The disputed status of developing countries in the WTO

File source: http://commons.wikimedia.org/wiki/File:Geneva_Ministerial_Conference_18-20_May_1998_(9305956531).jpg

Currently, the US and China are fiercely discussing about the role of developing countries in the World Trade Organization (WTO). At the heart of the discussion is the question whether rising powers like China should benefit from special rights in the WTO.

This is one key dimension of a broader ongoing debate about the future of the WTO. Finding a compromise on the disputed status of developing countries and, more generally, reforming the WTO will be essential to safeguard the multilateral trading system.

Special and Differential Treatment – a key issue for the future of the WTO

While the role of developing countries is thus a central issue worthy of debate, the current dispute, presently with no signs of flexibility to negotiate on either side, seems too confrontational to provide a promising basis for WTO reform. Looking ahead, we need an inclusive deliberation process to seek a possible middle ground. In this blog post, we lay out the current state of the debate and sketch some ideas for a possible way forward, both in terms of process and in terms of content.
WTO rules imply that developing countries receive “special and differential treatment”, for instance, longer time periods for implementing WTO commitments or exemptions from certain obligations. At the same time, the WTO rules do not define “developing countries.” There are thus no criteria in the WTO that determine whether a member state is a “developing” country or not. Instead, developing countries in the WTO are designated on the basis of self-selection – independent of whether they are rich or poor, big or small. It is argued by some members that this “self-designation” approach has been a central reason for the lack of progress in the Doha Round negotiations and represents an immense challenge for negotiating new agreements in the WTO.
For example, China still sticks to its status a “developing country” in the WTO even though it is the world’s largest exporter of goods and its average income per capita increased to almost $9,000 in 2017 (from $1000 in 2001). The case of China is particularly controversial: According to Dennis Shea, the US ambassador to the WTO, there is “nothing special or differential when a member that has landed a rover on the dark side of the moon … insists on the same treatment as one of our poorest members.”

Who should receive special treatment?

The US administration recently suggested to introduce some, potentially overlapping, objective criteria for “developing countries” in the WTO. According to the draft decision proposed by the US, it should be made impossible to hold on to this status if the country in question is a member of the Organization for Economic Cooperation and Development (OECD) or the Group of 20 (G20), a high-income country, or accounts for at least 0.5 percent of global merchandise trade. Zhang Xiangchen, the Chinese Ambassador replied to the US proposal, rejecting it on several grounds, including the argument that the US has arbitrarily selected the suggested standards. China also signed a critical joint communique together with India, South Africa and other like-minded members in the WTO, arguing that self-designation is the best approach for addressing massive inequalities in economic development across WTO members.
While the suggested criteria of the US proposal might – despite the controversy they have stirred – provide a basis for a future compromise, the currently ongoing debate is unlikely to generate common ground. This is especially the case given that the reform proposal has been made by the US. The Trump administration has been strongly attacking the WTO without showing flexibility to negotiate with its counterparts about how to improve the functioning of the organization. In particular, with respect to solving the Appellate Body crisis, the EU, Canada and many other countries have made concrete reform proposals, but the US has not yet shown any willingness to sit down to discuss these proposals, which thereby undermine US’ credibility in reforming the WTO. Rather than the current confrontational dispute dominated by the US and China, we need a more inclusive and more nuanced discussion.
In terms of process, the current debate on the US proposal is only promising if the US manages to form a consensus with other member states like the EU and Japan. Only then can the proposal be the ground for a much-needed reflection. If emerging economies like China, India and South Africa are interested in saving the negotiation function of the WTO, they should consider being more open to a compromise. The G20 would hence also be a suitable forum to further ponder special and differential treatment as well as other aspects of WTO reform.

A possible middle ground

In terms of content, future deliberations should seek a middle ground. One way forward might be to refine the proposed criteria. For instance, the criteria should also take account of the share of people living in poverty in the country under consideration. While India, for example, is part of the G20 and accounts for a substantial share of global merchandise trade, around 30 percent in the low middle-income country live in poverty – and India might thus be regarded as justifiably arguing that it still deserves special and differential treatment.
As recently observed by former WTO staff, since it would be “impractical to try to negotiate the development status of countries,” special and differential treatment should be based on specific individual country needs, for instance at the sectoral level. The point of any special and differential treatment reform should be to engage members more fully in the system rather than exempting certain groups of members. A potentially complementary approach would be to base special and differential treatment on the capabilities of specific members to contribute to liberalization. For instance, a sector-based competitiveness index could determine the status of a country in the negotiations for a new agreement in that sector, for example in e-commerce, agriculture, services, and manufacturing goods. The Trade Facilitation Agreement has provided a useful example of such an approach by breaking developing members into various groups who are offered different timeframes to implement the terms of the agreement.
To cut to the chase, it is time to question the conventional binary distinction between developed and developing countries in the WTO. However, for developing countries, negotiating the development status of WTO members seems to be a non-starter. There is thus a need for a new approach with more fine-grained case-by-case options to reform special and differential treatment in the WTO – either based on specific countries’ needs for assistance or their capabilities to contribute, or both. European member states should join this discussion more actively and provide a bridge among the US, China, and other WTO members in order to promote a more robust and inclusive multilateral trading system.

Image: Clara Brandi

Dr. Clara Brandi is Senior Reseacher at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) and an expet on global economic governance, international trade and sustainable development. She holds a PhD from the European University Institute, an MPhil from Oxford University and a Diplom from the University of Freiburg.

Dr. Wallace S. Cheng is Nonresident Fellow at the German Development Institute, Agenda Contributor for the World Economic Forum, and Greenberg World Fellow at Yale University.  He has 10 year experiences of analyzing global and Chinese economy, trade, technology and development.

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