development, trade, and the wto - world...

D E V E L O P M E N T,T R A D E , A N D

T H E W T OA Handbook

Bernard Hoekman, Aaditya Mattoo, and Philip English, editors

THE WORLD BANKWashington, D.C.

Administrator

29799

© 2002 The International Bank for Reconstruction and Development / The World Bank1818 H Street, NWWashington, DC 20433

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ISBN 0-8213-4997-X

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Foreword xi

A Tribute to J. Michael Finger xiii

Acknowledgments xix

Contributors xxi

Abbreviations xxiii

Introduction xxvii

Part I Trade Policy Reform in Context 11 Trade Policy Reform as Institutional Reform 3

Dani Rodrik 2 Economywide Dimensions of Trade Policy and Reform 11

Kym Anderson3 Exchange Rate Overvaluation and Trade Protection 17

Howard J. Shatz and David G. Tarr 4 Fiscal Dimensions of Trade Liberalization 24

Liam Ebrill, Janet Stotsky, and Reint Gropp5 Trade Policies for Poverty Alleviation 28

L. Alan Winters

Part II The World Trade Organization 396 The WTO: Functions and Basic Principles 41

Bernard Hoekman7 Reciprocity in the WTO 50

J. Michael Finger and L. Alan Winters 8 WTO Accession 61

Constantine Michalopoulos9 Developing Countries and the WTO Dispute Settlement System 71

Valentina Delich10 The Adequacy of WTO Dispute Settlement Remedies:

A Developing Country Perspective 81Robert E. Hudec

Part III Selected Trade Policies Affecting Merchandise Trade 9311 Market Access Issues and the WTO: An Overview 97

Sam Laird 12 Tariff Peaks and Preferences 105

Marcelo Olarreaga and Francis Ng

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13 Rules of Origin and Trade Preferences 114Luis Jorge Garay S. and Rafael Cornejo

14 Nonpreferential Rules of Origin and the WTO Harmonization Program 122Stefano Inama

15 Customs Valuation and Customs Reform 128Vinod Rege

16 Trade Facilitation: Improving the Invisible Infrastructure 139Brian Rankin Staples

17 Industrial Policy and Developing Countries 149Mari Pangestu

18 Export Development Policies and Institutions 160Philip English and Luc De Wulf

19 Trade-Related Investment Measures 171Bijit Bora

20 Local Content Policies: Australia’s Experience with Automobiles 179Garry Pursell

21 Implementing the Agreement on Textiles and Clothing 186Hanaa Kheir-El-Din

22 Safeguards: Making Sense of GATT/WTO Provisions Allowing for Import Restrictions 195J. Michael Finger

23 Dealing with U.S. Trade Laws: Before, During, and After 206Gary N. Horlick and Eleanor Shea

Part IV Developing Countries and Negotiations on Trade in Services 213

24 Liberalization of Trade in Services in Developing Countries 221James Hodge

25 The Magnitude of Flows of Global Trade in Services 235A. Maurer and P. Chauvet

26 Quantifying Barriers to Trade in Services 247Robert M. Stern

27 The GATS: Key Features and Sectors 259Rudolf Adlung, Antonia Carzeniga, Bernard Hoekman, Masamichi Kono,Aaditya Mattoo, and Lee Tuthill

28 Negotiating Improved Market Access Commitments 280Aaditya Mattoo

29 Domestic Regulations and Liberalization of Trade in Services 290Carlo Gamberale and Aaditya Mattoo

30 Movement of Natural Persons and the GATS Major Trade Policy Impediments 304Rupa Chanda

31 Electronic Commerce, the WTO, and Developing Countries 315Catherine L. Mann

32 Completing the GATS Framework: Safeguards, Subsidies, and Government Procurement 326Pierre Sauvé

33 Regional Liberalization of Trade in Services: Experiences in the Americas 336Sherry M. Stephenson and Francisco Javier Prieto

Part V Technology and Intellectual Property 34734 International Technology Transfer and Economic Development 351

Kamal Saggi

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35 Implementing the TRIPS Agreement 359Jayashree Watal

36 Benefiting from Intellectual Property Protection 369Keith E. Maskus

37 Proprietary Protection of Genetic Resources and Traditional Knowledge 382Arvind Subramanian

38 Cultural Industries and Intellectual Property Rights 390Frank J. Penna and Coenraad J. Visser

39 Trademarks, Geographical Indications, and Developing Countries 403Carsten Fink and Beata K. Smarzynska

Part VI “Behind-the-Border” and Regulatory Issues 41340 Multilateral Disciplines and Government Procurement 417

Simon J. Evenett 41 Standards, Regulation, and Trade: WTO Rules and Developing Country Concerns 428

John S. Wilson 42 Multilateral Disciplines and National Investment Policies 439

Bernard Hoekman and Kamal Saggi 43 Trade, Competition, and the WTO 447

Peter Holmes 44 Merger and Anticartel Policies in an Era of Integrating Markets 456

Simon J. Evenett 45 Trade and Labor: Text, Institutions, and Context 463

Simon Tay 46 Environmental Regulation and the WTO 472

Veena Jha

Part VII The Trading System and Developing Countries 48347 Developing Countries: Turning Participation into Influence 485

Diana Tussie and Miguel F. Lengyel 48 Implementation of WTO Commitments: The Development Challenge 493

J. Michael Finger and Philip Schuler 49 Special and Differential Treatment 504

T. Ademola Oyejide 50 Trade-Related Capacity Building for Enhanced African Participation

in the Global Economy 509David F. Luke

Part VIII Trade Policy Questions and Guidelines 51751 Rules of Thumb for Trade Policy 519

Constantine Michalopoulos, Maurice Schiff, and David G. Tarr 52 Arguments for and against Uniform Tariffs 526

David G. Tarr 53 Formula Approaches to Reciprocal Tariff Liberalization 535

Arvind Panagariya 54 Binding Tariffs: Why Do It? 540

Joseph F. Francois and Will Martin 55 Benefiting from Regional Integration 548

Bernard Hoekman and Maurice Schiff

Appendixes 559A Patterns of Trade and Protection: Selected Country Data 561

Francis Ng

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B Trade Indicators and Indices 585Francis Ng

C A Dataset on Trade and Production, 1976–99 589Alessandro Nicita and Marcelo Olarreaga

Glossary of Trade-Related Terms 593

Bibliography 605

Index 629

CD-ROMs1 A Dataset on Trade and Production, 1976–99

Alessandro Nicita and Marcelo Olarreaga2 Applied Trade Policy for Developing Countries: Outline, Content, and Readings for a Short Course

Jaime de Melo and Marc Bacchetta

Tables3.1 Comparing “Great Depressions”: Cameroon, Côte d’Ivoire, and the United States 214.1 Revenue Impact of Trade Liberalization 256.1 From GATT to WTO: Major Events 467.1 Control of Free-Riding in GATT Negotiations: U.S. Experience, 1947–67 537.2 U.S. Imports Covered by Kennedy Round Tariff Concessions (Reductions plus Bindings) as

a Share of Total U.S. Imports from the Country Group 547.3 Tariff Concessions Received and Given at the Uruguay Round 578.1 Accessions to the World Trade Organization as of May 1, 2001 649.1 Number of Dispute Settlement Cases, 1995 through September 2000 76

11.1 Post–Uruguay Round Applied and Bound Rates of Industrial and Developing Economies by Major Product Group 98

11.2 Tariff Escalation on Products Imported by Industrial Economies from Developing Economies 99

11.3 Post–Uruguay Round Import-Weighted Applied and Bound Tariff Rates 9911.4 Patterns of Protection in Manufacturing, 1995 10212.1 Tariff Peaks and Imports, Quad Economies, 1999 10812.2 Tariff Peaks and Preferential Duty Rates, Quad Economies, 1999 11012.3 Effects of Granting Duty- and Quota-Free Access to Quad Markets to

