The old GATT was not a single undertaking agreement. Contracting parties were free to be signatories of the various codes on an a la carte basis, in accordance to their needs and levels of development.
In the course of the Uruguay Round, the developed countries made a concerted effort to push for the inclusion of new issues into the GATT – services, intellectual property and investment – and for these to be treated as parts of a ‘global accord’. That is, members had to accept all parts of the multilateral trading system or chose to opt out entirely. In the 1980s, prior to the Punta Del Este Ministerial of 1986, the US even went so far as to threaten that should developing countries refuse to agree to ‘strengthening’ the multilateral trading system in this direction, US and her allies would resign as contracting parties and set up an alternative system.
The developed countries were insistent on this type of ‘global’ multilateral framework primarily because they wanted to ensure that the new issues which they were so aggressively putting into the Uruguay Round agenda – services liberalization and the tightening of intellectual property rules – would be enforced upon all members. The Uruguay Round took place at the time when the industrialized economies were slowing down and when certain sectors of their services industries were mature and ripe for expansion aboard. It was also the start of the information technology revolution, and the information technology multinationals were keen to expand and preserve their monopoly globally. To keep up economic growth in the developed countries, it was necessary for these countries to gain greater access to markets of the third world, not only in goods, but also in services and the sale of technology.
Transforming the multilateral trading system into a single undertaking was therefore a tremendously powerful tool that would serve the interests of developed countries’ multinational corporations. Never before in history, did any one institution have such overarching and penetrating control over the economies of developing countries. Today, as new sectors and issues arise, the industrialized countries continue to attempt broadening the scope of the WTO, hence finding effective and new ways to gain markets in developing countries.
The single-undertaking transformed the trade regime and trade negotiations in several ways:
1) Firstly, a single-undertaking means that the WTO trade package is an all or nothing package. Members either accept the different parts or reject it in its entirety.
2) It allows trade-offs across sectors during the trade negotiations.
3) It made it easy to engage in cross retaliation in disputes. In a trade dispute, a wronged country, after a process of mediation, can retaliate against the wrongdoer by limiting imports from that country. If it is impossible to restrict imports of the same product involved in the dispute, or a product under the same agreement, it is then possible to take action against imports of any product, and under any of the agreements.
4) In terms of the process during negotiations, the single undertaking meant that nothing is agreed to unless everything is agreed to.
THE PERILS OF TODAY’S MULTILATERAL TRADING SYSTEM
Five years into the life of the WTO, developing countries are finding that the package of Uruguay Round commitments have not served them well. On the contrary, for most of the developing world, conditions have worsened. The single undertaking structure has contributed to this situation because it has forced developing countries to take on board liberalization in all areas covered by the WTO, often even before their industries are competitive enough.
The latest UNCTAD Trade and Development Report (1999) published only weeks before the Seattle Ministerial gave a very dismal evaluation of the Uruguay Round package. The report states that not only have the expected gains from valiant efforts to be integrated with the world economy not materialized, but empirical evidence has shown that in fact ‘the downside risks have proved far greater than expected’.
‘The predicted gains to developing countries from the Uruguay Round have proved to be exaggerated… Poverty and unemployment are again on the rise in developing countries which had struggled for many years to combat them. Income and welfare gaps between and within countries have widened further… As the twentieth century comes to an end, the world economy is deeply divided and unstable. The failure to achieve faster growth that could narrow the gap between the rich and the poor must be regarded as a defeat for the entire international community. It also raises important questions about the present approach to development issues. Asymmetries and biases in the global system against the poor and underprivileged persist unchecked’ (our emphasis).
The Report delivers a grim warning
‘Leaving global economic integration to markets has not helped, and that should hardly come as a surprise. Unbridled competition, particularly among unequals, has never, by itself, delivered faster growth and shared prosperity even in today’s developed countries, and it has at times been destructive. There is no reason to expect a different outcome in a globalising world.’
The bleak situation of developing countries is characterized as follows:
1) Average growth rates for developing countries (excluding China) as compared to the 1970s has been lower by 2 per cent per annum.
2) In almost half of the developing countries examined by UNCTAD, the trend is that of widening trade deficits, with falling or stagnant growth rates. The trade deficit for non-oil exporting developing countries in the 1990s is approximately the same proportion of GDP as in the 1970s.
