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International Agreements and Policy Reform
by Bernard Hoekman
Contracting parties of the General Agreement on Tariffs and Trade (GATT) decided in 1994 to create a new international body, the World Trade Organization. What is the relevance of the WTO for countries in the Middle East and North Africa? Where does the region stand with regard to the WTO, and how does the WTO fit into the emerging network of preferential trade agreements that governments are in the process of implementing?
The basic benefit of the World Trade Organization, as it is constituted today, is that it provides a mechanism through which governments can commit themselves to the pursuit of certain types of trade policy. It achieves this through a variety of instruments, the most important of which is called "tariff-binding." In binding their tariffs, countries commit themselves to applying tariffs no higher than a certain ceiling. This mechanism is valuable because the use of tariffs constitutes a distortionary trade policy and, therefore, an inefficient way of allocating resources. At the same time, it gives governments a certain level of backing in resisting efforts to reimpose tariff protection when domestic circumstances deteriorate or when an industry faces import competition and petitions for protection.
One of the innovations of the WTO as compared to the GATT that preceded it is that the rules apply to everyone. Under the GATT system, many developing countries had the choice to opt out of particular types of disciplines, especially those relating to non-tariff policies (such as the enforcement of product standards or procedures used to value shipments by Customs). Even in the area of tariffs, developing countries usually did not apply all the rules; for instance, they frequently did not bind tariffs, and this gave them leeway to raise tariffs without being subjected to multilateral disciplines. A major result of the recent Uruguay Round of negotiations that led to the creation of the WTO was that many countries concluded that it was in their own interest to bind their tariffs, and to do so at levels not far from applied rates. This has made the WTO much more relevant than the GATT ever was to these countries.
The relevance of the WTO has also increased because of changes to the system of dispute settlement. Under the GATT, a country which had violated the rules was able to refuse to implement recommendations issued by a panel of experts charged with investigating a dispute. This option no longer exists: Dispute settlement findings under the WTO cannot be blocked by one of the parties to the dispute; the findings of the panel report can only be blocked if all WTO members agree to do so. This is extremely unlikely to occur, given that at least one WTO member — the one winning a case — is likely to be happy with the outcome of the dispute settlement procedure.
The WTO embodies a wide variety of rules and principles that pertain to particular trade policy issues. One important dimension of the WTO — which is not found in the GATT — is that there are multilateral rules on services and the protection of intellectual property. Since the GATT applied only to trade in goods, this is a significant development for the world trading system. It again implies that the WTO will have more far-reaching implications for member countries than the GATT.
Where do the Mediterranean countries stand in terms of the extent to which they participate in and use the WTO? In answering this question, one finds a great variance. A number of countries are not yet members of the WTO. Some are in the process of negotiating accession; others have yet to apply. Other countries were already members of GATT and are thus full-fledged members of the WTO. Yet even for countries that were GATT members, the WTO will have important implications. As mentioned earlier, many disciplines that were found in the GATT did not really apply to developing countries. This implies that countries from the region that were GATT members — such as Egypt, Morocco and Tunisia — will have to implement a whole set of disciplines in various non-tariff related areas — such as standards or customs valuation — which they may not have applied in the past. The net impact of this is likely to be of great value as most of the disciplines that are found in the WTO constitute good policy. The fundamental principles contained in these agreements are nondiscrimination and transparency, which benefit any type of policy regime.
It is quite urgent for those countries in the region which are not members of the WTO to accelerate the process of accession, partly because the gap that is now emerging between the old regime and new regime will increase. In addition, since the WTO is a more complex and an all encompassing instrument than the GATT, it is now a much more valuable mechanism through which governments can signal to international financial markets that the trade policy stance that is pursued is a liberal one. A necessary condition for using this mechanism is that concrete commitments are made by governments in the WTO with respect to both classic trade policy (tariff bindings) and the liberalization of access to service markets. Countries in the region made relatively few commitments in the area of services liberalization. This is potentially costly as the role of services in international trade is increasing and an efficient service sector is quite fundamental to enhance the competitiveness and productivity of the agricultural and manufacturing sectors. Many services cannot be traded the same way goods are traded, as services are intangible and non-storable. Consequently, introducing foreign competition in domestic services markets often requires foreign direct investment.
Statistics compiled by the European Union are quite interesting in this connection. The EU is to a large extent a single market for both goods and services. In looking at the flows of trade and investment within the EU, approximately 70 percent of all direct investment flows relate to services. With regard to flows to the rest of the world, 35 to 40 percent of all outward investment by EU firms are in the services sectors. This illustrates that there are still larger barriers to flows from the EU to the rest of the world than to those within EU, and that the potential exists clearly for two-way flows of investment in the service sector in this region and worldwide.
The WTO is far from being a perfect instrument, which may be one of the rationales why countries continue to engage in bilateral negotiations to establish regional trade agreements. These have become very important in the Middle East and North Africa region, as reflected in the series of negotiations to establish bilateral free trade agreements with the European Union under auspices of the European-Mediterranean Partnership Initiative and the recent agreement between Arab League members to create a free trade agreement by 2008. These agreements, once fully implemented, will do much to liberalize trade. As such, these agreements will act to complement the WTO. At the same time, they may imply greater discrimination against WTO members that are not members of the regional trade agreements. This may be costly to the region insofar as consumers switch from the lowest-cost global producer of goods to higher cost regional producers. Such trade diversion costs can be reduced if governments continue to lower external trade barriers and maximize the potential of regional agreements to achieve deeper integration by pursuing initiatives to reduce the costs of differences in administrative procedures and the enforcement of redundant regulations ("red tape").