LDC Exporters 11117.1 Evolution of Industrial Policies in East Asia, 1950s–1990s 15317.2 Policies and Measures for Promoting Exports in Asia 15521.1 Results of Integration Programs for ATC Stages 1 and 2 18921.2 Number of Quotas Eliminated by Integration in ATC Stages 1 and 2 19021.3 Restrained Trade Freed of Quotas, 1995–97 19021.4 Expanded Market Access Attributable to Increases in Quotas

(Stages 1 and 2 Combined) 19022.1 Frequency of Use of GATT Provisions That Allow Trade Restrictions, 1948–94 196IV.1 Summary of Selected GATS Negotiations and Domestic Policy Issues:

Current Status and Desirable Outcomes 21825.1 Inadequacies of Statistical Domains with Regard to Modes of Supply 23725.2 Average Annual Growth of Services and Merchandise Trade, 1990–99 23825.3 Trade in Commercial Services by Region, 1990–99 23925.4 Share of Selected Economies in World Trade in Services, 1995 and 1998 23925.5 Exports of Services of Selected Economies by Selected Partners, 1995 and 1998 24025.6 Evolution of Transport, Travel, and Other Commercial Services, 1980–99 24125.7 World Trade in Other Commercial Services by Category, 1996–98 241

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25.8 Trade in Services by Mode of Supply, 1998 24225.9 Shares in Inward and Outward FDI Stocks, Selected Country Groups,

1990 and 1999 24325.10 Total U.S. Services Trade, 1994, 1996, and 1997 24326.1 Constructed Ad Valorem Tariff Equivalent “Guesstimates” by One-Digit ISIC

Services Sector, Selected Countries 25026.2 FDI Restrictiveness Indices, Selected APEC Economies and Selected

Services Sectors 25026.3 Estimated Tariff Equivalents in Traded Services: Gravity Model–Based

Regression Method 25226.4 Average Gross Operating Margins of Firms Listed on National Stock Exchanges,

1994–96, by Economy or Region 25326.5 Alternative Approaches to Modeling the Impact of Barriers to Trade and Investment 25426.6 Welfare Effects of 33 Percent Reduction in Barriers to Trade in Agriculture,

Manufactures, and Services 25727.1 Main Provisions of the GATS 26027.2 Format and Example of a Schedule of GATS Commitments 26127.3 Number of Committed Services Sectors by Member, July 2000 26327.4 Market Access Commitments on Insurance (Life and Nonlife) under the GATS 26827.5 Market Access Commitments on Banking (Acceptance of Deposits and Lending of All

Types) under the GATS 27027.6 Current Status of GATS Commitments on Voice Telephone Services 27328.1 Types of Market Access Restrictions on Commercial Presence in Services Sectors,

All WTO Members, 2000 28128.2 Developing Country Precommitments to Liberalize in Basic Telecommunications

Negotiations, 1998 28430.1 Commitments by Sector and Mode of Supply (Professional Services) 30833.1 Specific Services Sectors Highlighted in the Subregional Integration Agreements

of the Americas 342V.1 Summary of Selected TRIPS Issues: Current Status and Possible Approaches

from a Development Perspective 34940.1 Performance Indicators for Government Procurement in Korea, 1993–98 42441.1 Total Number of Countries That Have Established SPS Enquiry Points 43544.1 Economies with Firms Convicted of Price Fixing by the United States or the

European Commission during the 1990s 45844.2 Cross-Border Mergers and Acquisitions in Latin America and Asia Pacific,

1991–98 45948.1 Costs of World Bank Customs Reform Projects, Selected Countries 49648.2 Costs of SPS-Related World Bank Projects 49748.3 World Bank Projects Related to Intellectual Property Rights 49954.1 Industrial Applied and Bound Tariff Rates 54254.2 Unbound Tariff Lines by GATT Multilateral Tariff Negotiation (MTN) Category 543A.1 Trends in Average Tariff Rates for Developing and Industrial Countries, 1980–99 562A.2 Average Tariff Rates by Sector and FDI Inflows for All Countries in Recent Years 568A.3 Tariff Escalation in Developing and Industrial Countries, 1994–2000 571A.4 Pre– and Post–Uruguay Round Nontariff Barriers for All Goods, Developing and

Industrial Countries, 1984–93 573A.5 Nontariff Barriers for All Products in Developing Countries, 1989–98 576A.6 Tariff Peaks and Preference Margins, Canada, 1999 578A.7 Tariff Peaks and Preference Margins, European Union, 1999 580A.8 Tariff Peaks and Preference Margins, Japan, 1999 581

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A.9 Tariff Peaks and Preference Margins, United States, 1999 582A.10 Comparison of MFN Applied Tariffs of Labor-Intensive Products,

Selected Countries, 1997–99 583

Figures11.1 Implications of a 40 Percent Reduction in Agricultural Trade Barriers 10011.2 Share of Manufactures in Developing Country Merchandise Exports,

Actual and Projected, 1965–2005 10112.1 Projected Changes in LDC Export Revenues as a Result of Duty-Free Access,

by Product and Importer 11222.1 Renegotiations, Emergency Actions, and Voluntary Export Restraints (VERs),

1948–93 19822.2 Renegotiations, Emergency Actions, Antidumping Actions, and Voluntary Export

Restraints (VERs), 1948–93 20027.1 Number of WTO Members Committing to at Least Part of an Aggregate Services Sector,

July 2000 26427.2 Market Access Commitments by WTO Members on Movement of Natural Persons

(Services Mode 4) 26529.1 Approaches toward Domestic Regulation at the Multilateral and National Levels 29133.1 Matrix of Possible Elements in Services Trade Agreements 34339.1 Global Demand for Trademarks and Patents 40839.2 Nationality of Trademark and Patent Title Holders by Country Income Group, 1997 40941.1 Number of Notifications under the SPS Agreement by Region, 1995–99 43554.1 Implications of a Tariff Binding for the Applied Rate of Protection 54554.2 Welfare Implications of Tariff Bindings for a Small Country 54655.A1 A RIA Involving Small Countries 557

Boxes 4.1 Export Taxes 275.1 Key Questions for Determining the Poverty Impact of a Trade Reform 296.1 Transparency: Notification and Surveillance 459.1 Special and Differential Treatment and the DSU: Some Examples 739.2 The Advisory Centre on WTO Law 75

10.1 The Bananas Case 8712.1 The European Union’s “Everything but Arms” Initiative 10613.1 The U.S. Trade and Development Act of 2000 11515.1 The WTO Agreement on Preshipment Inspection 13215.2 The International Convention on the Simplification and Harmonization of

Customs Procedures: 1999 Revision of the Kyoto Convention 13516.1 Increasing the Effectiveness of Preshipment Inspection Services 14316.2 Improving Export Clearance in Jamaica 14517.1 Nominal and Effective Rates of Protection 15117.2 Instruments of Industrial and Export Promotion Policies Employed in the

Republic of Korea and Japan 15218.1 Matching Grant Schemes to Promote Exports 16218.2 Duty Drawback for Direct Exporters: The Chilean Case 16418.3 Subsidies, the WTO, and Developing Countries 16821.1 The Cost of Trade Protection of Textiles and Clothing in the European Union 19322.1 The Basics of WTO Antidumping Rules 20122.2 The Flawed Economics of Basing Decisions on an Injury Investigation 20324.1 Realizing the Gains from Financial Liberalization 223

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24.2 Contribution of Inefficient Internal Transport Systems to the Concentration ofChina’s Export Industries in Coastal Regions 225

24.3 Lessons from Reforming Argentina’s Ports 22724.4 Welfare Gains from Services Liberalization: The Case of Tunisia 22924.5 Achieving Effective Competition in Telecommunications: The Asian Experience 23325.1 Services Statistics and the GATS 23625.2 Improving Data on Trade in Services 24427.1 Financial Services: Market Access Commitments of Developing and

