WTO’s neo-liberalism

Published October 31, 2005

By close of the year 2004, the World Trade Organization (WTO) completed its ten years of existence and started the second decade of its operations from January 1, 2005. Why was the WTO created? What are its declared objectives? Which countries of the world played the major role in establishing the WTO and what were their motives? What were the deficiencies in GATT 1947, the predecessor organization to WTO, which led to its replacement by a new body?

What was the nature of the negotiations held as a part of the Uruguay Round under the aegis of GATT and what was the level of involvement of the developing countries in these negotiations? Has the creation of WTO generated new challenges and pressures for the developing countries and how are these challenges being met? Are the costs and benefits of WTO symmetric for the developed countries and the developing countries? To which direction is the international trading system being driven by the WTO?

These are not simple questions. Their complexity is deeply embedded in the political economy of globalization. One conclusion, however, can be easily derived from the first decade of WTO’s existence. For all practical purposes, the WTO and neo-liberalism have become synonymous and inseparable.

The chief characteristic of neo-liberalism as it operates at the global level is the relentless pursuit of “free trade” regime based on the Ricardian paradigm of “comparative-advantage” and the Hecksher-Ohlin model of “relative factor-endowments”. As an outcome of the evolving neo-liberalism, the economies of the developing countries are now fully exposed to the vagaries of global competition in every sector of their economy including agriculture, manufacturing and services affecting through various channels their growth, terms of trade, competitiveness and standards of living.

Under the new trading system embodied in the WTO, the developing countries and their developed counterparts have to conduct their trade under the so-called “level-playing field”. This implies that a small country like Siera Leone is subject to the same rules and regulations in international trade as are applicable to a giant country like USA.

Apart from some cosmetic concessions available to the category of least developed countries to which Siera Leone belongs, the overall thrust of WTO’s “free trade” policies has almost jettisoned the traditional “special and differentiated (S&D) treatment” available to the developing countries under specific articles of GATT 1947, such as Article XII (Restrictions to Safeguard the Balance of Payments), Article XVIII (General Assistance to Economic Development), Article XX (General Exceptions) etc.

Every country has the sovereign right to adopt trade policies which contribute significantly towards achieving its declared economic objectives such as maintaining high growth rate of real GDP, earning maximum foreign exchange through diversification of exports, restricting imports to correct imbalance in external payments and bringing about self-reliance in the economy through import-substitution measures etc.

For achieving these objectives, the developing countries in the pre-Uruguay Round phase, could depend upon the common trade policy instruments such as quotas, tariffs, licensing, subsidies, negative lists and interventions through state trading corporations. In the post-Uruguay Round era, however, the scenario is quite changed.

A holistic appraisal of ten years operations of WTO would indicate that, the effectiveness of most of the trade policy instruments has been eroded in a fundamental way. For example, all quantitative restrictions such as import and export quotas have been eliminated. The member countries have universally abolished the use of licencing to regulate exports or imports.

At the same time, countries have been obliged to cut down the list of items on the negative list or the banned list. The number of state trading corporations and their scope of operations have been drastically curtailed to meet the demands of WTO. In a nutshell, the role of the common trade instruments has been fairly reduced and policy makers have been left with a limited autonomy to use these instruments for achieving the basic economic objectives.

Historically, tariffs comprize the most important policy tool to regulate trade and commerce both in the developed and the underdeveloped countries. Tariffs have variable applicability, albeit with clear short-term and long-term effects on the economy.

Tariffs have served as a major source of revenues for the public exchequer in the developing countries. Moreover, tariffs have been used to raise the prices of foreign products in the domestic markets to discourage consumption of certain products which have relatively lower value in the economic, moral or cultural scales of a country. Thus the unwarranted consumerism of the public can be controlled through a rational use of tariff instruments.

Besides, regulating consumption of imported goods, tariffs have been deployed more frequently to promote economic development through the process of industrialization. Resorting to the well-known “infant industry” logic, countries throughout the world have been adopting high tariffs as a strategy to protect domestic industries at the nascent stage till these are fully developed to face the competition of established foreign producers. By protecting the domestic industries through tariffs, the industrial base of the country can be expanded and the economy can move to a higher level of production-possibilities- frontier.

The larger productive capacity achieved by protecting indigenous industries generates employment and thus helps the country to move along the road of greater self-reliance. For the long-run, tariffs are the most effective means of promoting industrial growth and economic autarky.

As a major outcome of Uruguay Round of trade negotiations, numerous changes have been introduced in the tariff regimes across the globe. The tariff peaks have been drastically slashed, the number of tariff slabs have been cut and quite a few products in the manufacturing sector have been zero-rated.

Another significant development has been in terms of raising the tariff lines in the “bound” category. For the items which are notified as “bound”, the governments are committed not to raise the tariffs above the “ceiling rates” specified for such items. These are important steps towards an open and liberal world trading system.

The neo-liberalism sponsored by the WTO has the full support of the developed world led by the United States. As a new gospel of the evolving world economic order, it must be accepted by all countries whatever their level of development or whatever their specific needs for economic growth.

The US is currently obsessed with the idea of creating in the foreseeable future a global economy sans tariffs which apparently happens to be the last instrument left in the armoury of trade managers. Any opposition or resistance to the tariff-free world does not find any favour with the US policy-makers. For that reason, the former US Trade Representative (USTR) Mr. Robert Zoellick while endorsing the benefits of free trade sometimes back, dubbed the opponents of a tariff-free world as “anti-globalization nihilists.” This is certainly a strong reminder to all those who still want to live in their bastions of protectionism built with the help of tariff walls.

In a tariff-free global system, the economic predicament of developing countries would be serious. These countries are being deprived of a potent source of fiscal revenues putting constraints on their investment efforts and growth plans. How are the treasuries of LDCs going to meet the big shortfall in their gross earnings in the near future when customs duties would be altogether eliminated as policy tools? Naturally, the LDC will have no option but to increase substantively the scope and coverage of their domestic taxes.

In relation to the choice of tax policy instruments as a means of economic development, the message of WTO is quite straightforward. This message could be succinctly put down as a piece of “advice” repeatedly given to the developing countries by the mandarins of WTO namely: “Don’t tax the imported goods, just tax the domestically produced goods and services”. This advice is the essence of WTO and its underlying philosophy of neo-liberalism.

One of the lessons of world economic history indicates that regulation of trade and commerce by the governments is a pre-condition of sustained economic development. Hence, how can the group of less developed countries achieve success in their efforts for economic development when the governments of these countries are hardly left with any dependable tool to regulate its exports and imports.

The adherence to the WTO charters, may therefore force these countries to maintain the status quo or these countries could slip further down the scale of underdevelopment and impoverishment. The globalization of world politics has transformed the neo-liberalism of WTO into a system of neo-Darwinism.

(The views expressed by the writer, joint chief economist, Planning Commission, are personal)

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