Bulletin Article, October 2013

A WTO Treaty on Trade Facilitation? Regulatory, Institutional, Legislative, and Cost Challenges for Developing Countries

The WTO members are negotiating a possible trade facilitation agreement, which could be a potential outcome in the WTO’s Bali Ministerial in December. However, the developing countries face many challenges in such a treaty and have asked for special and differential treatment as well as finance to meet the costs of new obligations.

By Kinda Mohamadieh


An agreement on trade facilitation is being propped as a viable outcome from the World Trade Organization (WTO) 9th Ministerial Conference, to be held in Bali at the end of 2013. Yet few weeks before the Ministerial Conference, the concerns that developing countries have repeatedly pointed to in regards to a binding trade facilitation agreement under the WTO have as yet not been addressed. These include the lack of balance within the agreement, whereby developing countries and least developed countries (LDCs) are being asked to take on extensive binding obligations while their right to special and differential treatment is being diluted.

Facilitation of trade, including setting in place enabling infrastructure and boosting productive and trade capacities, has been central to trade concerns of developing countries and LDCs. Yet, negotiations towards a trade facilitation agreement under the auspices of the WTO significantly differ from the broader process of facilitation of trade. The agreement would be narrower in scope, focusing on simplification, harmonization and standardization of trade procedures. Thus, it does not necessarily address the needs and priorities of developing countries and LDCs.

The negotiations process and content so far indicate that a trade facilitation agreement in this sense would lead to higher imports into developing countries and LDCs without corresponding higher exports, and to irreplaceable loss of tariff revenue. Hence, net macroeconomic impact of implementing a potential trade facilitation agreement under the WTO, particularly implications on trade balance and balance of payments, should be well assessed by WTO Member States.

The agreement would also be enforced through the WTO dispute settlement mechanism. Thus, if a Member fails to align its procedures with the time intervals, methods, criteria, or other stipulations addressed under the agreement, they would be exposed to a challenge under the WTO dispute settlement understanding (DSU). The implications of accepting binding commitments and the cost of non-compliance could be significant. A non-complying country in certain cases has to incur substantial costs in order to comply with its binding commitments. A member may also accept commitments for activities that may get outsourced to the private sector and over which there might be little control by the government.

Overall, a trade facilitation agreement under the WTO would carry significant implications for WTO Member States at each of the regulatory, institutional, and legislative fronts, and would carry short-term and recurring long-term costs, which are discussed in the following brief.

The negotiations mandate for a trade facilitation agreement

WTO Members formally agreed to launch negotiations on trade facilitation in 2004 pursuant to the July 2004 Framework Package (referred to as the post-Cancun decision).

It is worth remembering that trade facilitation was part of the four ‘Singapore Issues’, along with investment, government procurement, and competition, which developing countries had opposed including in the WTO negotiations agenda at the 5th WTO Ministerial Conference in Cancun.

The trade facilitation negotiations mandate, established in the “Modalities for Negotiations on Trade Facilitation” of the 2004 decision (Annex D) explicitly stressed that the negotiations “shall aim to clarify and improve” relevant aspects of trade facilitation articles under the GATT 1994 (i.e. Articles V, VIII and X GATT), with a view to further expediting the movement, release and clearance of goods, including goods in transit. Thus, the negotiations are not meant to limit or eliminate the rights and obligations under the three GATT articles or impinge on national policy and regulatory space. Such tendencies would be commensurate to going beyond the negotiations mandate. Yet, provisions under negotiations are in fact amending, not just clarifying, the GATT Articles V, VIII, and X.

The trade facilitation negotiating text is divided into two sections; section (I) includes the new rules being negotiated in order to clarify and improve GATT Articles, while section (II) deals with rules on special and differential treatment. Section II is central to ensuring that developing countries and LDCs have the needed flexibilities, taking into consideration their individual level of development, and ability to implement new trade facilitation obligations progressively, at their own pace, and subject to available resources.

Special and differential treatment (SDT)

Special and differential treatment and enhancing technical assistance and support for capacity building has been central to the 2004 negotiating mandate, which underlined that negotiations “shall take fully into account the principle of special and differential treatment (SDT) for developing and least-developed countries”. The mandate established that SDT would extend beyond transitional periods for implementation  by developing countries and LDCs would be conditioned on the acquisition of financial and technical assistance, and capacity building, based on the delivery of such assistance by developed country Members of the WTO.