Transition Economies 26728.1 Services Exports by Developing Countries: Potential Gains and Current Barriers 28629.1 Whose Regulations, and for What Purpose? Sticky Issues in Electronic Commerce 29229.2 Assessing the WTO Telecommunications Reference Paper 29329.3 Rules for Domestic Regulations: The Experience with Accountancy 29529.4 Challenges in Implementing Procompetitive Regulation 29729.5 Financial Sector Liberalization: The Need for Policy Coherence 29929.6 Financial Liberalization and Access to Credit by the Poor 30129.7 Pursuing Social Objectives in Competitive Telecommunications Markets 30230.1 Immigration Patterns in OECD Countries 30931.1 The Economics and Law of Duty-Free Electronic Commerce 31932.1 ASEAN Proposal for a GATS Emergency Safeguard Mechanism 33035.1 An Overview of Intellectual Property Rights 36035.2 Combating Disease Worldwide: Fostering the Required R&D 36636.1 Pharmaceutical Policies and the TRIPS Agreement 37436.2 Differential Pricing 37836.3 Health Care Systems and Essential Medicines 38040.1 Accession to the GPA: Identifying Costs and Benefits 42541.1 SPS Measures: The Kenya Fish Exports Case 43041.2 Standards-Related Problems Encountered by Indian Exporters 43341.3 Moving Forward: A Proposal 43842.1 WTO Rules on FDI: A Positive View 44143.1 Why Competition Policy Should Not Be Seen through a Market Access Lens 45043.2 Free Trade and Competition Policy 45245.1 What Are Core Labor Standards? 46445.2 Trade and Labor Standards: Three Debates 46646.1 Basic Principles of Environmental Regulation 47447.1 Café au Lait Diplomacy 48948.1 Costs of Implementing the WTO Agreements: The Jamaican Experience 50251.1 Export Diversification in Africa: Elements of a “Business Plan” 52355.1 Selected Major Regional Integration Agreements and Dates of Formation 549

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oday, trade policy is at the fore-front of the development agenda,

and it is a critical element of any strategy to fightpoverty. This renewed interest in trade liberaliza-tion does not come from dogma but instead is basedon a careful assessment of development experienceover the last 50 years.

Developing countries that increased their integra-tion into the world economy over the past twodecades achieved higher growth in incomes, longerlife expectancy, and better schooling. These coun-tries, home to some 3 billion people, enjoyed anaverage 5 percent growth rate in income per capitain the 1990s compared to 2 percent in rich countries.

A common thread exists among these developingcountries that have been successful at generatinggreater growth and at lifting people out of poverty.They opened up their economies as part of a broad-er development strategy that builds on two pillars:improving the investment climate for the privatesector to generate jobs and empowering poor peo-ple, so they can participate in growth.

This approach to development, with trade liberal-ization as one mechanism of improving the invest-ment climate for private entrepreneurs, has gainedwide support among developing and industrialcountries. All WTO member countries, includingthose in the developing world, have reduced theirtrade tariffs since the Uruguay Round. In its Every-thing but Arms agreement, the European Union hasunilaterally lowered its trade barriers to the leastdeveloped countries. The United States adopted theAfrican Growth and Opportunities Act. And inNovember 2001, the members of the World TradeOrganization launched a “Development Agenda” inDoha. In doing so, they acknowledged that to makeprogress in the fight against poverty, rich country

markets should be more open to the goods of poorcountries, and that developing countries shouldopen their markets as well as address a range ofinstitutional issues.

The advance at Doha presents a unique opportuni-ty for development, but it will require substantiveparticipation from all countries to succeed. In partic-ular, each participating developing country will needa thorough understanding of how trade liberaliza-tion can contribute to its national objectives of eco-nomic growth and poverty reduction. Such strategicunderstanding will have to be supported by both thetrade negotiators and by civil society; at times, themedium-term goal of poverty reduction requiresgovernments to challenge the interests of some par-ticular industries for short-term protection.

In addition, many countries will have to break newground. Today’s trade issues go beyond the tradi-tional mechanisms of tariffs and quotas and include“behind-the-border” issues, such as the role of infra-structure and governance in supporting a well-func-tioning trading economy. Many poor countries haveyet to create intellectual property regimes that maketraditional knowledge or cultural products intonegotiable and defensible assets; to identify optionsto upgrade and enforce national product, health,and safety standards; or to strengthen institutionsfor prudential and pro-competitive regulation ofservices. Developing countries will have to acquirequickly the needed expertise on these complexissues, so they can negotiate more effectively andensure that agreements serve their objective ofpoverty reduction.

This Handbook is part of our efforts to preparedeveloping countries to negotiate trade agreements.It is the product of a joint capacity-building effortinvolving a number of research institutes around

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T

Foreword

the globe. It aims to provide a summary of the eco-nomics of sound trade policy and to be a guide tomany of the behind-the-border regulatory issuesthat confront countries in the contexts of bothdomestic reform and international negotiations.Views and approaches to many of the issues that aredealt with in this volume differ substantially, andthese differences are reflected here. All are motivat-ed by the question of how the global trade architec-ture might be made more supportive ofdevelopment, and the question of how developingcountries can use international negotiations andcooperation as an instrument to further domesticreform and access to export markets.

The Handbook is intended to be a source ofinformation and guidance for all practitioners,defined as those with either a responsibility for, or a

strong interest in, real-world trade policy making,rather than the theory of international trade. Suchpractitioners will be in ministries of trade, industry,and finance; parliaments; private sector associationssuch as chambers of commerce; consumer organi-zations, and policy institutes.

The diversity and pragmatism of the views repre-sented contribute to the richness of this Handbookand make it a very worthwhile resource for all tradepractitioners. It will help us “seize the moment” andfulfill Doha’s promise to focus on the need for tradeto bring about greater growth and poverty reduction.

NICHOLAS STERN

SENIOR VICE PRESIDENT AND

CHIEF ECONOMIST

THE WORLD BANK

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ifteen years after the publicationof the World Bank’s first handbook

on trade policy and multilateral negotiations (Fin-ger and Olechowski 1987), the development dimen-sions of trade policy and trade negotiations oftenseem to be neglected. This is especially the case asregards trade agreements, where negotiations arefrequently driven by interest groups in high-incomecountries and where outcomes can have significantcosts for developing countries, both in a monetaryor resource-use sense and—since these obligationsmay deflect attention and resources away fromother, more important, tasks—in opportunity costs.The focus of much of the advice and assistance thatis offered to developing country policymakers cen-ters on enhancing their understanding of the rulesof the international trading game, as opposed todetermining what type of trade policy makes themost sense from a development perspective. Thelatter is crucial, as only on that basis is a national“bottom-up” approach to the design of multilateralrules possible. As noted by J. Michael Finger (1991a,1991c), when it comes to the relationship betweenthe multilateral trading system and development,there is a widespread tendency to “think aboutGATT only in the GATT way.” Finger made thisobservation before the creation of the WTO and,characteristically, well before it became convention-al wisdom in the development community. Subse-quent experience has reinforced his insight.1

This Handbook continues a series that Fingerlaunched in 1987. Mike Finger, who retired from theWorld Bank in 2001, has been a source of inspira-tion, a guide, and a mentor to several generations oftrade policy analysts. Many of the contributors tothis volume have been inspired by his writings, anda significant number have also been colleagues and

friends. This Handbook is dedicated to him both asa practical tribute to his work and influence and inthe belief that his clear-sighted approach to tradepolicy will motivate researchers, analysts, and com-mentators who have never had the opportunity tomeet him.

Finger has noted that “trade theory is about iden-tifying whose hand is in whose pocket. Trade policyis about who should take it out” (Finger 1981). Bothare important. Good policymaking requires a solidgrounding in fact and analysis—an understandingof the processes that are taking place—and a frankrecognition that, at least for international trade,there will be winners and losers from virtually anypolicy decision. Trade policy advice needs to pro-vide this grounding, but it must also understandand internalize how the potential conflicts betweenwinners and losers are played out in actual decision-making institutions. Merely wringing one’s handsand bemoaning the fact that policy advice is ignoredis not satisfactory; one needs to see why and askhow institutions can be designed to produce betterpolicy outcomes.

Five components of good trade policymaking canbe distinguished: economic analysis, informationand data, political economy, operationalization ofpolicy advice, and a contestable market for policyresearch. Each is discussed below.