3) The terms of trade for developing countries as a whole has fallen by more than 5 per cent per annum during the 1980s. UNCTAD findings are that terms of trade losses are no longer confined to commodity exporters. Many manufactures exported by developing countries are now behaving more like primary commodities as more countries are trying to raise exports in relatively stagnant and protected markets of the industrial countries. The prices of manufactures exported by developing countries fell relative to those exported by the EU by 2.2 per cent per annum from 1979 to 1994.
For example, change in the terms of trade and its destructive impact on real income in Africa, from 1996-1998, is as follows:
1996 1997 1998
Change in terms of trade (percentage change over previous year)
Terms-of-Trade impact on real income (Percentage of GDP)
(Adapted from UNCTAD 1999; p. 29).
The Report states that the ‘big bang’ style of liberalization the developing countries have been forced to take on has been detrimental to their economic needs. In comparison, developed countries in the past and even today, continue liberalization only at a very gradual pace. The mix and sequencing of trade, industrial and technology policies are crucial, as shown in the East Asian economies.
The infant industry protection mechanism, which the Uruguay Round package of agreements is putting out of reach of developing countries should, in UNCTAD’s opinion not only be strengthened, but even ‘extended beyond the earliest stages of manufacturing and include nourishing more advanced competitive industries through appropriate protection and support’.
The report also states that, unfortunately, the post Uruguay Round trading regime has ‘circumscribed the scope in most developing countries for replicating some of the policy measures’ which contributed to the economic growth of East Asia. ‘If existing multilateral rules are indeed impeding the learning and upgrading process in the industrial sectors of developing countries, then a re-examination is called for’ (our emphasis).
Change to the present system is therefore essential. The dark abyss developing country economies are in is to a large extent due to the inflexibility of the multilateral system, whose rules have been tailored to suit the needs of the developed country economies and multinationals.
HISTORY OF THE SINGLE UNDERTAKING
How did the multilateral trading system come to take on board the single-undertaking structure? A peep into history provides useful insight into one of the most crucial structures of the WTO. It will become apparent that in fact this new structure ‘crept’ into the WTO agenda. It rode on board the negotiations on new issues, where developed countries were putting forward unrealistic demands such as the complete liberalization of services (without detailing exactly what sectors or how liberalization will take place). Furthermore, these negotiations took place only amongst a small group of countries. When there was opposition to the single undertaking, developed countries resorted to threats.
The first time the term ‘single-undertaking’ appears in any GATT agreement or Declaration is in the Punta del Este Declaration in 1986. There was a huge disagreement prior to the Ministerial between especially the US and developing countries. The US was pushing hard for services to be included into the new round that was being launched. Washington wanted all negotiations launched in Punta del Este to be treated as one undertaking ‘both politically and legally’. If it did not get its way, US first threatened withdrawal from the GATT and, at one point during the Punta Del Este ministerial itself, also suggested that it would resort to the two-thirds vote if some developing countries continued to resist.
Developing countries in the early 1980s were vehemently opposed to any inclusion of new issues. They pointed out that services liberalization within GATT would be skewed against their interest and that the socio-economic and political goals of a country should not be subordinated to the concept of liberalization. Subsequently, as the pressure from the industrialized countries continued unabated, the developing countries suggested instead that the issue be explored in another arena independent of the GATT framework.
The final Punta del Este outcome was a compromise. Multilateral Trade Negotiations covering both goods and services were launched as one single political undertaking, but as legally separate and distinct processes. As Contracting Parties of the GATT, the ministers present launched multilateral trade negotiations in goods ‘within the framework and under the aegis of the GATT’. The launch of negotiations in services was done separately by ministers in their political capacity, as opposed to their capacity as Contracting Parties of GATT.
Both negotiations in goods and services would commence and end at the same time. However, it was agreed that at the conclusion of the negotiations, Ministers in their capacity as Contracting Parties ‘shall decide regarding the international implementation of the respective results’. In concrete legal terms, this meant that developing countries still had the possibility of rejecting the incorporation of the services package within the GATT at the end of the Uruguay Round.
