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Compendium of Teaching Materials on the International Trading System (2011)

Article by St. Petersburg State University, 2011

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The main purpose of the compendium is to support implementation of new teaching technologies that are used in the educational process. It is developed especially for the students of MA programme International Trading System that was designed to train well qualified specialists in international trade and trade policy analysis. The book can also be helpful for other academic and business-oriented programmes devoted to international trade, international business and international economics. It includes two types of teaching materials: discussion papers and cases. Both can be used in class as well as for students’ self-study. Analysis of papers might be followed by discussions, and some cases require team work. All cases are based on real situations.

St. Petersburg State University




Faculty of Economics




Compendium of teaching materials




MA Programme «International Trading System»










St. Petersburg


2011




  2
Introduction ................................................................................................................................... 3


CASES ............................................................................................................................................. 5


Alexandra G. Koval. Economic Integration and Trade Flows in MERCOSUR ............................. 6


Alexandra G. Koval. Mexico and Dispute Settlement: WTO versus NAFTA ............................. 14


Emilio F. Riccio. Dispute Resolution in Ukraine .......................................................................... 20


Nikita E. Lisitsyn. Russian-Finnish “Raw Wood Dispute”: tactic necessity versus strategic


neighbourliness .............................................................................................................................. 24


Alexander I. Pogorletsky. Liberalization of air Transportation Industry in the European Union:


new opportunities for Travelling and Some Lessons for Russia ................................................... 28


Sergey F. Sutyrin. Could customs union help Russia to join the WTO? ...................................... 37


Sergey F. Sutyrin. “Rolekas?” ....................................................................................................... 40


Olga Y. Trofimenko. Foreign investments in Russia: The case of Segezhabumprom - AssiDoman


....................................................................................................................................................... 45


Olga Y. Trofimenko. Olympia’s Preferential Tatiff Quotas ......................................................... 48


Maryana A. Gubina. Services in the System of International Trade: the Example of Health-


Related Services ............................................................................................................................ 51


Nikolay V. Hovanov, Maria S. Yudaeva. Consequences of Russia’s Accession to the WTO for


Electricity Sector: Estimations on Basis of Expert Information.................................................... 90


Nikita A. Lomagin. Medvedev’s ‘Fourteen Points”: Russia’s Proposal for a New European


Security Architecture ................................................................................................................... 103


Juliana Peixoto Batista. Flexibilities for Developing Countries in the Doha Round as “À La


Carte” Special and Differential Treatment .................................................................................. 122


Zoya S. Podoba. West versus East .............................................................................................. 153


Sait Akman. Turkey in the World Trading System and the WTO: Activism Under Global


Challenges and the EU Process ................................................................................................... 169


Nikolay A. Kozhanov. The Problem of Food Security in Iran during the Period 1990 – 2010 .. 201





  3


Introduction


Dear Reader,


The World Economy Department of St. Petersburg State University is happy to introduce a new


compendium of the teaching materials. At the moment one can find plenty of books on various


aspects in trade policy developments, operations of international economic organizations and


regional trade agreements. At the same time there is still a niche for publication devoted to the


analysis of the consequences of countries’ involvement into multilateral institutions, including


the World Trade Organization.


The idea of the book was to upgrade and add new teaching materials to the previously published


textbook The WTO: Challenges and Prospects for National Economies1. It includes countries


and subjects that due to various reasons could not be covered in that edition: experience of


Turkey and Bosnia & Herzegovina at international economic arena, peculiarities of regional


integration in Latin America, challenges of bilateral economic relations between Finland and


Russia, etc. Profound analysis of medical services, foreign direct investments, quantitative


analysis of possible WTO accession for Russian energy sector provide additional opportunities


for a comprehensive study of international economic relations.


Present compendium includes two types of teaching materials: discussion papers and cases. Both


can be used in class as well as for students’ self-study. Analysis of papers might be followed by


discussions, and some cases require team work. All cases are based on real situations; one could


expect qualitative and quantitative analysis of described issues.