Economic Analysis

Economic analysis is perhaps the most obvious andmost easily provided input into the policy cocktail.Many academic economists are active in this area,and theory is cheap. Getting concepts clear andshowing how one thing implies another, and underwhat conditions, are necessary first steps toward any

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A Tribute to J. Michael Finger

reliable policymaking. Finger’s early work on theusefulness of the concept of effective protection isan example (Finger 1969). Such analysis might bepurely positive—describing relationships betweeneconomic phenomena—or it might have normativedimensions in which conclusions about welfare areinferred. Either way, it needs to be clear and logical-ly watertight.

But although logical precision may be necessary,it is far from sufficient for defining good policyanalysis. The other essentials—which are, regret-tably, much scarcer—are that the analysis deal witha real problem that someone is interested in andthat it be couched in operational terms.2 Policyresearch must ultimately refer to phenomena thatcan be observed—especially in terms of defining thecircumstances in which the research can be appliedand the levels at which to set policy instruments—and it must refer to policy levers that could, in prin-ciple, be manipulated. Unfortunately, all this makessuch analysis less attractive to the editors of aca-demic journals. Finger’s work, and his publishingrecord, suggest, however, that policy analysis can beevery bit as exciting intellectually as “pure” theory.Some examples are early pathbreaking work assess-ing the relative impact of transport costs and tariffs(Finger and Yeats 1976) and assessments of theeffects of the offshore assembly provisions in U.S.customs law (Finger 1976b).

Information and Data

Great analysis will occasionally throw up universaltruths that do not require detailed empirical analy-sis in order to be applied. More commonly, howev-er, policy analysis is empty without a supportinginformation base. The most obvious need in inter-national trade is for data on international tradeflows and policies, but information on the laws andinstitutions that govern behavior is also essential.“Merely” collecting and presenting information canbe spectacularly illuminating. For example, in themid-1980s Finger inspired and managed the WorldBank’s empirical work on nontariff barriers(NTBs); Nogués, Olechowski, and Winters (1986) isan example.3 At that time theory about the effects ofNTBs was not lacking, but there was almost no con-cept of how pervasive these barriers were. Present-ing the data (and being clear about the adequacy orinadequacy of the measurements) took the debatemuch further and had a significant effect in mobi-

lizing support for disciplining the use of NTBs inthe Uruguay Round.

Finger also produced the most useful summariesof tariff concessions in the Uruguay Round (Finger,Ingco, and Reincke 1996). They were useful partlybecause he chose to measure concessions in a moreinformative way than did national statisticians andthe WTO. He generated the statistic, much cited inthe mid-1990s, that trade reforms under IMF andWorld Bank programs liberalized more developingcountry trade than had the Uruguay Round. Andrecently he showed how developing countriesreceived fewer Uruguay Round concessions (in amercantilist sense) than they gave (Finger andSchuknecht 2001; Finger, Reincke, and Castro forth-coming). In each case, the secret was to base detailedwork on the data on a well-specified question posedin terms of clear operational concepts. This is, infact, not “mere” description but a sophisticatedmarriage of theory and data that relies on simplestatistics rather than high-technology econometrictechniques.4

A further important dimension of good policyresearch is to devise ways of helping policy analyststhroughout the world to repeat and extend state ofthe art analysis. Many theoretical analyses are easilyreplicated, but once one begins to work with data,there can be high costs to replication even if thereare no unforeseen difficulties to overcome. The firstrequirement for facilitating replication is to makedata available. Great strides have been taken recent-ly in this direction, but there are still many hurdlesto be overcome. For example, it is unfortunate thatmembers of the WTO continue to resist making theUruguay Round bound tariff rates available in aconvenient form for analysis.5

The second component also focuses on conven-ience. Where complex operations or calculations arerequired, it is essential to make tools and routinesavailable to external researchers and so make itcheap and easy for them to carry out their ownanalysis. Although we tend to equate data withnumbers, it is equally important for policy analyststo have accurate representations of institutional andlegal processes. Some of these may be summarizednumerically, as in, for example, Finger’s compilationof tariff concessions granted and received in theUruguay Round (Finger, Ingco, and Reincke 1996).In other cases it is a matter of observing processesand finding ways of distilling their essence into afew simple statements. The pioneering work by Fin-

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ger, Hall, and Nelson (1982) on administrative pro-tection (on which more below) is based on a carefulinstitutional study of U.S. antidumping, counter-vailing, and escape clause protection.

Today, as we grapple with the subtleties and com-plexities of trade and development policies and therole of the WTO in supporting development, workon information and data is prominent. For exam-ple, many of the chapters on services in this Hand-book deal with how to measure the progress ofliberalization in these areas and examine how gov-ernments have applied the agreements domestically.

Recognition of Political Economy

If entrepreneurs and workers respond to price sig-nals and incentives in determining their behavior, itis hardly surprising that they respond to other eco-nomic incentives, such as the opportunity to createeconomic rents by intervening in markets. Nor is itsurprising that politicians and bureaucrats alsorespond to incentives of various kinds. Politicaleconomy may be broadly thought of as exploringthe role of political activities and forces in shapingeconomic behavior. Policy analysis must take it intoaccount not only in predicting the outcomes of par-ticular policy changes but also, and more particular-ly, in designing institutions and policy regimes.

Political economy and trade policy are closelylinked because every trade intervention potentiallycreates conflict between winners and losers—pro-ducers and consumers, agriculture and industry,skilled and unskilled labor. Because all political sys-tems find it difficult to deal with redistributionexplicitly, trade policy presents both problems andopportunities. Supporting a trade liberalizationwhile providing explicit redistribution to preventanyone from losing is a big political challenge,whereas using trade intervention as a form of covertredistribution that is buried beneath a pile of arcanetechnical detail often looks like an attractive way ofprotecting or rewarding specific interests.

Opacity can make trade policy very attractive.Finger (1981) and Finger, Hall, and Nelson (1982)showed that the mechanisms involved can beextremely subtle. Making protection subject to legalrequirements and establishing expert investigativeauthorities to establish the “facts” of the case allserve to remove the process from public scrutiny. Bymaking procedures complex and expensive, one canturn an apparently objective pseudo-legal process

into an unbalanced game with a strongly biasedoutcome. The classic analysis by Finger, Hall, andNelson of antidumping actions makes clear how thetechnical process favors business interests and dis-enfranchises consumers and users—in fact, theauthors argue that this is precisely the politicalfunction of the process. Only by covertly loadingthe scales can a low-level (ostensibly nonpolitical)process hope to resolve distributional struggles; ifthe loading is obvious, the matter tends to becomepolitical and more difficult. Moreover, once estab-lished, such unbalanced processes tend to perpetu-ate themselves because the interest groups whoseinterests are served (including the people who man-age the processes) ensure that this happens. Finger,who has contributed massively and seminally to ourunderstanding of antidumping and safeguards overtwo decades, discusses the subject in Chapter 22 ofthis volume.

A second area in which political economy hasbeen and continues to be crucial is in the analysis ofthe GATT and the WTO. Finger (1974, 1976a)demonstrated the centrality of reciprocity to GATTtariff negotiations: despite the requirement that alltariff cuts be extended to all GATT partners, nego-tiators chose commodities in such a way that muchof the benefit of a cut went to the country request-ing it (the principal supplier), and nearly all of thebenefit went to countries taking active part in thenegotiations. In passing, Finger also showed that thedeveloping countries which made significant con-cessions in the multilateral negotiations received farmore concessions on their exports than did passiveobservers.

Finger (1979) was being relatively unfashionablein observing that the critical political balance of theGATT was internal to countries, as exporters seek-ing market access abroad pressed import-compet-ing sectors to concede market access at home. WhenU.S. legislation provided an alternative route forexporters to open foreign markets, in the form ofSection 301, which authorized unilateral trade sanc-tions against trade-restricting partners, the wholedynamic of U.S. support for the multilateral systemchanged (Finger 1991b). Finger was prominentamong those who had argued that for developingcountries the principal requirement was not toopen up others’ markets, but to open up their own(Finger and Kreinin 1976) and that in this respectthe GATT approach (and GATT-think) based solelyon reciprocity was not very useful. Developing

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countries must address their own needs directly viatheir own policy and should not view the multilat-eral system as providing a shortcut to good tradepolicy or good trade outcomes; it just does not dothat (Finger and Winters 1998).