Furthermore, Annex E of the Hong Kong Ministerial Declaration (2005) outlined the work program of the negotiating group on trade facilitation. The Annex required that technical assistance and capacity building commitments contained in Annex D of the July 2004 Framework be ‘made operational in a timely manner’ and be made ‘precise, effective, and operational, and reflect the trade facilitation needs and priorities of developing countries and LDCs’. Annex E establishes that developed country Members are expected to provide support and assistance to developing and least developed country Members in a comprehensive manner and on a long term and sustainable basis, backed by secure funding, in order to allow implementation.

Intrusion on regulatory capacities and policy space

The trade facilitation rules under negotiations are designed in a manner that could undermine the regulatory capacities and space of WTO Member States. It could introduce multiple grounds based on which laws and regulations of Member States could be challenged under the WTO DSU.

It is worth recalling that dozens of dispute settlement cases have been raised based on legal grounds provided by the trade facilitation articles under the GATT 1994 (i.e. articles V, VIII and X GATT). The WTO panel and appellate body have often found WTO Members in violation of their obligations under these articles.

For example, the WTO panels have actively addressed Members’ obligations under Article VIII GATT on fees and formalities connected with importation and exportation in each of the cases Argentina-Textiles and Apparel, US-Certain EC Products, China-Raw Materials, and EEC-Bananas II. Overall, the panels have undertaken an expansive approach when addressing Members’ obligations under this Article, including in regards to Members’ obligations to limit the amount of fees and formalities imposed on or in connection with importation and exportation to the approximate cost of services rendered.

Furthermore, the panel and appellate body actively addressed Members’ obligations under Article X GATT on publication and administration of trade regulations. In multiple cases, the dispute settlement bodies (DSB) found Members in violation for not publishing a certain law, regulation, judicial decision or administrative ruling that fell within the scope of the provision, or for not doing that in a manner that is ‘prompt’ or that ‘enable governments and traders to become acquainted with them’.

The trade facilitation negotiating text is packed with undefined and vague legal terminology as well as ‘necessity tests’, beyond what the GATT articles on trade facilitation include. These could establish multiple grounds for challenging a broad range of WTO Members’ laws, rules, regulations, and measures that are not limited to customs, but are more broadly trade-related or regulations ‘on or in connection with’ import, export and transit of goods.

For example, Article 1 of the trade facilitation negotiating text addresses publication and availability of information, and seeks to clarify and improve Article X GATT. Under the GATT Article, the only qualification to the manner of publishing an act was ‘promptly’ and ‘in such a manner to enable governments and traders to become acquainted with them’ (i.e. with laws, regulations, judicial decisions and administrative rulings). Both these terms were actively addressed by the DSB. The trade facilitation negotiating text adds grounds that would be prone to being interpreted by the DSB, including the requirement to publish in a ‘non-discriminatory’ and ‘easily accessible’ manner. Thus, it multiplies the grounds based on which a member state could be challenged and found in violation of its obligations.

The inclusion of vague language that is open for interpretation and possible use as grounds to challenge the regulatory action and capacities of Member States is a trend across the various articles of section I under the trade facilitation negotiating text.

Furthermore, the design of the rules under negotiation is over-prescriptive and intrusive on national policy and regulatory space. For example, Article 6 addressing penalty systems goes a long way into addressing procedures related to conflict of interest and remuneration/ reward systems of government officials, which extend beyond what the GATT stipulates. Other articles propose detailed lists of criteria for designing and applying certain custom practices. This is the case with Article 7 on release and clearance of goods, which addresses the practice of ‘risk management’ systems and ‘authorized operators’ that benefit from extra preferences and facilities when it comes to their transactions. Such stipulations would limit the discretion and space of Members in designing and applying several of the requirements under a potential trade facilitation agreement, and would be intrusive on national policy space.

Overall, the negotiating text is designed based on mandatory language in most provisions, which has limited and uncertain flexibilities in some parts. It includes a wide variety of formulations that attempt to qualify the mandatory nature of the provisions, such as “shall, as appropriate”, “shall endeavor”, “shall to the extent possible”, “shall where practicable”, “shall to the extent practicable”, among others. This language is presented in the negotiations as an alternative to the mandatory term “shall”, thus is supposed to provide Members with flexibility in regards to the obligations they would carry as a result of a trade facilitation agreement.

