the agency had begun a study on “new issues.”1 The working groups on the relationship between trade and investment and trade and competition policy held their first meetings in June and July 1997, respectively. On 21 July that year, the Working Group on Transparency in Government Procurement completed its second session. The Council for Trade in Goods held discussions on trade facilitation around the same time. While three of the four Singapore issues were dropped in the 2004 July package, the fourth issue was sealed with the trade facilitation agreement at the Bali Ministerial Meeting in 2013.
Some of the new issues that are currently being discussed may have their origins in the Singapore issues. Investment issues, competition policy, and transparency in government procurement are some of the new issues in currency. They are already in place in different trade agreements, especially in some of the Economic Partnership Agreements (EPAs), mega Free Trade Agreements (FTAS) like Trans-Pacific Partnership Agreement (TPPA) and Transatlantic Trade and Investment Partnership (TTIP), Regional Comprehensive Economic Partnership (RCEP), plurilateral agreements like Government Procurement Agreement (GPA), and regional agreements like ASEAN Comprehensive Investment Agreement (ACIA). However, bringing these issues into multilateral negotiations may pose opportunities/challenges that may vary from country to country. Some issues may also be added to the list of Singapore issues, especially those which, are now part of some of the mega FTAs, including TPPA. Some such issues are those pertaining to labour standards, state-owned enterprises (SoES), environment, and electronic commerce. This article discusses four of the new potential issues: trade and investment, transparency in government procurement, SoES, and labour standards.
Trade and Investment
A contentious “new issue” which may enter the multilateral negotiations is trade and investment. While the multilateral negotiations of 2004 rejected this issue, an investment chapter has appeared in many trade agreements and exclusive investment treaties have been signed bilaterally as well as regionally. Trade agreements which give cover investment issues extensively include the 2012 US Model Bilateral Investment Treaty (US Model Treaty), ACIA 2009, TPPA and TTIP. There are three provisions around investment issues that need to be highlighted. These are:
Coverage of Investment: For many countries which want to encourage foreign direct investments (FDI) agreements are a way of assuring a stable environment to foreign firms. However, the definition of “investment” can go much beyond FDI. The US Model Treaty, ACIA, TPPA and TTIP provide a broad asset-based definition of investment where the term means every kind of asset, owned or controlled, by an investor, including but not limited to:
(i) movable and immovable property and other property rights such as mortgages, liens or pledges; (ii) shares, stocks, bonds and debentures; intellectual property rights; (iii) claims to money or to any contractual performance related to a business and having financial value; (iv) rights under contracts, including turnkey, construction, management, production or revenue-sharing contracts; and (v) business concessions required to conduct economic activities and having financial value conferred by law or under a contract, including any concessions to search, cultivate, extract or exploit natural resources.
An important implication of such extensive coverage of investment would imply that the provisions for investment protection such as national treatment, most favoured nations treatment, and minimum standards of treatment would apply to all the above kinds of investments, except those listed in non-conforming measures in the annexes. These could also extend to both pre- and post-establishment phases, as in the US Model Treaty and TPPA.
Performance Requirements: Performance requirements are mandatory conditions that investors need to perform, either as a precondition of entry into a country or to receive a specific incentive. This has been an FDI-development policy tool used by developed as well as developing countries. Commonly used performance requirements are export targets, transfer of technology and local content requirements. However, US Model Treaty as well as TPPA have a long list of prohibited performance requirements which go beyond what is included in WTO Agreement on Trade-Related Investment Measures (TRIMS). Should investment issues be included in multilateral negotiations, there is a possibility that the list of prohibited performance requirements may expand beyond those in the TRIMS. This would imply that countries will be prohibited from relating investments of any kind to performance targets like exports, domestic content, linking volume and value of imports to exports, domestic sales and transfer of technology/knowledge locally.
Investor–State Dispute Settlement: Investor–State Dispute Settlement (ISDS) is one of the most controversial provisions of investment treaties. ISDS allows an investor to directly sue the state for violation of any of the principles of an investment treaty. The process also involves setting up of an arbitration tribunal outside the control of any government, which then decides on the specific aspects of the case. Investors directly take their case to this panel rather than the courts in the host country. With weaker legal and institutional frameworks and wide interpretations of investment treaty provisions this could open the floodgates of litigations for developing countries and make policymaking more complex. Further, developing countries sometimes lack the data and skills to determine the quantitative impact of activities of transnational corporations on their local economy. Defending cases can therefore be quite challenging.