In the Punta del Este Declaration, the term ‘single undertaking’ was not used to refer to multilateral negotiations in both goods and services as a single package. Rather, it appears under the ‘General Principles Governing Negotiations’ of Part I ‘Negotiations on Trade in Goods’. The sentence reads
‘The launching, the conduct and the implementation of the outcome of the negotiations shall be treated as parts of a single undertaking’, hence referring only to the fact that the various subjects for goods negotiations should be treated as one package.
That the US was not prepared to accept this fact at the end of the compromise was evident when it suggested to the participants after the compromise was struck, that each participant should ignore the media of the others and not react to them over the next two weeks!
Subsequently, the concept of a single undertaking was aggressively pushed by the US, EC and other developed countries to refer to the ‘globality’ of the entire Uruguay Round negotiations. In February 1987, the EC flagged this ‘globality’ issue, however, making it clear that it was using it in the goods negotiations. Yet a year later, the EC expanded the concept to include both goods and services negotiations. At the time, India stepped in to put on record that apart from the fact that the negotiations would begin and end at the same time, there was no other linkage – legal, procedural or otherwise.
During the mid-term review in Montreal in late 1988, it was also agreed that the institutional implementation of TRIPS, as in services, would be decided only at the end of the negotiations.
However, as the Uruguay Round progressed, the developed countries began to exert unrelenting pressure on developing countries to give in. By October 1990, both the EC and US had floated non-papers basically stating that Third World countries either accept the new trading system and Organisation incorporating all the agreements in old and new areas, or withdraw completely from the GATT. The US suggested that the results of the Uruguay Round should be integrated with the existing GATT in a successor agreement, ‘the Integrated Trade Accord’. This approach would therefore allow the GATT to expand automatically whenever new rules, disciplines or agreements emerged.
The G77, in the run-up to UNCTAD VIII in 1991, made a public statement that the single undertaking had been introduced at a ‘very late stage’ and was tantamount to ‘breach of good faith’. It pointed out that the concept had not been part of the negotiations and had been introduced merely to force developing countries to accept all the results of the Round. Instead, the G77 stated that there should be meaningful evaluation of the outcome of negotiations, as allowed for in the Punta del Este mandate. The statement also pointed out that the establishment of the Multilateral Trade Organisation was not in the Uruguay Round mandate. Such an institutional arrangement would be limited in scope and will not be fully responsible for the needs of the international trading system, especially the developmental aspirations of the Third World. Instead, it could legitimatise retaliation over Third World policies on services, technology and foreign investment.
Furthermore, the G77 pointed out that the process of negotiations was highly problematic because ‘the conduct of negotiations has not permitted broad-based participation in decision-making’. The results of the lop-sided control was clear in the continued lack of meaningful liberalization favouring Third World countries. On a separate occasion, developing countries including Brazil, India, Venezuela and Tanzania also expressed concern that the single undertaking would be used as an instrument for cross-retaliation.
By 1993, the US went even further and was pushing the line that only a single protocol would be fair for developed countries. Andrew Stohler who was then heading the US GATT team said that it would put an end to the ‘free riders’ in the system – meaning that developing countries have been getting benefits without offering tariff concessions of their own. Thus, the single undertaking was being framed as an expectation, that in all fairness, all members should take on similar obligations, as opposed to the concept of liberalization in accordance to Members’ levels of development.
In this vein and under the overwhelming demands in the negotiations by the EC and US on developing countries in new areas, the single undertaking structure was included in the Dunkel draft text of the Uruguay Round Agreements, and was subsequently instituted as a structure of the Uruguay Round Agreement. In the usual style of GATT negotiations, dominated by the interests of the industrialised economies, unbearable pressures were put on developing countries. Take for example, the push for the liberaliation of services and the inclusion of services in the GATT. The compromise in the negotiations which developing countries only achieved after a hard fight, was for services to be liberalized on a positive list approach ie, only the items listed are included for liberalisation. The single undertaking structure slipped into the Uruguay Round package amidst these compromises. Developing country negotiators concluding the Round probably did not realize the full implication of this new structure.
An UNCTAD published study in 1993 made the following comment on this matter:
‘The all-or-nothing approach of the MTO (WTO) should be judged on its merits or as the outcome of negotiations among a small group of countries in 1991, but never formally placed before all negotiators, and included in the Dunkel text. There was no consensus on it, nor could it be blamed on the Punta del Este declaration and the references there to ‘single undertaking’.