The edition is developed especially for the students of MA programme International Trading


System that was designed to train well qualified specialists in international trade and trade policy


analysis. The main purpose of the compendium is to support implementation of new teaching


technologies that are used in the educational process. The book can also be helpful for other


academic and business-oriented programmes devoted to international trade, international


business and international economics.



1 ВТО: механизм взаимодействия национальных экономик. Угрозы и возможности в условиях выхода на
международный рынок/ Под ред. С.Ф.Сутырина. – М.: Эксмо, 2008. – 400 с. – (Профессиональные издания
для бизнеса).




  4
The textbook was developed in co-operation with our partners of UNCTAD Virtual Institute and


the WTO Academic Network within the framework of WTO Chairs Programme2. Regardless the


fact of sponsorship, these teaching materials do not present official position of the WTO on the


issues described. Each author shared his/her unique knowledge and expertise in various aspects


of international economic relations development.


The Department of World Economy would like to thank all the participants for their valuable


contribution into the compendium. No additional editing of the papers was done. All authors


would highly appreciate any comments regarding effort sent to the e-mail address of World


Economy Department (SPSU) wec@econ.pu.ru.




Sergey F. Sutyrin


Professor, Head of the World Economy Department


St. Petersburg State University


The WTO Chair holder




Olga Y. Trofimenko


Associate Professor of the World Economy Department


St. Petersburg State University



2 http://www.wto.org/english/tratop_e/devel_e/train_e/chairs_prog_e.htm




  5


CASES




  6
Alexandra G. Koval



Seniuor Lecturer


Department of World Economy
St. Petersburg State University





Economic Integration and Trade Flows in MERCOSUR


Countries play different roles in international trade; however, all of them try to promote


their positions on international markets. One of the possible trade promotion strategies could be


an involvement into integration processes. Latin America and the Caribbean have a


comprehensive experience in economic integration. Different partial scope and free trade


agreements were signed in the region, initially between neighboring states. One of the most


successful examples of integration in Latin America is considered MERCOSUR.


MERCOSUR (Southern Common Market) was founded on March, 26, 1991 under the


Treaty of Asuncion. Argentina, Brazil, Uruguay and Paraguay became the first members of this


union. Thereafter several Latin American countries joined MERCOSUR as associate members


with no obligations and no rights under the agreement. In 2006 Venezuela became a fifth full


member of MERCOSUR, but hasn’t revised its trade policy yet. That is why the case examines


trade flows between four founders.


The new regional organization was established in the period of economic changes in


Latin America. The 1980-s were crucial years for the region with decelerating economic


development, consequences of import-substitution industrialization and growing public debts. In


the early 90-s Latin American countries followed the ‘Washington consensus’ concept and


invented the strategy of liberalizing economy. This new program for Latin America proposed by


the US economists referred also to liberalization in trade.


The idea of boosting integration between countries under investigation, however, was not


new. All future MERCOSUR members were involved in Latin American Integration Association


(LAIA). LAIA consisted of 11 South American countries and Mexico, which provided mutual


trade preferences. From the very beginning of the 80-s LAIA demonstrated advantages of


integration and trade between its members increased rapidly. Nevertheless, the first arrangements


were shortly exhausted and the further development of LAIA slowed down. During that period


of time Brazil and Argentina launched several bilateral agreements, in particular, concerning


joint ventures, the usage of non-renewable natural resources and energy, scientific and technical


cooperation, border trade, etc. Finally, two countries singed the Integration and Economic


Cooperation Program in 1986 and started negotiations for more intensive collaboration.




  7
Moreover, the relationships between Brazil and Argentina at that time were also deeply


rooted in political interests, such as consolidation of democracy and promotion of regional


stability. Brazil, which started to grow in economic and geopolitical terms, tried to diversify its


economic and political contacts and become more powerful in Latin American region. The


sectoral agreements between Brazil and Argentina could have improved the development in


strategic fields such as energy and transportation, and also could have fostered productive and


technological changes. Finally, in 1991 a new integration bloc accompanied by Paraguay and


Uruguay was established.