ISDS is a novel creation of investment treaties and arguably one of the strongest tools for foreign investors to manage political risk. However, it may expose governments to huge claims from multinationals outside their judicial systems and in some cases may also restrict them from introducing new laws and regulations for obtaining social objectives.
Countries which rely heavily on foreign investments and have strong legal and institutional frameworks as well as capacity to fight legal disputes, but are struggling to improve their domestic investment regimes, can benefit from these tightened investment provisions. One of the challenges that most developing countries face is that, given their institutional frameworks and resources, these investment rules could be fairly difficult to implement. Mere adoption of rules without implementation can in fact result in increasing the vulnerability of the developing countries to international disputes and severely restrict their policy space in the area of investments, especially with respect to FDI.
Government Procurement
Governments are one of the largest buyers in the domestic market and procure around 30%–40% of GDP in developing countries. Government procurement has been traditionally used as a development policy tool by the developed as well as developing countries, especially to encourage small and medium enterprises (SMEs). Incentives provided to outfits who supply to the government are amongst the ways through which domestic investments are channelised in specific directions and certain targeted industries given a boost. However, in many countries lack of transparency in government procurement has been identified as a major cause of corruption.
In 1996, the plurilateral GPA came into force in the WTO. The agreement was seen as an attempt to increase transparency in government procurement as well as a way of providing both domestic as well as foreign firms equal access to a growing market. Some of the benefits of acceding to GPA as highlighted by studies are: competition resulting from the agreement can lead to a better utilisation of taxpayer’s money as the goods and supplies can be sourced from more efficient producers at lower costs; GPA may improve the market access for domestic producers by making them eligible to export to other countries’ government procurement market; the transparency requirements reduce uncertainty for potential bidders (both domestic and foreign), which may encourage them to compete for government contracts and lowers prices paid by the state; transparency requirements control “corruption” and ensure accountability.
The costs associated in acceding to the GPA are mainly threefold. First, switching over from the existing procurement regime to one that is compliant with multilateral obligations would involve new costs. This would include costs of putting into place a system for supplier registration, bid challenge procedures and disclosure of tender results. Finger and Schuler (2001) estimated that the implementation cost of some of the WTO agreements was around $150 million for each country. For many LDCs, this would be more than a full year’s development budget. Second, complying with obligations related to compiling and reporting statistics on government procurement could entail huge costs. Third, this could result in an adverse impact on domestic industry if the reciprocal market access given is large. This may be more acutely felt by SMEs which may not be in a position to compete with big foreign producers.
Further, government procurement has been used as a policy tool for:
(i) National security, especially in case of defence-related procurement; (ii) redistributive goals, for example, higher public procurement from domestic entities through local content requirements;
(iii) industrial and regional development which could mean encouraging procurement from backward regions; (iv) promoting SMEs; and (v) supporting SOEs.
Government procurement is increasingly featuring in trade agreements. Thirteen of the 24 European Union (EU) FTAs inked since 2000 have a separate public procurement provision. The major differences in the provisions around government procurement in different trade agreements come from: coverage of entity (central government entity, sub-central government entity and other entities); coverage of goods and services; thresholds and set asides.
While construction has been excluded in many bilateral and regional GPAs, some mega FTAs like TPPA include construction.
Coverage of Entity and Thresholds: In most trade agreements only central government entities are included; however recent mega FTAs like TPPA include sub-central government entities as well. It is important to note that there can be vast differences in the share of central government entity in total public procurement across countries. For example, central-level procurement ranges from 80% in New Zealand to a measly 8% in Belgium. Sub-central public authorities represent 87% of the public procurement expenditures in Germany and Canada and 86% in Japan (Cernat and Dimitrova 2015). In TPPA, sub-central government entities of some members, including the US, are not covered. However, the final provision in Chapter 15 reinforces the possibility of holding negotiations and requires the parties to commence negotiation with a view to achieving expanded coverage, including sub-central coverage, no later than three years after the agreement coming into force. Further, although the threshold for central government procurement are higher for Malaysia, Vietnam and Brunei Darussalam in goods, services and construction services, these countries are required to equalise their thresholds to that of developed countries after their adjustment period (five years in case of Brunei Darussalam, eight to 10 years for Malaysia in goods and services and five to 10 years in case of Vietnam).