These political-economy problems figure promi-nently in this Handbook, for it is only by recogniz-ing their force that they can be overcome. Thus, forexample, Chapter 52, by Tarr, stresses the political-economy advantages of uniform tariffs, which aremuch more robust to lobbying than tailor-madetariffs. Rodrik, in Chapter 1, emphasizes the impor-tance of developing local institutions as local solu-tions to local problems rather than adoptinguniform institutions imposed by the internationalcommunity, and this analysis is consistent with Fin-ger’s point about the costs of certain UruguayRound institutions (Finger and Schuler 2000). InChapter 22, Finger explores the political economyof safeguard provisions, and in Chapter 7 Fingerand Winters explore what reciprocity means in thecurrent broad agenda of the WTO. (It has no “exter-nal” definition; it is whatever deal the parties arewilling to agree on.)

Operationalization of Policy Advice

Policy analysis is ultimately sterile if it does notchange behavior. How to present and package thefindings of analysis in ways that both strike chordswith decisionmakers and are (relatively) easy toapply is critical. Again, Mike Finger leads the way.The clarity and directness of his writing is a modelfor all researchers. And it is substantially achievableby them too, for while it certainly requires talent, itmostly relies on thinking hard—and with brutalobjectivity—and on working hard (spending timerefining one’s prose). Finger also has a talent for thememorable phrase or metaphor: “Antidumping isordinary protection with a great public relationsprogram” (Finger 1993); “Where the WTO got itwrong, it was perhaps because the World Bank didnot get it at all” (Finger and Nogués 2002, on theinappropriateness of certain Uruguay Round out-comes for development); “Half of domestic interestshave no chance to score” (on antidumping, inChapter 22 below, with a picture of a soccer field ofwhich only one end has a goal).

The discussion of political economy in the pre-ceding section covered some aspects of operational-izing trade policy advice: recognizing reactionary

forces and shining a light on them (Jagdish Bhag-wati’s “Dracula principle”); redressing the balanceof forces in trade debates to promote consumerinterests; and making transparent the winners andlosers from any action (or inaction); see, for exam-ple, Finger (1982, 1986). It also illustrates the dan-gers of complexity, suggesting a second aspect ofoperationalization: the use of rules of thumb in pol-icymaking. Among the rules of thumb advocated inthis Handbook by some authors are the use of uni-form tariffs as a robust antidote to sectoral specialpleading and rent-seeking, and promotion of effec-tive competition as the single most importantobjective in services markets.

A Contestable Market for Policy Research

An important dimension of such beneficial compe-tition relates to policy analysis. The social functionof such research is to improve policy outcomes bybasing them on the best possible understanding ofthe effects of policy. De facto, its political function isto smooth the path of decisionmaking by ensuringthat relatively minor issues do not destroy socialconsensus and impose huge costs in the form ofstrife. This second function is not unimportant (asRodrik notes in Chapter 1), but it is often at vari-ance with the first. The tension between the tworoles of policy research is felt most immediately inofficial policy research centers. If analysts there stickto the objective side of their brief, they are ignored,abused for being irrelevant or obstructionist, andoften, as happened to Finger’s unit in the U.S. Trea-sury, closed down. If they stress the political aspects,they discredit themselves and, ultimately, their insti-tutions as purveyors of information; indeed, theymay even discredit analysis itself. And by giving apolitically convenient compromise a gloss of spuri-ous intellectual respectability, analysts can sow theseeds of further problems by establishing the wrongbasis for thinking about future decisions. The falla-cy that trade liberalization creates jobs (perpetrated,for example, in the debate on the North AmericanFree Trade Agreement), and its refutation by experi-ence, have made rational trade policy more difficultto achieve. The fallacy that reductions of tariffs on adeveloping country’s exports are more importantthan reductions of tariffs on its imports has led tothe waste of huge resources on instruments such astrade preferences, the Generalized System of Prefer-ences (GSP), and the New International Economic

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Order and, ultimately, to the false notion that theGATT/WTO process and good trade policy arecoterminous (see Finger 1975, 2001; Finger andKreinin 1976).

How can this tension be resolved? In his valedic-tory speech to the U.S. Treasury (Finger 1981), MikeFinger observed that “political responsibility is theultimate intellectual vasectomy.” What is theanswer? It is to ensure that the market for policyresearch is open and contestable. Governments andinternational organizations require research arms,but it is vital that others, outside government, arealso able to participate fully in this market. Govern-ments thus have to make data and information eas-ily available publicly, accept criticism, and beprepared to justify distributive judgments and deci-sions.

Finger has shown by example what type of analy-sis is necessary for better policy choices and out-comes. We hope that this Handbook, and the kindof collaborative, research capacity–building efforton which it draws, will help stimulate others toemulate the “Finger approach” to policy researchand analysis.

BERNARD HOEKMAN

L. ALAN WINTERS

Notes

1 Similar arguments are made in Finger and Kreinin (1976) and

Finger (1982).

2 This is not to decry basic economic science but merely to place

it outside the box of policy research.

3 The actual collection was mostly (and continues to be) done

by the UNCTAD, but the presentation and use of the data for

policy analysis was pursued more vigorously by the World

Bank.

4 Another example was Finger and DeRosa (1980), which

showed with the simplest of tools that the IMF’s Commodity

Compensatory Fund might not have the desired effect of stabi-

lizing developing countries.

5 A CD-ROM that replicates the country schedules is available,

but it is not an electronic file of data.

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he chapters included in this Hand-book are a product of a collaborative

research and capacity-building project that involvedscholars in developing countries, internationalexperts, and World Bank trade economists and thatwas designed to assess the costs and benefits of fur-ther multilateral rule-making and liberalization. Inaddition to researchers based in national researchorganizations, the project draws on the work of anumber of research networks, including the LatinAmerican Trade Network (LATN); the EconomicResearch Forum for the Arab Countries, Iran, andTurkey (ERF); the African Economic Research Con-sortium (AERC); the Coordinated African Programof Assistance on Services (CAPAS); and the TradePolicy Forum of the Pacific Economic CooperationCouncil (PECC). The views expressed are entirelythose of the contributors, and do not necessarilyreflect the views of the World Bank Group, the insti-tutions that the authors are affiliated with, or thecountries they represent.

The project was supported by a grant from theU.K. Department for International Development(DFID) and by the World Bank Institute, the WorldBank Research Support Budget, the government ofthe Netherlands, and the Société Générale de Sur-veillance (SGS), Switzerland. We are particularlygrateful to Susan Prowse and Charlotte Seymour-Smith for their encouragement and guidance.

The editors are indebted to Maria Kasilag, RebeccaMartin, Ana Rivas, Rob Simms, and Lili Tabada forexcellent administrative support throughout theproject. We thank the following people for theiractive engagement and participation in the deliveryof various parts of the project: Kym Anderson, Ade-laide University; Bijit Bora, at the time with the Unit-ed Nations Conference on Trade and Development

(UNCTAD); Diana Tussie, LATN; Ademola Oyejide,University of Ibadan and AERC; Rajesh Chadha,National Council of Applied Economic Research(NCAER), New Delhi; Hana’ Al-Sagban, ERF; Thier-ry Noyelle, United Nations Department of Economicand Social Affairs (UNDESA); Dominique Njinkeu,AERC; Mari Pangestu, Center for Strategic andInternational Studies, Jakarta; Alan Winters, SussexUniversity; and Stephen Yeo, Centre for EconomicPolicy Research (CEPR), London. We are grateful aswell to Constantijn Claessens, Antonio Estache,Carsten Fink, Faezeh Foroutan, John Hegarty,Charles Kenny, Dorsati Madani, Amrita Narlikar,Christina Neagu, Claudia Orozco, Randeep Rathin-dran, and Gomi Senadhira, who contributed part orall of the material for boxes on specific topics.

