and policy space for development
3 How is trade policy constrained by international rules?
WTO establishes a set of disciplines that apply to all members. These are largely aimed at preventing governments from using certain types of pol-icies and to a lesser extent establish norms that members must adopt, for example, in the area of product standards and protection of intellectual property rights (IPRs). The basic non-discrimination rules – national treat-ment (Article III of the General Agreetreat-ment on Tariffs and Trade (GATT)) and most-favoured nation (MFN) treatment (GATT, Article I) – help to en-sure that WTO members abide by trade liberalization commitments and do not re-impose protection through domestic policies that discriminate against foreign providers. The rationale for many if not most WTO rules is to prevent discrimination beyond that which is implied and permitted by the set of tariff commitments a country has made – that is, the main instrument of protection for domestic industry is presumed to be the tar-iff. From an SDG and economic development perspective this implies that a key question concerning WTO rules and whether they constrain policy space is whether it is appropriate (necessary) for policy to discriminate against foreign products. A corollary question is whether WTO con-straints on the use of specific trade policy instruments (tariffs and NTMs) can be detrimental in the sense of precluding government use of policy instruments in cases where the government has decided that discrimina-tion against foreign products is appropriate/needed. Such discriminadiscrimina-tion may be called for to safeguard domestic natural resources or public health (e.g. to prevent entry of pests and diseases or protect national security).
In principle, WTO bans the use of quantitative restrictions (quotas) and measures with equivalent effect that give a commercial advantage to do-mestic industries such as local content requirements (these violate the na-tional treatment requirement). Non-discrimination is also the main goal of agreements dealing with product regulation: these require that such meas-ures apply equally to domestic and foreign goods. Aside from various disci-plines on (potentially) import-restricting measures – quotas, local content requirements, import licensing, pre-shipment inspection (PSI), valuation of goods for customs purposes, labelling requirements, technical product reg-ulations – WTO also has rules on measures that promote exports, including production and export subsidies and specific measures that may have that effect, such as tax rebates and input subsidies that have an impact on exports.
There is a close relationship between the WTO rules on product regu-lations, the national treatment requirement and the provision that al-lows for “general exceptions” (GATT Article XX). The provision on general
measures that restrict trade if these are necessary to protect public health, safety or the environment. The basic rule here is that the national treat-ment requiretreat-ment applies to measures taken to attain health, safety and related goals; “like” products produced in foreign countries can be subject to regulatory requirements that may restrict trade and associated con-formity assessment procedures if this is necessary to ensure compliance.
The key constraint is that this does not result in discrimination against foreign products – that is, domestic products must be subject to the regu-lation in question as well. Most measures used by governments under the umbrella of Article XX will take the form of NTMs.
In addition to the substantive requirements imposed by WTO agreements, there are also many rules pertaining to the processes and procedures that WTO members must follow when implementing their trade policy meas-ures. These include a large number of transparency-related provisions – for example, notification and publication requirements, establishment of en-quiry points where firms can obtain information on the trade regulations that apply – and a large number of process-related rules. Notification and publication requirements simply constitute good governance practice and will not be discussed in this chapter as they are not relevant to the policy space question – they do not entail substantive constraints or limitations on the ability of a government to pursue a social or economic objective.
Examples of good practice process rules are requirements that food safety standards have a basis on scientific evidence where this exists or that when taking action against imports that are deemed to injure domestic compet-ing industries, a government engages in an investigation to determine whether certain conditions have been satisfied – for example, that imports are dumped in the case of anti-dumping actions, they have been subsidized in the case of a countervailing duty action and/or they are causing or threat-ing injury to domestic industries. The various procedural and process-re-lated criteria and rules have a bearing on policy space as they constrain the way a government goes about implementing its trade policies, but they do not question the right of a government to initiate such trade policy actions.
WTO and GATT before it sought to address differences in capacity and wealth across countries by complementing generally applicable rules of the game with “special and differential treatment” (SDT) for developing countries. SDT has two major dimensions (Hoekman, 2005). One is a rec-ognition that most developing countries are small as well as poor and thus not very “interesting” markets for large exporting nations. The con-sequence of this is a disadvantage when engaging in quid pro quo bargain-ing for market access – many developbargain-ing countries have relatively little
to offer to rich, large countries. The latter would not have incentives to offer concessions because of the MFN rule: any trade concessions offered to a developing country would apply to all trading partners, including large countries. This problem led to the first pillar of SDT – promises of non-reciprocal preferential access to markets by rich nations. This dimen-sion of SDT will not be considered in this chapter. The other dimendimen-sion of SDT was to permit developing countries greater latitude to use trade re-strictive measures. This was motivated on infant industry industrial de-velopment grounds. This was given substance through three channels: (i) agreement that developing countries have the latitude to offer “less than full reciprocity” in multilateral trade negotiations (i.e. liberalize less and make fewer commitments than rich countries); (ii) opt outs and exceptions to specific trade policy disciplines; and (iii) a specific provision on infant industry protection. Jointly these three channels provide additional poli-cy space for developing countries.