It is interesting to note that very few developing countries are members of WTO GPA; most of the developed countries in TPPA are already members of WTO GPA. Canada, Japan and the US get extended market access and TPPA does not require significant changes to their procurement measures and practices as the two largely comply with its requirements.
Set-asides: GPA includes a provision for set-asides; non-discrimination rules do not apply to some of the procurement made in the member countries. Such provisions can be applied on the basis of either the total value of procurement to which non-discrimination rules will not apply or as a percentage of the total value of procurement. While set-asides do provide some space for fulfilling social objectives of the procurement, these have to be negotiated. TPPA allows Australia, Canada and the US some set-asides. The US has chosen to exclude a number of industries, including procurement of any agricultural good made in furtherance of an agricultural support programme. Australia and the US have also negotiated set-asides for SMEs. It is to be noted that the definition of SMEs differs and large firms in developing countries can at best compete with SMEs in the developed countries for procurement contracts.
Multilateral commitments in GPA can be useful for countries which are already party to bilateral or regional agreements but can be extremely challenging for countries which are not parties to such agreements. Moreover, countries which have a large number of SMEs and have been using government procurement as a tool for creating demand for their products may find themselves negotiating away their policy space. All members have to agree to the set-asides as well as entities and thresholds to be included; this could make GPA more challenging for countries with limited negotiating capacity.
State-owned Enterprises
Competition policy has been closely linked to trade and investments. In order to deter businesses from limiting free and fair competition and discourage formation of monopolies through cartels and mergers a working group on trade and competition policy was set up at WTO’s Singapore Ministerial Conference in 1996. However, the July 2004 package decided that trade and competition policy will not be a part of the Doha Development Agenda.
It is important to note that many countries have some form of competition policy in place. But competition laws in most of the countries exclude SOEs, because such enterprises have been set up in many strategic industries to fulfil social objectives as well as to generate income for governments. In many countries these industries/services include banking, insurance, telecom, transportation, infrastructure, and oil and gas utilities.
Almost all FTAs have kept SOEs out of their ambit, except for a few such as TPPA. While early discussions in the TPPA focused on strengthening the chapter on competition, the final text included a separate agreement on SOEs and designated monopolies (Chapter 17) with country-specific annexes detailing exceptions to SOE commitments. Proponents of TPPA argue that provisions around SOE are a modest first step towards disciplining unfair advantages that such enterprises have over foreign firms and the provisions will promote competitive neutrality. However, a criticism levied against including SOEs in the ambit of competition regulations is that in many countries such enterprises are set up in strategic areas with long gestation periods because they fulfil key social objectives.
In TPPA, provisions around SOEs apply with respect to large commercially focused SOEs which are profit-oriented with direct government ownership of more than 50% of share capital; ownership interests that result in control of over more than 50% of voting rights or where members have the ability to appoint majority of members of the management body. This implies that all SOEs which are engaged in “commercial activities” have to operate according to non-discriminatory commercial principles and should not harm competitors. TPPA also includes transparency rules which means that members have to clearly identify SOEs and their specific programmes of assistance whenever a TPPA member makes a request. The threshold level set for SOEs are 200 million SDR (special drawing rights), to be adjusted every three years. Non-conforming measures (NCMs) have to be listed. For example, Vietnam has listed all current and future activities of its Ministry of Defence as NCMs.
Although the high threshold levels, exemptions and definition of SOEs which limits them to commercial activity provide sufficient flexibilities to TPPA members to continue with some of their key activities related to such enterprises, it should be noted that the ball has been set rolling and may gather speed. Doubts have also been raised on whether the functions of SOEs in some countries are clear enough for the provisions to apply. In many countries, especially developing countries and LDCs, a SOE has a hybrid of commercial and social or public good functions, for example in sectors such as railways and postal services. It may become extremely difficult for countries in such areas to demarcate whether an SOE is undertaking commercial activity or not. Some railway lines may be operating on commercial basis while others may be serving social objectives. These provisions may also limit the government’s ability to experiment with respect to development policy tools. For example, it may become extremely difficult for governments to restore the functions of the SOEs, if the market model fails in providing necessary good quality public utilities at accessible prices.