The main objectives of MERCOSUR in its first stage of development were tariff


reductions and implementation of free trade area. Zero duties were set in intraregional trade in


goods, excluding automobiles and sugar. These exceptions may seem insignificant; however, it is


noteworthy that the supply of automobiles and their spare parts makes up over a 25% of


MERCOSUR trade. From 1991 to 1994 MERCOSUR intraregional trade increased nearly three


times. Moreover, the intraregional trade grew faster than interregional ones.


In 1994 the Ouro Preto Protocol was signed, which indicated an establishment of


MERCOSUR as a customs union. Since January, 1, 1995 a common external tariff (CET) of


about 12.4% has been applied for 85% of importing products. Tariff peaks for the remaining


15% reflected the difference in average applied duties among MERCOSUR countries. While


Brazil and Argentina increased the tariff rates for sensitive goods in order to protect national


producers; Uruguay and Paraguay, on the contrary, decreased import duties to provide their


markets with foreign products.


In 1995 the intraregional trade accounted for USD 14.5 billion, that was seven times


higher than decade ago. The intraregional trade in the first two years of MERCOSUR customs


union rose by 20% annually and achieved USD 20 billion in 1997. Again, the interregional trade


of MERCOSUR grew not so fast. However, in 1985 the estimated trade balance of MERCOSUR


was USD 15 billion while in 1995 it turned to – USD 9.4 billion. Table 1 shows MERCOSUR


intra- and interregional export and import volumes from 1980 to 2009.





  8


Table 1


MERCOSUR intra- and interregional trade, USD millions, 1980-2009


Year 1980 1985 1990 1995 1996 1997 1998 1999 2000
Intraregional
export 3,424 1,936 4,127 14,457 17,041 20,584 20,362 15,163 17,741
Interregional
export 26,096 33,255 42,292 56,041 57,365 62,178 60,982 59,159 66,850
Total export 29,520 35,191 46,419 70,498 74,406 82,762 81,344 74,322 84,591
Intraregional
import 3,424 1,936 4,238 14,441 17,041 20,584 20,848 15,761 17,713
Interregional
import 34,330 17,415 25,057 65,475 69,879 81,958 78,360 66,685 72,153
Total import 37,754 19,351 29,295 79,916 86,920 102,542 99,208 82,446 89,866
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009
Intraregional
export 15,170 10,208 12,719 17,114 21,138 25,794 32,443 41,587 33,000
Interregional
export 72,713 78,397 93,371 118,487 142,623 164,104 191,409 236,761 184,000
Total export 87,883 88,605 106,090 135,601 163,761 189,898 223,852 278,348 217,000
Intraregional
import 15,820 10,635 13,360 17,879 22,091 26,415 33,917 44,535 32,000
Interregional
import 68,253 51,807 55,235 78,053 91,825 114,265 150,450 214,429 154,000
Total import 84,074 62,442 68,595 95,932 113,916 140,680 184,367 258,964 186,000


Source: ECLAC, IDB-INTAL, WTO.




Demonstrating trade growth, MERCOSUR became a more significant player in the


international trading system. In 1994 the USA launched negotiations on FTAA (Free Trade Area


of Americas), an enormous integration project involving all countries in the Western Hemisphere


except Cuba. This initiative failed by two main reasons. Firstly, because of the disagreement on


regulation of trade in agricultural goods; and, secondly, due to the conflicts of interests between


a leading trader, the USA, and a regional power, Brazil.


In FTAA MERCOSUR members negotiated on the behalf of the integration bloc. As


MERCOSUR is a customs union, its members have the common tariff policy and elimination of


tariffs with non-member countries had to be discussed within the whole union. In FTAA that was


a case and mostly Brazil represented the position of MERCOSUR members. If Uruguay, for


instance, intends to sign a free trade agreement with the USA, it will also have to follow the


interests of all MERCOSUR members (or withdraw from this bloc).