The single undertaking therefore brought on board services, TRIPS and TRIMS in addition to liberalization in goods, into the multilateral trade system.
Since the conclusion of the Uruguay Round, electronic commerce has already been included in the WTO deal. The other areas the developed countries are pushing hard for inclusion are government procurement, further liberalization in investment, trade facilitation, environment, labour issues and products which have been genetically modified.
WEIGHING THE PROS AND CONS OF THE SINGLE UNDERTAKING STRUCTURE
The single undertaking structure is now a taken for granted feature of the multilateral trading system, and is sometimes touted by some as one of the strengths of the system. Some of the points which have in the past been made in favour of the single undertaking include the following:
1) Some developed countries have said that the single undertaking eliminates confusion and fragmentation of the plurilateral system.
2) The structure has been lauded by some for creating only one class of membership. Developing countries now abide by the same set of rules in all areas. Special and differential treatment is now confined mainly to transitional measures.
3) Concessions in one area can be offset by gains in another.
Downsides to the single undertaking include:
1) Developing countries have lost more than they gained by agreeing to a single undertaking. Not all agreements in the WTO, for example TRIPS, TRIMS and agriculture are on balance beneficial for most of the developing world.
2) The single undertaking is anti-development because it is not being balanced by real special and differential treatment (S and D) clauses. The S and D provisions today are very superficial, relating to transitory time frames and are not related to Members’ level of development.
3) Cross-retaliation in the dispute settlement system is now possible. Most developing countries, however, only export a small range of products, some even only a single product. Developed countries tend to export a greater range of products. Retaliation against a single product exported by a developing country will have greater effect than it would on a developed country.
4) The single undertaking structure puts liberalization before the development needs of countries. Instead, development must be the objective of trade. The single undertaking limits the ability of developing countries to integrate gradually. The big bang style of liberalization, as UNCTAD warns, is detrimental to developing countries’ economies.
Apart from developing countries benefiting from cross-sectoral concessions, the other two points – less confusion and the creation of one class of membership – are minor in comparison with the downside effects. The plurilateral system may in fact be more complex, but complexity is a small price if the economic situation of developing countries were to improve. Nor should a single class of membership be an important consideration. On the contrary, in order to ensure development priorities, there should be as many different categories of membership as there are the different levels of development of members.
Furthermore, even with a plurilateral system, cross-sectoral concessions and gains can still be a feature of the multilateral trading system. The complexity will only be a characteristic of a system that is much more development-friendly.
DEVELOPMENT OBJECTIVES VERSUS THE SINGLE UNDERTAKING
The WTO and its single undertaking structure is problematic and contrary to the development needs because it attempts to integrate all 136 members into a common set of rules. Who sets the rules in this situation, becomes a key question.
GATT / WTO negotiations have always been dominated by the QUAD countries – US, EU, Canada and Japan. By putting up a fight, developing countries usually get some compromise, but the situation invariably is a position that is further than what developing countries on their own accord would otherwise be prepared to agree to. Refusal to give in at least in some way to the developed countries usually results in some form of political or economic pressure on a resistant country. For example, threats to withhold aid or market access, or the withdrawal of political support in one form or another. These tactics combined with dividing developing countries as a unified bloc at the WTO has led to a weak Southern bloc unable to hold up to intense pressure.
With each compromise that developing countries give in to, the WTO rules move incrementally towards the direction set by the developed countries. With each compromise, the development priorities of developing countries get eroded. This was how, over the course of seven years of Uruguay Round negotiations, many developing countries which in the first place were vehemently opposed to new issues, found themselves signing on to the single undertaking structure and an all-embracing WTO institution.
This incredibly first-world-biased process is therefore aggravating the economic situation of developing countries. The results after five years of the Uruguay Round are now clear, as elucidated by UNCTAD.
Enforcing a compulsory liberalization agenda according to the present Uruguay Round package is counter development for the following reasons:
1) It is not how open an economy is, or how protected it is, but in fact, how internationally competitive domestic firms are, and therefore, whether or not they can withstand liberalisation. Developing countries do need protection from foreign suppliers, who have had all the advantages of an early start. They have already consolidated the market, and have gained sophistication in creating the technology.
