Geneva, 30 October (Martin Khor) -- Can the new multilateral trading system anchored in the World Trade Organisation (WTO) promote the industrial and economic development of countries or will it curb?
This debate and argument which has been swirling up over the last two years seems likely to be fuelled by some protests and disputes coming up before the WTO.
Protests have been made by Northern countries in recent weeks over Indonesia's national motorcar project and these illustrate
In early October, Japan and the European Union filed complaints with WTO, and have sought consultations with Indonesia, charging that Indonesia was unfairly and illegally protecting its Timor national cars from foreign competition. Such consultations are a preliminary step in the WTO dispute settlement process.
Under the dispute settlement rules, Japan and the EU have to hold bilateral talks with Indonesia to settle the dispute. If this fails, the complainants can ask the WTO to set up a dispute panel to hear the case.
If Indonesia loses before the panel, it will have to comply with the recommendations by changing its policies and removing its special incentives to the national car project. Failure to comply may give rise to trade retaliation.
The Timor is a post-Uruguay Round project, having been announced early this year. The cars are produced through a venture between Kia Motors of South Korea and PT Timor Putra Nasional, an Indonesian company.
In the project's initial phase, the Timor cars are produced in South Korea and imported whole into Indonesia. In the next phase, by early next year, there will be joint assembly of the car within Indonesia.
In its letter of complaint to the Indonesia Mission in Geneva, the European Commission charged that:
* The exemption from custom duties and luxury sales tax, for "national vehicles" assembled outside Indonesia by "pioneer companies", discriminate against imports of cars from the EU, and thus infringe Article I (most-favoured-nation treatment provision) of GATT 1994.
* The exemption for luxury tax for "national vehicles" assembled in Indonesia by manufacturers which meet local content requirement discriminates against EC cars, and also favours the purchase of domestic over imported parts, violating GATT (Article II) and TRIMs (Article 2).
* The exemption from customs duties on imports of parts and components made by "pioneer companies" and other manufacturers which comply with local content requirements favours the purchase of domestic parts and components, contrary to GATT 1994 (Article III:4) and TRIMS (Art. 2).
* This last exemption when granted to pioneer companies discriminates against imports of parts and components originating from the EC, violating GATT 1994 (Article I).
The complaints and charges bring out a conflict of interest between aims of a developing country's industrial policy (to develop its own local industries) and the aims of developed countries (which want to retain and increase the market access and market share of their already established companies and products).
From the viewpoint of a developing country, there is a need to protect a national company, or give it preferences such as tax breaks, at least in the initial or "infant" stage of its development, before it can freely compete with bigger companies. The tax exemptions or reductions enable the eligible local firm to cut costs and sell at a cheaper price, thus boosting competitiveness.
Also, the incentives given for companies that have a high "local content" are meant to encourage the development of "linkages" to and "spin-off effects" on local industries. Instead of importing the parts used for making a product, increasingly these components would then be locally made, thus generating more local business and jobs.
Without the protection for local firms or the incentives for generating linkages to the domestic economy, there would be little chance for local industry to develop.
The developed countries, on the other hand, are not so sympathetic to the industrial aspirations of developing countries. Their governments are more interested in helping their big companies to sell their products in the South.
They therefore fight for more and better "market access" to developing countries. They view the protection or special privileges for local companies as an obstacle to their own companies and their products. They also look at "local content" policy as hindering the imports of parts originating from their countries.
And if the industrial countries have their way, the developing countries would find themselves locked perpetually into the lower end of the scale in the international division of labour.
In its letter to Indonesia, the EC claims that the exemptions from import duties, and the tying of exemption from sales tax on luxuries to local content targets, constitute an unfair government subsidy. The EC claims that this "impedes imports of EC vehicles" into Indonesia, and creates "significant price undercutting" and "loss of sales of EC manufacturers in the Indonesian market."
In the Indonesian car policy, tax breaks are given to companies reaching "pioneer status", which is given if local content reaches 20 per cent by the end of the first year of production, 40 per cent by the end of the second year and 60 percent by the end of the third year.
Under the WTO's TRIMs Agreement (one of the outcomes of the Uruguay Round), governments are forbidden to have "local content policy" (requiring or giving incentives to firms to have a certain percentage of their product made up of locally-made components).
Local content and other "investment measures" (such as requiring companies to export a certain percentage of their production) are considered to have a "trade distorting" effect, for instance in encouraging local products vis-a-vis imported ones.
The TRIMS agreement provides a transition period of five years for developing countries and seven years for least developed countries to comply. Countries can take advantage of this transition period for trade-related investment measures in existence, and if they have followed notification procedures.