At the same period of time MERCOSUR negotiated trade agreements with neighboring


countries while revising the preferences granted under LAIA. MERCOSUR also began to


examine collaboration with the EU. Later, in the 2000-s, MERCOSUR discussed trade




  9
agreements with other countries (for example, Israel and Republic of Korea, etc.). However, only


one partial scope agreement was signed with India.


The attention of MERCOSUR members to other regions and countries for further


integration processes was predictable. Firstly, MERCOSUR intraregional trade has never


exceeded a quarter of total trade (1998). Although for Uruguay and Paraguay MERCOSUR


formed a significant share of their foreign trade, Brazilian trade within the block amounted about


10%. Brazil, being a leader in the integration process with 70% of MERCOSUR GDP (while


Paraguay and Uruguay hold less than 3%), would like to encourage its involvement in


international trade. At the same time the imbalance in trade between MERCOSUR members in


favour of Brazil caused concerns of the other states.


Secondly, as Table 2 (and also Annex) highlights, even when we see compatibility in


trading products (for example, in the energy sector), there are several competitive industries


among MERCOSUR members. One can observe conflicts between MERCOSUR producers,


especially in agriculture as well as in some industrial sectors. Antidumping duties initiated


between MERCOSUR members could prove this statement.


Finally, for further integration it was needed to organize a common market and also to set


up appropriate regulatory institutions. However, internal economies were not ready for such


changes, which were also not expected by politicians despite their intentions to follow the EU


model of integration.


Table 2


Main exporting and importing products of MERCOSUR members, 2009 (6-digit HS Code)


Main exporting products Main importing products
Argentina Soy-beans and soy-bean oil,


automobiles, petroleum oil, maize
(corn), cooper ores, wheat


Cars and spare parts for them and motor
vehicles, telecommunication equipment,
aircrafts, petroleum oil, medicaments


Brazil Soy beans, iron ores, petroleum oil,
meat, sugar, coffee, aircraft, chemical
wood pulp


Petroleum oil, automobiles, spare parts for
motor vehicles, electronic equipment,
medicaments


Paraguay Soy beans, meat, maize (corn), wheat,
sesamum seed, wood charcoal, sugar


Petroleum, computers and electronics,
aviation spirit, fertilizers, parts for
machines


Uruguay Meat, soy beans, rice, malt, milk
products


Petroleum, electrical energy, automobiles,
polyethylene terephthalate, electronics


Source: ITC Trade Map




Moreover, trade diversification within MERCOSUR (for instance, Brazil and Argentina


raised their shares in intraregional export of manufactured products) and deeper integration with


growing trade flows between members led to the greater dependence on neighboring economies


and their vulnerability. The crisis of 1998-1999 in Brazil and default of 2001 in Argentina




  10
significantly influenced commercial relations between MERCOSUR members. The crises caused


a rise of protectionism between MERCOSUR members and the block was on the brink of


collapse. Only in 2005 volumes of intraregional trade achieved the level of 1998.


In order to encourage trade in Latin American region, a new ambitious initiative was


presented in 2004 when the Cusco Declaration was signed by 12 South American states. They


supposed to launch a free trade zone in South America among MERCOSUR, Andean


Community and Chile. In 2007 the Union of South American Nations (UNASUR) was


established. At the same time Venezuela joined MERCOSUR. Thus, MERCOSUR started to


develop deeper links with its South American neighbors. In particular, Brazil was an initiator of


this new union as Brazilian foreign policy focused on getting the leading role in regional and


global governance. However, not all MERCOSUR members were deeply involved in regional


integration processes and it seems that MERCOSUR states followed more autonomous trade


policy. Thus, in 2007 Paraguay and Uruguay signed trade and investment framework agreements


with the USA.


Furthermore, in the beginning of the 21st century many Latin American countries were


concerned about consequences of liberalization for income distribution and poverty. In this sense


internal economic problems were on the agenda, and trade policy wasn’t radically changed.