There is one specific provision on infant industry protection in the WTO:
GATT Article XVIII. This pertains to governmental assistance for economic development, and includes language allowing import restrictions to protect infant industries. GATT Articles XVIII(a) and XVIII(c) permit developing countries (as defined in Article XVIII, paragraph 4) to remove tariff conces-sions or impose quantitative restrictions or analogous NTMs in order to promote industrial development or modify or extend production structures in accordance with a country’s economic development priorities. The coun-try invoking these provisions must compensate negatively affected trading partners. Thus, there is a cost for using this policy space independent of whether tariff bindings have been made, which explains why these excep-tions have rarely been invoked. Another reason is that developing countries have either had high tariff bindings or had no bound tariffs at all for goods produced locally. In practice countries have made greater use of subsidies and trade-related investment measures (TRIMs) for industrial development purposes. In the Doha Round of trade negotiations many developing coun-tries argued that Article XVIII should be made more user-friendly but no agreement was reached on what was acceptable in this regard.
What is of interest from a policy space perspective is both how develop-ing countries are constrained in usdevelop-ing policies that could promote de-velopment prospects (where does WTO bind in ways that are potentially detrimental?) and whether the areas in which they have negotiated more freedom than other WTO members to use trade policies can (will) be ben-eficial in promoting development. Before turning to the main substantive provisions in the WTO provisions pertaining to NTMs, it is important to note that the primary aim of WTO rules and rule-making is to address
trade policies. Such negative spillovers can be significant only if a country is large in the sense of being able to affect its terms of trade. If a small de-veloping country maintains a highly restrictive trade policy it will have ef-fects only on its domestic market; it will not affect world market prices. This has implications for the effective policy space of many developing coun-tries: no matter what the WTO rules may be, if the country does not abide by a given rule it may not have a significant enough impact on the rest of the world. That is, the consequences of trade policy – good or bad – are lo-cal in nature. This helps to explain why in practice most developing coun-tries have been involved only infrequently, if at all, as respondents in WTO disputes. While this means that (de facto) policy space is likely to be great-er in practice than it would appear to be based on the lettgreat-er of WTO law (de jure), it can also be argued that this situation creates a “development defi-cit” if compliance with WTO rules would enhance welfare or the attainment of one or more of the SDGs. Given that trade policy rarely is an effective instrument to address the market failures that are associated with low-in-come developing economies, critics of trade policy space have argued that the WTO provisions giving greater leeway to developing countries to use policies that otherwise would be constrained or prohibited are misplaced.2 An important question is why governments need more freedom (space) to use trade policies in ways which do not comply with WTO provisions.
From a development perspective trade policies must be motivated on the basis of addressing specific market failures that impede or distort invest-ments. Examples of such market failures are capital market imperfections, coordination failures that result in missing input markets, agglomeration externalities that are conditional on the provision of public goods or in-formation asymmetries that preclude trade from taking place. There is an extensive development literature that makes a compelling case for gov-ernment action to address such market failures by supporting processes of
“self-discovery” by innovative firms to learn whether the ideas they have for new products are viable, to allow the realization of dynamic economies of scale through learning by doing, that is, allowing firms to move down their average cost curve and helping firms to identify potential opportunities in export markets. Policy instruments that may help to do this include effec-tive exchange rate management (Rodrik, 2008; Mayer, 2009), a supporeffec-tive
2 One rationale for trade policy (tariffs) is the government revenue constraint in low-income countries. As poor countries may not be able to impose and collect domestic taxes, import tariffs and export taxes may be the most efficient method of raising revenue. See, for example, Tarr (2002).
For greater discussion and references to the literature, see Hoekman (2005).
investment climate, targeted subsidies for domestic investment (includ-ing inward foreign direct investment), the creation and operation of ex-port development zones where the government provides infrastructure (Creskoff and Walkenhorst, 2009; Moran, 2014) and export subsidies and export promotion activities that help firms to grow along extensive mar-gins (Olarreaga et al., 2017). Some of these policies are subject to WTO rules. Many are not. The types of government interventions and policy measures that involve the provision of health and education services, in-vestment in transport infrastructure, electricity generation and distribu-tion, protection of property rights, a macroeconomic policy framework that provides price stability and a competitive exchange rate, and other pub-lic goods (e.g. security, rule of law, good governance) are unconstrained by WTO provisions. WTO is quite narrow – its focus is on measures that affect products when they cross borders. Such measures – trade policies – gener-ally will do little to address the types of market failures that are likely to be prevalent in low-income countries, such as expropriation through emu-lation of good ideas (Hausmann and Rodrik, 2003), capital market failures and coordination failures. These usually call for forms of intervention that are domestic in nature and that target the source of the market failure.3 The discussion that follows does not aim to provide an analysis of the util-ity or efficacy of different types of NTMs in promoting national economic development objectives or the SDGs. The goal instead is to review suc-cinctly WTO provisions pertaining to NTMs and the extent to which gov-ernments retain the ability to use these NTMs if they so wish.