The transition period can, on request, be extended for individual countries by the Goods Council which, in considering such a request is directed "to take into account the individual, development, financial and trade needs of the Member in question."
Many developing countries have investment measures like local content policy in order to promote development of the domestic sector, or to protect themselves against potential balance of payments problems or against restrictive practices of big foreign firms.
These important development objectives have been overridden by the trade rules that place a higher priority to "non-discrimination" between foreign and local products, services and firms.
Most of today's developed countries were able to develop, in their comparative stages of development, by using a wide variety of such instruments for industrialization. Now they want to deny developing countries the right to such instruments.
The case of the Indonesian car project illustrates the difficulties that developing countries will face in implementing the TRIMS agreements, as well as other rules that forbid subsidies.
For, implementation of the WTO trade rules will make it difficult (some critics say almost impossible) for a developing country to succeed in building up its own local industries or services.
At the UNCTAD-organised Global Investment Forum on 10 October in Geneva, India and China, in their interventions voiced their problems in accepting or absorbing TRIMS.
Referring to the TRIMS agreement, India's Commerce Secretary, Mr. Tejendra Khanna, noted that two provisions (export obligations and phased manufacturing programme for increasing the level of indigenisation in joint ventures) had been made "not acceptable" on the ground they were "trade distorting."
He critisised this approach of the TRIMS agreement, commenting that both provisions would have had positive effects on development, but had been embargoed by TRIMS. "Under the guise of a trade linkage, the development process is now being distorted," he said.
China's Assistant Minister of Foreign Trade, Mr Long Yong-Tu, the country's top negotiator for getting membership to the WTO, said that in his negotiating experience, he had found that the TRIMS agreement in WTO was not that balanced. "I am kept busy in the WTO discussing investment, so I know how difficult the TRIMS has been for my country," he said.
Long added: "I am puzzled. China is attracting FDI, yet we are facing so many questions on our investment conditions. It is a ridiculous situation and reflects the imbalance of TRIMS and does not reflect the investment reality in the world."
The problems faced by Indonesia, India and China demonstrate the implications of TRIMS and other Uruguay Round agreements on local domestic policies and practices.
Brazil too has been facing a similar problem in relation to its domestic auto-industry sector. The Brazilian problem has been compounded by the fact that during the days of President Collor in the early 1990s, Brazil in its precipitate rush to embrace new-liberalism, liberalised its domestic and foreign trade, and did away with a number of its investment-related measures and restrictions.
As a result, when the WTO came into existence, Brazil had no TRIMs measures to notify the WTO, and thus did not even have the 5-year transition period to adjust.
Thus the Brazilian measures and policies, that became essential in the light of the MERCOSUR or the Latin American southern cone common market joining Argentina, Brazil, Paraguay and Uruguay. Argentina which had some TRIMs measures notified them and has been able to use them visavis its own auto-sector. Brazil thus found itself in a dilemma and took recourse to some incentives and measures (tariff rates for component imports) that dealt with those importing components for manufacture of automobiles differently from importers of cars or components.
The EU, Japan, the United States and South Korea (one of whose companies benefit from the Indonesia policy, but another that feels aggrieved in Brazil) have sought consultations with Brazil as a preliminary to seek WTO ruling.
Statements from Washington, Brussels and Tokyo make clear that these capitals are looking at the policies of these individual countries from the perspective of the likely effects if other developing countries adopt similar policies so as to encourage their own industrialization.
The TRIMs agreement has transition periods for developing countries and LDCs (five for the former and seven for the latter) to enable these countries to bring their domestic laws and regulations and practices into line with the provisions of the agreement.
Almost two of this five or seven year transition has already passed, so there is little time left for adjustment.
The TRIMs agreement provides for a review of the agreement by the WTO Council for Trade in Goods, no later than five years after entry into force of the WTO or year 2000. The Council is mandated to review the operation of the Agreement and, as appropriate, propose to the Ministerial Conference amendments to its text.
There is an unwarranted assumption, promoted by the WTO secretariat and major industrial nations that any such review must result in more amendments to TRIMs, more measures to "discipline" developing countries using TRIMs, and on top of it disciplining their investment policies themselves.
But developing countries need not accept this. There is nothing to warrant the view that the review, linked in a sense to the transition period and the difficulties of implementation that developing countries may face, has necessarily to result in more disciplines on them.
In the review of TRIMs, which is scheduled no later than the year 2000, developing countries can take the opportunity to elaborate on the problems of implementation of the agreement, and make a case of adjusting the rules to enable development objectives to be met.
All developing countries, or atleast as many of them as have an interest in building up their industrial capacities and industrial development, can join hands to block further disciplines and push for changes in the disciplines of the TRIMs agreement that come in the way of their industrialization and development.