However, the problems of the Doha round in the WTO turned countries’ attention to regional


integration. The global economic crisis of 2008-2009 changed the agenda.


As Table 1 reveals, in 2009 intra- and interregional trade plummeted. The global crisis


also led to initiations of protection measures even between members of integration blocs. All


countries tried to deal with effects of the crisis and didn’t focus o integration processes.


Therefore, at the present time it is difficult to make forecasts for further integration in


MERCOSUR, more precise trends could be seen after a remarkable recovery and economic


growth in the region.




Tasks and questions:


1. Highlight the incentives for MERCOSUR integration.


2. Calculate the share of intraregional trade in MERCOSUR for 1980-2009 (treat the
Table 1). What does this estimation mean for MERCOSUR development? Compare
trends in inter- and intraregional trade flows.


3. Emphasize the stages of MERCOSUR development (in the chronological order) and
present the periodization criteria.


4. How did MERCOSUR integration influence trade policy of its members? Provide a
broad discussion (incl. an evaluation of positive and negative impacts).




  11
5. What are trade opportunities and challenges of customs unions? Examine the case of


MERCOSUR.


6. ‘Trade within MERCOSUR is equally significant for its members’. True or false?
Prove your answer with an analysis of the structure of MERCOSUR intra- and
interregional trade presented in the Annex (incl. a comparison of members’ trade by
major product group).


7. ‘MERCOSUR is outdated in the contemporary international trading system’. State
your attitude.


8. (additional) Analyze trade flows between Brazil and the other members of
MERCOSUR for 2005-2009 by share and main exporting – importing products while
using the ITC Trade Map (www.trademap.org). Characterize MERCOSUR role for
Brazilian trade and Brazilian role for trade of MERCOSUR members. Underline the
impact of the global crisis on MERCOSUR trade. Instructions for users of the ITC
market analysis tools could be found on the ITC Distance Learning Support page:
http://www.intracen.org/marketanalysis/DistanceLearning.aspx (see Trade Map
Videos: Introduction, №1 and №17).






References for further studies:


Aggarwal, V., Espach, R. and Tulchin, J. (2004) The Strategic Dynamics of Latin American


Trade, Woodrow Wilson Center Press, Washington, D.C.


Bekerman, M. and Rikap, C. (2010) Regional Integration and Export Diversification in


MERCOSUR: the Case of Argentina and Brazil, CEPAL Review, 100


Carranza, M.E. (2010) MERCOSUR, the Global Economic Crisis, and the New Architecture of


Regionalism in the Americas, LATN Working Paper, 125


IDB-INTAL (2010) MERCOSUR Report, № 14
Prokopova, A.G. (2008) National Interests of MERCOSUR Countries in the WTO,


Contemporary International Trading System: Tendencies and Prospects, Materials of


international conference, April, 25, St. Petersburg (in Russian)





  12
Annex


Merchandise trade of MERCOSUR countries by major product group and by


origin/destination, 2000-2009 (billion dollars and percentage)


World MERCOSUR Other
origin/destination


Destination Value Share Value Share Value Share
2009 2000 2009 2009 2000 2009 2009 2000 2009


Exports
Argentina
Agricultural products 28 45.4 50.6 3 28.4 24.2 25 53.4 60.3
Fuels and mining
products


8 20.6 14.0 2 22.9 18.0 6 19.5 13.7


Manufactures 18 32.4 31.9 9 48.7 57.8 9 24.7 21.4
Total exports 56 100.0 100.0 14 100.0 100.0 42 100.0 100.0
Brazil
Agricultural products 58 28.1 37.7 1 10.5 5.5 57 30.9 41.3
Fuels and mining
products


33 11.8 21.3 2 5.7 10.6 30 12.8 22.1


Manufactures 58 57.5 38.0 13 83.7 82.2 46 53.2 33.3
Total exports 153 100.0 100.0 16 100.0 100.0 137 100.0 100.0
Paraguay
Agricultural products 3 80.2 88.7 1 83.2 81.5 2 75.0 92.0
Fuels and mining
products