While a qualified “shall” presents a level of mandatory obligation associated with some flexibility, there is no clarity or certainty on the extent of that flexibility. The WTO jurisprudence show that the opinions of the DSB have tended to differ in the extent of strictness it applies when interpreting these terms. For example, when addressing the language “shall endeavor”, the DSB tended to indicate that the language does not hold a ‘result obligation’, thus is not legally binding with respect to what would be the outcome of the action. Nevertheless, the language would require Members to undertake at least certain steps in light of the provision under consideration, otherwise the Member would be found in violation of their obligation.

Challenges on the institutional and legislative fronts

The implementation of a potential trade facilitation agreement will take different forms across countries given how the practice will be integrated in national systems, and the way it will interact with the national legislative and judiciary systems.

Several of the provisions under negotiations could hold significant administrative and institutional burdens on Member States, especially developing countries and LDCs, whose customs and customs-related institutional mechanisms are not as advanced compared to developed countries. It is worth noting that most of the proposals and disciplines based on which negotiations are undertaken were presented by developed countries, thus reflect the nature and form of practice that they already undertake, and that is more suited to their priorities, interests, financial capacities, and resources.

Several provisions necessitate setting in place and continuously updating systems for managing information, and assigning staff or specific units to follow that. This is the case for Article 1 on publication and availability of information, Article 2 on prior publication and consultation, Article 6 on disciplines on fees and charges imposed on or in connection with importation and exportation, as well as Article 7 on the procedures of release and clearance of goods, among other Articles.

A legal act or formal policy may be necessary in many countries to identify the government agency (or agencies) or other entities that would be responsible for implementing the obligation. Also, legislative or administrative acts may be required to designate responsibilities and define the mandate and authority of the responsible institution. In some cases, the national legislative process would need to be changed in order to accommodate requirements stipulated by the agreement. Such would be the case in relation to publishing new or amended trade laws and regulations prior to their entry into force and accommodating the right of traders and ‘other interested parties’ to comment on laws and regulation, according to what is proposed under Article 2 of the draft negotiating text.

The reference to the category ‘interested parties’ does not appear in the GATT language, and in this sense could be considered an extension beyond the mandate of negotiations wherever it appears. As currently proposed in the draft negotiating text, it would encompass an undefined open-ended category of parties. This category could include an expanded list of entities that have a direct or indirect relation to the trade transactions covered by the agreement, and do not necessarily have to be located in the territory of the Member State implementing the measure.

The reference to ‘interested parties’ under Article 2 could result in an obligation to open the legislative process to prior consultation and comments on draft, new, and amended rules by traders and other interested parties located outside the territories of the Member. This may lead to speculation, lobbying pressures, and profiteering by interest groups. Such lobbying and influence could tilt the balance in national regulatory and legislative processes away from the national constituencies and development priorities.

Moreover, requirements under Article 7 on advance submission of the goods’ declarations before their arrival to the member state, and Article 10 addressing formalities connected with importation and exportation and transit, deals with the sovereign role of the state in dealing with customs and could change the nature of how states deal with duty systems and collection. Many Members would need to undertake legal changes to allow release of imported goods according to the conditions established by the agreement.

It is worth noting that Members will be obliged to put these requirements in practice across the board at the national level. While some Members may already have the practice implemented in some regions or custom agencies, it remains significantly difficult to ensure a homogenous alignment with the requirements across the national level.

Costs associated with a trade facilitation agreement: is financial assistance enough?

Much discussion and analysis about meeting the costs of a trade facilitation agreement has been generated by the WTO secretariat, international organizations, as well as among WTO Members. Multiple assessments and forums have been organized with the aim of linking aid-for-trade with the process of negotiating a trade facilitation agreement, claiming enough funds and donor capacities are available to meet the needs of developing countries in implementing such an agreement.

Yet, it is questionable whether such efforts would address the challenges that developing countries and LDCs would face in meeting the costs of implementing a trade facilitation agreement. Costs would include human resource expenses, equipment and information-technology systems, as well as other significant infrastructure expenditures. These costs would not be limited to a one-time investment; most of them would be of a recurring nature.

For example, Turkey’s efforts to modernize its customs information technology required US$2 8million. In Morocco, the ICT costs were estimated at US$10 million, while in Chile, the total investment cost of implementing an automated customs system amounted to US$ 5 million in the early 1990s. In Jamaica, the introduction of the computerized customs management system cost about US$ 5.5 million. Tunisia needed US$ 16.21 million to computerize and simplify procedures. It is also worth noting that a World Bank report notes that the costs of implementing ICT at customs is only part of the life cycle cost of these systems and that too often these maintenance and upgrading costs are underestimated and not adequately included in the life cycle costs.