Many of the papers that were prepared under theauspices of the research capacity–building projectof which this Handbook is a part have been pub-lished in journals and conference volumes. Paperswritten by members of the project and dealingwith many of the subjects covered in this Hand-book can be found in the April 2000 issue of TheWorld Economy; the May 2001 issue of The Reviewof International Economics; Olarreaga and Rocha(2000); Hoekman and Martin (2001); Stern(2001); Martin and Pangestu (forthcoming);Maskus and Wilson (2001); and Mattoo and Stern(forthcoming).

All of the members of the World Bank’s tradeteam have been active contributors to the project, inparticular Will Martin, who has played a key role inmanaging the project and provided leadership inworking with partners in Asia. Carsten Fink, andKeith Maskus have been unstinting in their willing-ness to contribute and comment on materials. Fran-cis Ng played an essential role in providing data to

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T

Acknowledgments

participants. The Trade and Production DatabaseCD-ROM included with the Handbook is the resultof the painstaking work of Marcelo Olarreaga andAlessandro Nicita. Miroslava Zervoudakis andFaezeh Foroutan were key contributors to the pro-ject’s Website, <www.worldbank.org/trade>, whichhas become the major dissemination vehicle for theoutput generated by team members.

The chapters included in the Handbook benefitedfrom comments and feedback obtained from par-ticipants in workshops, conferences, and seminars,who are too numerous to be mentioned by namehere. We are very grateful to the people and institu-tions that hosted and helped arrange these meet-ings, in particular Richard Eglin, Sam Laird, andPeter Tulloch of the WTO secretariat, who organ-ized a major conference in September 1999 and aday-long review seminar of the first draft of theHandbook in May 2001. Members of the WTO del-egations in Geneva provided invaluable suggestions

that helped improve the final product. We thankthose who acted as readers and discussants of chap-ters and the handbook as a whole, including ClaudeBarfield, Paul Collier, Richard Eglin, Alan Gelb, JoeFrancois, Jacob Kol, Patrick Messerlin, Douglas Nel-son, David Palmeter, Garry Pursell, Jayanta Roy,Alan Winters, Luc de Wulf, Jamel Zarrouk, andAmbassador B. K. Zutshi.

Finally, we acknowledge the considerable timeand effort that has been devoted to the preparationof the second CD-ROM included with this Hand-book, “Applied Trade Policy for Developing Coun-tries: Outline, Content, and Readings for a ShortCourse.” Our thanks go to the principal authors,Jaime de Melo, Centre d’Etudes et de Recherches surle Développement International (CERDI), andMarc Bacchetta, WTO, and to their organizations, aswell as to Olivier Jammes (CERDI) for CD-ROMdevelopment.

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Rudolf Adlung World Trade OrganizationKym Anderson Adelaide University, Australia, and CEPRMarc Bacchetta World Trade OrganizationBijit Bora World Trade OrganizationAntonia Carzeniga World Trade OrganizationRupa Chanda Indian Institute of ManagementPhilippe Chauvet World Trade OrganizationRafael Cornejo Inter-American Development BankValentina Delich FLACSO/Argentina and LATNJaime de Melo University of Geneva, CERDI, and CEPRLuc De Wulf Independent ConsultantLiam Ebrill International Monetary FundPhilip English World BankSimon J. Evenett World Trade Institute, Berne, and CEPRJ. Michael Finger American Enterprise Institute, Washington, D.C.Carsten Fink World BankJoseph F. Francois Erasmus University, Rotterdam, and CEPRCarlo Gamberale World Trade OrganizationLuis Jorge Garay S. Inter-American Development BankReint Gropp International Monetary FundJames Hodge University of Cape TownBernard Hoekman World Bank and CEPRPeter Holmes University of Sussex, U.K.Gary N. Horlick O’Melveny & Myers, Washington, D.C.Robert E. Hudec Tufts University, Boston.Stefano Inama UNCTADVeena Jha UNCTADHanaa Kheir-El-Din Cairo UniversityMasamichi Kono Financial Services Authority (Japan)Sam Laird UNCTAD and University of Nottingham, U.K.Miguel F. Lengyel FLACSO/Argentina and LATNDavid F. Luke Organization for African UnityCatherine L. Mann Institute for International Economics, Washington, D.C.Will Martin World BankKeith E. Maskus University of ColoradoAaditya Mattoo World BankAndreas Maurer World Trade Organization

xxi

Contributors

Constantine Michalopoulos Independent consultantFrancis Ng World BankAlessandro Nicita University of GenevaMarcelo Olarreaga World Bank and CEPRT. Ademola Oyejide University of Ibadan, AERC, and the Development

Policy Center, Ibadan, NigeriaArvind Panagariya University of MarylandMari Pangestu Centre for Strategic and International Studies, JakartaFrank J. Penna The Policy Sciences Center, Inc., New Haven, Conn.Francisco Javier Prieto Organization of American StatesGarry Pursell Independent consultantVinod Rege International trade consultantDani Rodrik Harvard UniversityKamal Saggi Southern Methodist University, Dallas, Tex.Pierre Sauvé OECDMaurice Schiff World BankPhilip Schuler University of MarylandHoward J. Shatz Harvard UniversityEleanor Shea O’Melveny & Myers, Washington, D.C.Beata K. Smarzynska World Bank and CEPRBrian Rankin Staples Trade Facilitation Services, OttawaSherry M. Stephenson Organization of American StatesRobert M. Stern University of MichiganJanet Stotsky International Monetary Fund Arvind Subramanian International Monetary FundDavid G. Tarr World BankSimon Tay Member of Parliament, SingaporeDiana Tussie FLACSO/Argentina and LATNLee Tuthill World Trade OrganizationCoenraad J. Visser University of South AfricaJayashree Watal World Trade OrganizationJohn S. Wilson World BankL. Alan Winters University of Sussex, U.K. and CEPR

xxii


ACIS Advance Cargo Information SystemACP African, Caribbean, and Pacific (Cotonou Convention, formerly Lomé)ACWL Advisory Centre on WTO LawAD antidumpingAERC African Economic Research ConsortiumAGOA African Growth and Opportunity Act (U.S.)AMS aggregate measure of supportAPEC Asia-Pacific Economic CooperationASEAN Association of Southeast Asian Nations ASYCUDA Automated System for Customs Data and Management (UNCTAD)ATC Agreement on Textiles and Clothing (WTO)ATPA Andean Trade Preferences ActBDV Brussels Definition of ValueBIT Bilateral Investment TreatyBTN Brussels Tariff NomenclatureCAP Common Agricultural Policy (EU)CBD Convention on Biological DiversityCCC Customs Cooperation Council (now the WCO)CCCN Customs Cooperation Council NomenclatureCEFACT Center for Facilitation of Procedures and Practices for Administration, Commerce,

and Transportation (UN)CGE computable general equilibrium (model)c.i.f. cost, insurance, and freightCRM customs reform and modernizationCRTA Committee on Regional Trade Agreements (WTO)CTE Committee on Trade and Environment (WTO)CTH change in tariff headingCVD countervailing dutyDSB Dispute Settlement Body (WTO)DSP dispute settlement procedures (WTO)DSU Dispute Settlement Understanding (WTO)EBA Everything but Arms (EU initiative for LDCs)EC European CommunityEDI electronic data interchangeEDIFACT Electronic Data Interchange for Administration, Commerce, and Transport (UN)EEC European Economic CommunityEFTA European Free Trade Association

xxiii

Abbreviations

EPZ export-processing zoneERP effective rate of protectionEU European UnionFAO Food and Agriculture Organization of the United NationsFDI foreign direct investmentf.o.b. free on boardFSC foreign sales corporationFTA free trade areaFTAA Free Trade Area of the AmericasGATS General Agreement on Trade in Services (WTO)GATT General Agreement on Tariffs and Trade (WTO)GDP gross domestic productGMO genetically modified organismGNP gross national productGPA Agreement on Government Procurement (WTO)GSP Generalized System of PreferencesGTAP Global Trade Analysis ProjectHCC Heads of Customs Conference (NAFTA)HS Harmonized Commodity Description and Coding SystemICC International Chamber of CommerceICTSD International Centre for Trade and Sustainable DevelopmentIDB Integrated Data Base (WTO)IECC International Express Carriers ConferenceIF Integrated Framework for Technical-Related Assistance, Including Human and