0 0.5 0.6 0 0.5 1.2 0 0.6 0.4


Manufactures 0 19.3 10.7 0 16.5 17.4 0 24.4 7.5
Total exports 3 100.0 100.0 2 100.0 100.0 2 100.0 100.0
Uruguay
Agricultural products 4 55.7 73.4 1 41.2 35.1 3 67.3 83.3
Fuels and mining
products


0 2.0 1.6 0 4.1 8.4 0 0.3 1.4


Manufactures 1 41.4 23.8 1 54.6 56.5 1 30.8 13.8
Total exports 5 100.0 100.0 2 100.0 100.0 4 100.0 100.0
Imports
Argentina
Agricultural products 2 6.5 4.9 1 9.2 7.3 1 5.5 3.7
Fuels and mining
products


3 6.2 8.5 1 9.3 8.6 2 5.0 8.5


Manufactures 33 87.1 85.8 10 81.5 84.0 23 89.4 86.6
Total imports 39 100.0 100.0 12 100.0 100.0 26 100.0 100.0
Brazil
Agricultural products 9 8.5 6.4 4 34.1 30.0 5 4.3 3.8
Fuels and mining
products


24 17.9 17.6 2 20.0 11.2 22 17.6 18.3


Manufactures 101 73.4 75.9 8 46.0 58.6 94 78.0 77.9
Total imports 134 100.0 100.0 14 100.0 100.0 120 100.0 100.0
Paraguay
Agricultural products 1 17.8 8.9 0 25.7 17.1 0 9.2 3.3
Fuels and mining 1 14.3 15.2 1 20.9 20.3 0 7.2 11.7




  13
products
Manufactures 5 67.9 75.8 2 53.2 62.5 3 83.5 84.8
Total imports 7 100.0 100.0 3 100.0 100.0 4 100.0 100.0
Uruguay
Agricultural products 1 14.1 12.2 1 21.7 18.8 0 8.2 6.7
Fuels and mining
products


2 16.4 25.2 1 10.6 24.8 1 20.9 25.6


Manufactures 4 69.4 62.5 2 67.7 56.3 3 70.8 67.6
Total imports 7 100.0 100.0 3 100.0 100.0 4 100.0 100.0


Source: WTO.




  14
Alexandra G. Koval


Seniuor Lecturer
Department of World Economy
St. Petersburg State University





Mexico and Dispute Settlement: WTO versus NAFTA


Mexico has been deeply involved in the international trading system since 1980-s after


the liberalization reforms. From 1986 Mexico participated in the Uruguay round of the GATT


and then became a WTO member. Moreover, this country entered into several regional trade


agreements (RTAs), which are stipulated in the Table 1.


Table 1


Mexico and RTAs


Year RTAs


1994 North American Free Trade Agreement - NAFTA (the USA, Canada and Mexico)


1995 Colombia-Mexico


1995 Costa Rica-Mexico


1998 Mexico-Nicaragua


1999 Chile-Mexico


2000 Israel-Mexico


2000 EC-Mexico


2001 EFTA-Mexico


2001 Mexico-Northern Triangle (El Salvador, Guatemala, Hoduras)


2005 Japan-Mexico


Source: WTO RTA database.




Dispute settlement procedures are specified in both the WTO and the majority of RTAs.


NAFTA is considered as the most detailed dispute settlement system among Mexican RTAs and


NAFTA clauses on dispute procedures were the ground for the other RTAs with Mexico.


NAFTA dispute settlement system is described in Chapters 11, 19 and 20 of the


Agreement. Chapter 11 is dedicated to investment disputes, 19 – to disputes on antidumping and


countervailing duty matters, and Chapter 20 – to all other disputes on the subjects of the


agreement not stipulated in Chapter 11 and 19 (in Chapter 14 on regulation in financial services


there are also dispute settlement clauses, which refer to Chapter 20). Here it is worth


emphasizing that NAFTA has a broad agenda (called ‘WTO plus’) and provides regulation for




  15
trade in goods and services, investments, intellectual property, government procurement,


competition policy and entry for business persons.