Many developing economies today, because of structural adjustment programmes have almost completely opened up. But there is no growth. In fact, the evidence surfacing is that there has been deindustrialisation.
If protectionist trade policies lead to a healthier domestic economy with more dynamic growth, then there will be gain all round. It will not be a ‘beggar thy neighbour’ situation, as free trade theory concludes, since a healthy domestic economy will also stimulate neighbouring economies through imports. On the other hand, liberalisation policies which do not restrict imports, but end up deindustrialising a country, depresses demand, output and employment. This seriously damages not only the domestic economy but also the larger trading environment.
Domestic governments must therefore play an activist role in trade regulation. This means actively discerning which sectors are ready for liberalisation, and protecting sectors which cannot survive the competition.
2) The present WTO liberalisation package puts the emphasis on trade and exports as the engine for growth for developed and developing countries. The experience of the developed countries showed that in fact, most of their early growth was a result of stimulating the domestic economy. Trade and exports were follow-on effects of growth and a robust domestic economy.
The WTO, however, places restraints on the ability for developing countries to build up their domestic industries and sector. For example, the TRIMS agreement has made it almost impossible for countries to implement local-content requirements. This again was instrumental in the industrial development of many developed countries, as well as the newly industrialising developing countries. The other restraint placed on developing countries is in the area of bound tariffs. In some cases, these tariff levels are even lower than those of developed countries and in future negotiations, there will be pressure to lower these even further.
3) A third problem with a single undertaking has to do with technology. The WTO package has ignored the fact that countries require technology to maintain a position of comparative advantage. The diffusion of technology is therefore critical to continued economic growth. Rather than encouraging technological diffusion for developing countries, the WTO is concerned about protecting the rights of innovators. The TRIPS agreement stops the process of technological diffusion and basically makes cutting edge technology inaccessible. UNCTAD has described it as ‘a premature strengthening of the intellectual property system… ‘that favours monopolistically controlled innovation over broad-based diffusion’.
4) As mentioned earlier, the S and D provisions that are meant to off-set the liberalization disciplines inappropriate for development are inadequate and ineffective. (In contrast, the OECD countries even claim ‘S and D’ rights for themselves– despite the rules. The Agreement on Textiles and Clothing is a major derogation from the GATT.)
If all were well with developing countries’ integration into the world economy, exploration of this issue would not be necessary. However, given that the big-bang exercises in liberalization and the past five years of the Uruguay Round package have worsened the economic and development situation of developing counties, it is prudent to take some steps back and re-evaluate the status quo. The most glaring defect of the multilateral system today, is that development priorities have been put on a back burner. A peek into history shows that there was great resistance by developing countries to an all-or-nothing structure of the trading system. Many developing countries, for example, represented by the G77, were reluctant to agree to the strengthening of the institution in this direction. They were also opposed to the prospect of continuously facing new issues being added on, which they would have to implement under a single undertaking. However, the eventual outcome, as with other many other aspects in the Uruguay Round was brokered by a small group of countries with pressures on the rest to accept the results.
Today, as governments are toying with the institutional reform questions, it would be prudent to seriously evaluate its benefits and drawbacks of the single undertaking for developing countries. The system works well for the developed countries, and the present structure should be continued for them. However, an a la carte multiple undertaking system for developing countries would be much more development friendly, even if it may be complex. Such a plurilateral system would
1) Give developing countries the sovereignty, autonomy and policy freedom that they need at this juncture to decide when and how to integrate into the world economy. This would also give developing countries’ industries adequate time to mature and become competitive before liberalisation;
2) Allow developing countries to opt out of agreements that are counter development, such as TRIPS, TRIMS, agriculture and various agreements in the GATT;
3) Avoid false S and D provisions which only serve to legitimate the first-world-biased liberalization agenda. S and D measures providing slightly lighter disciplines, longer transition periods, or even measures to offset the negative effects of liberalisation still mean that developing country economies must change structurally, as new areas are brought into the WTO. Providing the flexibility available an a la carte system for developing countries, is the best and perhaps even the only appropriate ‘S and D’ measure.