Institutional Capacity Building to Support Least-Developed Countries in Their Trade and Trade-Related Activities

IFIA International Federation of Inspection AgenciesILO International Labour OfficeIMF International Monetary FundIPRs intellectual property rightsISIC International Standard Industrial ClassificationISO International Organization for Standardization ITC International Trade Centre (UNCTAD and WTO)ITC International Trade Commission (U.S.)ITCB International Textiles and Clothing BureauITO International Trade OrganizationLATN Latin American Trade NetworkLDC least-developed country (UN classification)MAI Multilateral Agreement on Investment MEA Multilateral Environmental AgreementMENA Middle East and North AfricaMERCOSUR Common Market of the SouthMFA Multifibre ArrangementMFN most-favored-nationMRA mutual recognition agreementMTA multilateral trade agreementMTN multilateral trade negotiationNAFTA North American Free Trade AgreementNATO North Atlantic Treaty OrganizationNGO nongovernmental organizationNRP nominal rate of protection

xxiv


NTB nontariff barrierNTM nontariff measureOAU Organization of African UnityOECD Organisation for Economic Co-operation and DevelopmentOMA orderly marketing arrangementPPM production and processing methodPSI preshipment inspectionPTA preferential trading agreementsQuad Canada, European Union, Japan, and the United StatesQR quantitative restrictionR&D research and developmentRCA revealed comparative advantageRIA regional integration agreementROO rules of originSADC Southern African Development CommunitySCM subsidies and countervailing measuresS&D special and differential (treatment) SDR Special Drawing RightSGS Société Générale de SurveillanceSITC Standard International Trade ClassificationSPS sanitary and phytosanitary STE state trading enterpriseTABD Transatlantic Business DialogueTBT technical barriers to tradeTMB Textiles Monitoring Body (WTO)TPO trade promotion organizationTPRB Trade Policies Review Body (WTO)TPRM Trade Policies Review Mechanism (WTO)TRIM trade-related investment measure TRIPS Trade-Related Aspects of Intellectual Property Rights (WTO agreement)TRQ tariff rate quotaUNCITRAL United Nations Committee on International Trade LawUNCTAD United Nations Conference on Trade and DevelopmentUNDP United Nations Development ProgrammeUSTR U.S. Trade RepresentativeVER voluntary export restraintWCO World Customs OrganizationWHO World Health OrganizationWIPO World Intellectual Property OrganizationWITS World Integrated Trade Solution (World Bank)WTO World Trade Organization

xxv

Abbreviations

xxvii

any countries have been less thansuccessful in integrating into the

world economy and benefiting from trade reformprograms. The reasons are multifaceted and com-prise a mix of domestic and international factors.Barriers to trade and investment remain high inmany nations, with policy regimes implying signifi-cant anti-export bias. Numerous countries havebeen affected by civil strife and war. And in spite ofthe trade preferences granted by member countriesof the OECD, industrial country tariff structures arestill characterized by escalating tariffs, with hightariff peaks for agricultural products and for labor-intensive products such as clothing.

There is general agreement that many complementa-ry policies and institutions are needed to support tradepolicy reforms in order to create an enabling environ-ment for supply-side responses that generate employ-ment and economic growth. As Dani Rodrik argues inChapter 1 of this Handbook, if trade policy reform is tobe successful, it must be embedded in and supportedby an effective institutional setting, and it must be com-plemented by other reforms. A large and complex“behind-the-border” agenda has to be addressed iftrade reform is to have its intended effect. Muchdepends on complementary policies that define thebusiness environment—on policies regarding invest-ment in human capital (education), infrastructure, andthe quality of public and private sector governance.The Handbook focuses on a number of the elements ofthat agenda, as well as on more “traditional” trade poli-cy issues such as the design of the tariff regime.

Trends in the Multilateral Trading System

Although the challenges confronting developingcountries primarily concern domestic policies and

institutions, trade policies, narrowly defined, arestill important in today’s international economiclandscape. Barriers to exports of some products inwhich developing countries have a comparativeadvantage remain high—tariffs on some agricultur-al products are over 100 percent. Agricultural subsi-dies in OECD countries exceeded US$300 billion in2000, contributing to global price instability andimpeding the ability of developing countries tocompete on export markets.

Trade between developing countries began togrow rapidly in the 1990s, increasing the signifi-cance of their own trade barriers for export interestsin these countries. Antidumping actions are nolonger limited to OECD economies but have cometo be used intensively by a number of developingcountries. Barriers to trade in services are manytimes those that apply to trade in merchandise,especially where movement of the service provideris necessary. In many cases these barriers and detri-mental policies can be removed only through inter-national negotiations.

International trade agreements, in particular theWTO agreement, have become the focal point formany discussions on trade and investment policy.As a result, policymakers and citizens of developingcountries are confronted with demands that a num-ber of trade policy–related issues be addressed inthe context of multilateral or regional negotiations.This offers opportunities to pursue what are regard-ed as desirable domestic reforms, but it also posesrisks associated with agreements or rules that maynot be supportive of development prospects.

The traditional mechanism driving trade agree-ments has been the reciprocal exchange of commit-ments to reduce trade barriers. This mechanismresults in greater welfare improvements than can be

M

Introduction

obtained through unilateral reform, as it generatesliberalization both at home and abroad and makespolitically feasible domestic trade reforms that oth-erwise might be blocked by powerful vested inter-ests. International cooperation can also be a usefuldevice for pursuing domestic reforms that are indi-rectly linked to trade. As tariff barriers have fallenand quantitative restrictions have disappeared, thefocus of trade agreements has increasingly shiftedtoward regulatory regimes that can have an impacton trade and investment.

Multilateral negotiations on nonborder policies,administrative procedures, and domestic legalregimes have proved much more complex than talkson traditional market access. Because it is more dif-ficult to trade “concessions,” the focus tends to be onthe identification of specific rules that should beadopted. Given the disparities in economic powerand resources among countries, the outcome oftenreflects the status quo in high-income countries.These may be fully consistent with the developmentpriorities of low-income countries, but there is nopresumption that this will be the case.

Developing country misgivings regarding therule-making dimensions of the WTO becameincreasingly prominent in the 1990s. These con-cerns centered on the costs required for implement-ing some WTO agreements, the lack of adequatefinancial assistance, and the failure of high-incomecountries to grant “special and differential” treat-ment to developing countries. (Most of the provi-sions in the WTO agreements calling for suchtreatment are “best endeavor” commitments thatare not binding on high-income countries.) A morefundamental concern was that the rules of the gamewere not always compatible with national efforts toreduce poverty and increase economic growth.

For the rules to make sense for all members,stakeholders in developing countries must partici-pate in the domestic policy formation process, beable to inform national representatives of theirviews, and hold their representatives accountablefor outcomes. If WTO agreements were unambigu-ously seen by constituencies in developing countriesas being conducive to (or consistent with) theattainment of development objectives, these agree-ments could play a much more beneficial and effec-tive role. In the run-up to the 1999 WTO ministerialmeeting in Seattle, a number of prominentobservers and policymakers called for the launch ofa “Development Round” of negotiations under

WTO auspices to address developing country con-cerns. Similar calls were put forward in the prepara-tions for the 2001 ministerial meeting in Doha.

The Doha Development Agenda that emergedfrom the meeting clearly reflects the increasedprominence of development concerns in WTOdeliberations—in turn, the result of increased par-ticipation by developing countries in the tradingsystem. All that was done, however, was to define anagenda. Achievement of a prodevelopment outcomeremains a major challenge. Resistance to liberaliza-tion of “hard-core” sectors such as agriculture andtextiles that are of key interest to developing coun-tries is very strong; conversely, many low-incomecountries are unwilling to extend the reach of theWTO to cover new issues. Implicitly, if not explicit-ly, much of the discussion and debate at Doha con-cerned defining the limits of the WTO. Developingcountries played a central role in this debate, withmany resisting the further expansion of the WTOinto the territory of domestic regulation.