Chapter 11 deals with the protection of private investments and, in comparison with the


other disputes, cases could be brought by companies. Chapter 19 describes procedures for


disputes on anti-dumping and countervailing measures, and the panel established on these issues


takes into consideration the laws of countries in order to judge the dispute. In Chapter 20 it is


specified that members could choose the dispute settlement system between NAFTA and the


GATT:


‘Before a Party initiates a dispute settlement proceeding in the GATT against another


Party on grounds that are substantially equivalent to those available to that Party under


this Agreement, that Party shall notify any third Party of its intention. If a third Party


wishes to have recourse to dispute settlement procedures under this Agreement regarding


the matter, it shall inform promptly the notifying Party and those Parties shall consult


with a view to agreement on a single forum. If those Parties cannot agree, the dispute


normally shall be settled under this Agreement’ (Article 2005, NAFTA).


In NAFTA disputes, if they haven’t been resolved during consultations, are conducted by


a convened Commission composed of cabinet level representatives of the both interested parties.


If the differences aren’t resolved, the Commission establishes an arbitral panel of five members


selected from the common roster. Third parties could also participate in disputes. Afterwards the


Panel provides a report, and the parties ‘shall agree on the resolution of the dispute, which


normally shall conform with the determinations and recommendations of the panel’ (Article


2018, NAFTA). In practice, the parties use this report as a basis for further negotiations.


The large number of disputes settled by NAFTA rules could speak in favour of this


regulation. Most of the cases concerned Chapter 19. A few cases were resolved under Chapter


11.


Mexico is one of the most active participants in trade disputes under NAFTA and the


WTO, and it doesn’t yield to its trade partners in this sphere. The country initiated 21 disputes in


the WTO and were respondent in 14 cases. Moreover, Mexico participated in 55 disputes as a


third party.


In the WTO Mexico initiated disputes either by individually or as a part of countries’


groups (e.g. the famous ‘Banana dispute’). The USA, the EU, China and Latin American


countries were respondents in the cases brought by Mexico in the WTO, as well as these


countries, except China, were complainants against Mexico. Thus, Mexico participated in the


WTO disputes both against its RTAs partners and not. A general view on Mexican participation


in disputes under the WTO is presented in the Annex. In order to compare the WTO dispute




  16
settlement system with NAFTA, it is needed to examine the cases between Mexico and the USA


in both organizations.


From the early days of NAFTA up until today, Mexico has initiated three times as many


disputes as the USA (Table 2). Furthermore, Mexico has submitted most of the cases under


NAFTA – 83.3 percent. This share is even greater than the USA’s (71.4 percent). We could say


that in comparison with Mexico the USA has been referred to the WTO more frequently.


Table 2


Disputes between Mexico and the USA in NAFTA and WTO, 1994-2010


Number of disputes initiated


by


Share of disputes (%) initiated


by


Mexico USA Mexico USA


NAFTA 45 15 83,3 71,4


WTO 9 6 16,7 28,6


TOTAL 54 21 100 100


Source: IDATD


Table 3 shows that the majority of disputes initiated by Mexico in NAFTA and the WTO


have related to steel and products made of steel. In the food and agricultural sector more disputes


have been initiated by the USA. In addition, most of the cases initiated by Mexico in NAFTA


referred to Chapter 19 (44 disputes), and the USA brought against Mexico only 10 disputes.




Table 3


Disputes by subject between Mexico and USA in NAFTA and WTO, 1994-2010


Number of disputes initiated
in NAFTA by in WTO by
Mexico USA Mexico USA


Steel and products of steel 14 3 3 -


Tubular goods 10 1 1 -


Cement 16 - 1 -


Chemical goods 1 5 - -


Food and agriculture 2 6 2 5


Apparel 1 - - -


Services 1 - - 1


Other - - 2 -


In total 45 15 9 6


Source: IDATD




  17
Thus, on the one hand, we could argue that the example of Mexico shows that many


disputes can be solved on the regional level; Mexico could follow the same strategy for all


disputes under RTAs with other countries. On the other hand, even having trade agreements with


its core partners, Mexico still defends its interests under the WTO as the final appeal institution.