While many countries, especially those in Africa, may not currently have many SOEs engaged in commercial activities, the decision on taking commitments on disciplining these activities for enhancing competition needs to be carefully taken. SOEs are, after all, powerful development instruments in the hands of the governments.
Labour Standards
Labour standards in international trade are increasingly becoming a contentious issue. At the 1996 Singapore Ministerial Conference of the WTO, the International Labour Organization (ILO) was recognised as the competent body to negotiate labour standards and it was suggested that the WTO Secretariat will work together with it on technical issues for “coherence” in global economic policy-making. Currently, none of the WTO councils and committees work on labour standards.
Labour standards include a wide range of practices including child labour, forced labour, trade unions and strikes, minimum wages, working conditions and working hours. While all WTO members agree on the internationally recognised “core” labour standards—that is, no forced labour, no child labour and no discrimination at work (including gender)—there is a raging debate on other issues. In general, it is perceived that while advanced countries emphasise the importance of greater international coherence in policies with regard to labour and propagate that trade provides a powerful tool for improving workplace conditions, the developing countries consider any further steps in this direction as enhancing protectionism and depleting comparative advantages of developing countries which have low wage labour.
While the US and EU have been including some provisions of labour standards in their bilateral and regional FTAs, degrees of enforcement vary. The majority of US FTAs cover the ILO core labour standards and in addition some of these agreements include cash standards on minimum wages, minimum hours and occupational health and safety. While these are enforceable in the partner countries’ national laws, ILO core standards are enforceable in very few of the US FTAs. The EU on the other hand offers additional market access to countries enforcing the ILO core principles (Bakshi and Kerr 2010).
The first mega FTA engaging developing and developed countries to include labour standards is the TPPA. Under its Chapter 19, members agree to maintain laws and practices governing minimum wages, hours of work, and occupational safety and health. More importantly, these members also agree to discourage imports of goods that are produced by forced labour or child labour or have inputs produced by such labour, regardless of whether the source country is a TPPA member. Further, commitments in the chapter are enforceable and subject to dispute settlement.
There is no doubt that small states, LDCs and developing countries need to improve their labour standards. The question, however, that arises is whether trade policy is the most “appropriate” and “effective” policy tool to do so, especially given the fact that most labour violations take place in the non-tradable sectors as well as in the unorganised sector. While a rising number of US FTAs are now including enforceable labour rights, the impact of these on partner countries’ existing labour standards (especially developing countries) is yet to be established. Ongoing research in fact suggests that ratification is endogenous—that is, countries that already have high standards tend to ratify conventions because the cost is low (Salem and Rozental 2012).
Conclusions
With the widening of the coverage and scope of 21st century trade agreements, many new provisions are being introduced and existing provisions are being tightened in order to provide a level playing field to domestic and foreign enterprises in areas which impact on international trade. Provisions around investments, government procurement, SOES and labour standards are few such provisions, among others, which may be considered for multilateral negotiations. It is important to note that the implications of including these provisions may differ not only between developed and developing countries, but also among developing countries. Interests and concerns around these provisions largely depend on existing laws and regulations as well as practices and institutions in developing countries. While provisions around SOEs may be extremely important for some developing countries, in others such enterprises may not exist. Similarly, while multilateral negotiations on investments may be favoured by some small states which lack negotiating capacity in this area and therefore may prefer multilateral negotiations, it may be highly contentious for others. This would imply that bringing “new issues” in the ambit of multilateral negotiations may further slow down the pace of multilateral negotiations, making the conclusion of Doha Development Agenda a distant reality.
Note
References
Bakhshi, Samira and William A Kerr (2010): “Labour Standards as a Justification for Trade Barriers: Consumer Concerns, Protectionism, and the Evidence,” The Estey Centre Journal of International Law and Trade Policy, 11, No 1.
Cernat, L and Kutlina-Dimitrova (2015): “International Public Procurement: From Scant Facts to Hard Data,” Robert Schuman Centre for Advanced Studies Research Paper No RSCAS, pp 2015/08
Finger, J Michael and Philip Schuler (2001): “Implementation of Uruguay Round Commitments,” Developing Countries and the WTO: A Pro-active Agenda, Bernard Hoekman and Will Martin (eds), Oxford: Blackwell Publishers.
Salem, Samira and Faina Rozental (2012): “Trade and Labour Standards: A Review of Recent Empirical Evidence,” Journal of International Trade and Commerce, No 2, 63–98.
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