The Doha Ministerial Declaration launches nego-tiations on market access for manufactures, disputesettlement, WTO rules, disciplines on regional inte-gration, environment, and intellectual propertyrights (geographical indications). These talks willcomplement ongoing negotiations on agricultureand services, as mandated by the Uruguay Roundagreements. Negotiations are to be concluded by2005. At the next WTO ministerial meeting, in 2003,negotiations will be launched on four “Singaporeissues”—competition, investment, trade facilita-tion, and transparency in government procure-ment—if agreement on modalities can be obtainedby explicit consensus at that time.

Whether the end result will be prodevelopmentwill depend to an important degree on the extent towhich developing and industrial country trade bar-riers are lowered, and on the rules that emerge. Akey determinant of the outcome of the negotiationswill be effective and proactive developing countryparticipation. This, in turn, requires a good under-standing of where national interests lie and a goodunderstanding of the substantive issues, not just bygovernment officials but also by the private sectorand civil society. There is clearly a need to strength-en capacity to undertake analysis and to identifynational reform priorities, market access con-straints, and the potential merits and implicationsof multilateral disciplines. This Handbook isintended as a contribution to that effort—as a use-

xxviii


ful resource for analysts and stakeholders engagedin the design of trade-related policies.

Objectives of the Handbook

A major challenge confronting developing countriesis to use international negotiations and cooperationas instruments for improving their terms of tradeand their access to export markets and as mecha-nisms for adopting and implementing domestic pol-icy reforms that will raise living standards andreduce poverty. The design of trade policy reform isa complex matter that extends far beyond tariffs andquotas applied at the border. It must be comple-mented by policies designed to ensure that enter-prises can compete on world markets. There is no“one size fits all” package of policy reform, and nomagic bullet. Approaches will and must differ acrosscountries, reflecting different circumstances, endow-ments, legal systems, and cultures.

One goal of this Handbook is to provide informa-tion on the implications of—and options offeredby—international trade agreements, especially theWTO, for developing countries that seek to usetrade as a vehicle for development. Contributorswere asked to write relatively short chapters on avariety of trade policy–related topics that areimportant from a development perspective and thatare subject to or affected by multilateral rules, ormay become so. The chapters assess the economicsof the issues, survey what cross-country experiencesuggests are good practices, and consider the prosand cons of the possibilities for using internationalcooperation as an instrument for improving bothdomestic policy and access to export markets.Although there is an emphasis on the WTO, manyof the issues addressed also arise in the context ofregional integration agreements.

Notwithstanding its length, this Handbook canonly partially address the many policy issues thatarise in the course of efforts to integrate into theworld economy. The focus is on trade policy, broad-ly defined to cover both traditional instruments ofcommercial policy—tariffs, customs administra-tion, and so on—and “new” issues such as services,intellectual property, and the behind-the-borderregulatory agenda that has implications for marketaccess conditions. The approach is one of multiplevoices; the contributors include many authors whohave no connection to the World Bank. In all cases,contributors wrote in a personal capacity, and their

views do not necessarily reflect those of the institu-tions with which they are affiliated.

Not everyone will necessarily agree with all thepolicy recommendations made by the authors. Afterall, as we noted above, on a number of issues there isno “one size fits all” answer, and this is especiallytrue of regulatory policies. What matters most is toask the right questions and to determine the statusquo in a given area. It is important to obtain asmuch information as possible regarding alternativepolicy options, to understand what type of analysisis needed to provide policy guidance, and to have agood understanding of the prevailing multilateralrules of the game.

Although much of what is contained in the Hand-book is motivated by the fact that the issues are onthe agenda of international negotiations, theemphasis of many contributors is on economic anddevelopment dimensions. The institutions and poli-cies that are important for development and eco-nomic growth extend far beyond the subject areasthat the WTO deals with or can deal with. Althoughthe WTO can be useful in helping countries addressspecific bottlenecks and constraints that impedetrade, most of the trade policy agenda is domestic. Itis therefore vital that policymakers and civil societyhave a good understanding of what their nationalpriorities are and what makes for good policy,informed by the experiences of other countries, inorder to determine what types of multilateral coop-eration can help countries benefit from trade inte-gration.

Relatively little emphasis is given in the Hand-book to an enumeration of WTO disciplines. Thereare many readily available resources that can pro-vide the interested reader with such information,starting with the WTO Website, <www.wto.org>.The CD-ROM provided with this Handbook,“Applied Trade Policy for Developing Countries,”contains all of the major agreements and manyother WTO documents. Therefore, only key aspectsof WTO rules are discussed. Relatively more atten-tion is given to the General Agreement on Trade inServices (GATS) and the Trade-Related Aspects ofIntellectual Property Rights (TRIPS) agreementthan to General Agreement on Tariffs and Trade(GATT) disciplines, since a wealth of analysis andinformation exists on “traditional” trade policyinstruments. The chapters in the Handbook dealingwith merchandise trade issues focus primarily onthose subjects that are of greatest interest to devel-

xxix

Introduction

oping countries—tariff peaks, preferences, rules oforigin, customs clearance and trade facilitation,local content and other industrial policy measures,and export promotion.

One topic that is of major importance to develop-ing countries—agriculture and agricultural tradepolicies—is not addressed in any depth in thisHandbook because it is the subject of a companionvolume (Ingco and Nash forthcoming). The same istrue for another major issue area: trade and poverty.Winters, in Chapter 5 of this volume, summarizesthe main messages and conclusions that haveemerged from the literature on trade and poverty.Those seeking a more in-depth treatment shouldconsult McCulloch, Winters, and Cirera (2001),which reviews the literature and good practices con-cerning the design of trade policy reforms from apoverty alleviation perspective.

Structure of the Handbook

This volume has eight parts. The chapters in Part Iplace trade policy reform in a development contextand discuss key dimensions of reform. Part II dealswith the main aspects of the WTO. Parts III, IV, andV cover the areas that are the subject of WTO rules:trade in goods, trade in services, and the protectionof intellectual property. Part VI contains discussionsof a number of regulatory issues; many of thesehave not been subject to multilateral rules but arenow being introduced into the WTO agenda due tostrong interest on the part of some high-incomecountries and nongovernmental organizations. Spe-cific process-related concerns of developing coun-tries are the subject of Part VII; these includeparticipation in the WTO, capacity building, andimplementation of WTO agreements. Finally, thechapters in Part VIII summarize a number of rulesof thumb for good trade policy and reviewapproaches to using the WTO (and regional agree-ments) as instruments for promoting development.

Each of the eight parts begins with a short intro-duction that is intended as a reader’s guide to theissues and to further reading. Annotated references,drawn in part from Hoekman and Kostecki (2001),are listed in each introduction for those who areinterested in pursuing in-depth discussion andanalysis. To facilitate consultation of the citations inindividual chapters, we have compiled an integratedbibliography, found at the end of the Handbook.

The boxes included in the chapters illustrate spe-cific points or describe specific cases. Many of theseboxes were prepared by the editors of the Hand-book, drawing on papers prepared for this projectand on the literature. The chapter authors are notresponsible for the content of those boxes writtenby the volume editors or by other contributors.

The appendix includes a glossary and a set oftables that present data on trade barriers for a largesample of countries. The glossary provides a listingof major WTO articles and provisions for the con-venience of readers who are not familiar with theWTO, as well as succinct descriptions and defini-tions of key trade-related institutions and policies.A CD-ROM containing data on tariffs, trade, andproduction is packaged with the Handbook. Thedatabase is described briefly in the appendixes andis more fully documented on the CD-ROM. Wehave also included in the appendixes and on theCD-ROM a short guide to the most commonly usedindicators and indices that can be applied to thedata. More detailed datasets and analytical toolsthat can be used for negotiations are being devel-oped in cooperation with UNCTAD; this set of toolswill be released in mid-2002.

A second CD-ROM contains the teaching modulesdeveloped by Jaime de Melo and Marc Bacchettaduring their many years of conducting an intensivetwo-week course for government officials, cospon-sored by the World Bank Institute and the WTO. TheCD-ROM also includes an extensive set of readingsand, as noted above, official WTO documents.

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