Furthermore, a 2003 OECD report highlighted that in Bolivia, a five year project for customs modernization cost US$ 38 million, of which about US$ 25 million was spent for institutional improvements and US$ 9 million for computerized systems. For Chinese Taipei, express clearance alone, in such a small country with already developed infrastructure, necessitated establishing 20 new processing lines, each equipped with an X-ray scanning machine. There are a total of 117 officers at the express division, working day and night shifts so as to provide a 24/7 service.

Such infrastructure and automated systems as highlighted above are only part of the investments and expenses required to allow implementing the practices stipulated under the negotiated trade facilitation agreement.

Accordingly, meeting these costs will necessitate a carve-out from the national budgets on a yearly basis, and could essentially lead to a disproportionate diversion of limited resources from other vital institutions and public services to customs administration. A serious assessment of the needs to meet these costs should be of a long-term nature, and cannot be addressed by solely assessing the available funds at the period of negotiations.

Moreover, it is important to unpack the nature of the international funds available to support the implementation of a trade facilitation agreement. These should not be a diversion from meeting development needs and goals, nor should it be of a debt-creating nature.

Besides, WTO Member States negotiating a trade facilitation agreement ought to address the potential costs associated with irreplaceable loss of tariff revenues. Compared to developed countries, the share of customs revenues in the total tax collection is much higher in developing countries and LDCs. Given the limited reliance on customs duties in the former, there is less chance of an importer filing a false import declaration intended for evasion of customs duties in developed countries compared to developing countries and LDCs. Some of the Articles with potential implications in this area include Article 3 on advance rulings, Article 6 on disciplines on fees and charges and on penalty disciplines, and Article 7 addressing separation of release of goods from final determination of customs duties, taxes, fees, and charges.

Moreover, many provisions in the trade facilitation negotiating text are purely a policy matter; thus technical and financial assistance will not help a Member State in overcoming the implementation challenges associated with such provisions.

Concluding remarks

On the surface, trade facilitation would seem beneficial for all. However, on closer scrutiny, the benefits and costs depend on the capacities and development trajectory of each country implementing such trade facilitation measures.

A proliferation of reports, such as OECD Trade Facilitation Indicators, have attempted to make the point that a trade facilitation agreement would have positive impact on trade flows, reduce global trade costs, and result in benefits most of which would accrue to developing countries. For example, OECD trade policy papers on impact of trade facilitation measures for OECD countries claim a potential reduction of overall trade costs by almost 10%, as well as a potential cost reduction by almost 14.5% for low income countries, 15.5% for lower middle income countries, and 13.2% for upper middle income countries.

Yet these reports do not show who accrues the benefits of increased trade flows, whether the trade flows resulting from the agreement are imports or exports, and whose trade costs would be reduced. For example, the OECD paper (2013) indicates that “potential trade costs reductions would benefit stakeholders as a whole, including both traders (importer and exporter firms) as well as the public administration”, and adds in a footnote that “a more refined quantitative approach could shed light on a more specific identification of the beneficiaries”.

Thus, the analysis does not provide information that would help with understanding the implications on developing countries and LDCs, especially in regard to the expected impact of a trade facilitation agreement on increasing imports and related implications on balance of payment positions. Trade costs could largely go down due to developing countries bringing their systems on par with the practice in developed countries. Thus, the distribution of benefits remains unclear.

In fact, a trade facilitation agreement under the auspices of the WTO would not necessarily address the actual needs of developing countries and LDCs in terms of productive and trade capacity and inter-regional trade. Many developing countries could face an increase in imports as a result of implementing the agreement, without necessarily gaining increased capacity to export.

Accordingly, it is vital to stress that achieving the benefits from facilitating trade through enhancing infrastructure and productive capacities of developing countries is significantly different from signing an international binding agreement that is enforced under an international dispute settlement mechanism, and that establishes multiple implementation obligations that Members need to align to, within a specific period of time, and commit to without testing and without a full and realistic estimation of costs.

Kinda Mohammadieh is a Researcher at the South Centre.

This article was published in South Bulletin 75 (7 October 2013)


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