Tasks and questions:


1. What are the reasons for Mexican involvement in the WTO dispute settlement system?


2. What are the differences of Mexican participation in intraregional and interregional


disputes? Analyze the number, subjects and status of the disputes under the WTO as well


as agreements cited. Treat the Annex.


3. Compare the relations of Mexico with the USA and the EU in the WTO dispute


settlement system.


4. Evaluate NAFTA and WTO dispute settlement mechanisms: pro and contra. (See also


Article 20 (Sections B and C) of NAFTA on http://www.nafta-sec-


alena.org/en/view.aspx?x=343).


5. Compare the participation of Mexico in the disputes with the USA under NAFTA and the


WTO.


6. «The WTO dispute settlement system proves that multilateralization is better than


regionalization». True or false? Discuss.




References for further studies:


Biggs G. (2005) The Settlement of Disputes under the WTO. The Experience of Latin America


and the Caribbean, Cepal Review, 86.


Delich, V. and Weston, A. (2003) Settling Disputes, in Trade Negotiations in Latin America:


Problems and Prospects, edited by Tussie, D., Palgrave Macmillan, New York


Heidrich, P. and Tussie, D. (2010) Regional Trade Agreements and the WTO: The Gyrating


Wheels of Interdependence, in Redesigning the World Trade Organization for the


Twenty-First Century, Edited by Steger, D., Wilfrid Laurier University Press.


Kerr, W.A. (2005) Trade Dispute Settlement Mechanisms: the NAFTA versus the WTO, in The


WTO and the Regulation of International Trade, edited by Perdikes, N., Read, R. and


Elgar, E., the US.


Koval, A. G., Trofimenko, O. Y. (2010) The WTO Dispute Settlement: Trends for Latin


American Countries, II International Congress of Americas Studies: ‘Americas: System


of Powers, Integration and Multiculturalism’, UERJ, Rio de Janeiro.




  18
Annex


Mexico as a complainant and a respondent in the disputes under the WTO, 1995-2010


Mexico as a complainant
Country Year of


request
Title Agreements cited Status


China 2007 Certain Measures Granting
Refunds, Reductions or Exemptions
from Taxes and Other Payments


SCM, TRIMs, GATT Withdrawal


2008 Grants, Loans and Other Incentives Agriculture, SCM,
GATT


consultation


2009 Measures Related to the
Exportation of Various Raw
Materials


GATT Panel proceedings


Ecuador 1999 Provisional AD Measure on
Cement


AD, GATS Consultation


2000 Definitive AD Measure on Cement AD, GATS Consultation
The EU 1995 Regime for the Importation, Sale


and Distribution of Bananas
IL, GATS,GATT consultation


1996 Regime for the Importation, Sale
and Distribution of Bananas


IL, Agriculture, TRIMs,
GATS, GATT


Second recourse
to the Appellate
Body


1999 Regime for the Importation, Sale
and Distribution of Bananas


IL consultation


Guatemala 1996 AD Investigation Regarding
Portland Cement


AD, GATT Panel proceedings


1999 Definitive AD on Grey Portland
Cement


AD, GATT Implementation


Panama 2005 Tariff Classification of Certain
Milk Products


AD, GATT Mutually agreed
solution


The USA 1996 AD Investigation Regarding
Imports of Fresh or Chilled
Tomatoes


AD, GATT Withdrawal


2001 Continued Dumping and Subsidy
Offset Act of 2000


SPS, Agreement
Establishing the WTO,
AD, GATT


Proceedings
under Article 22
DSU (remedies)


2003 Countervailing Duties on Steel
Plate


SPS Panel proceedings


2003 AD on Cement Agreement Establishing
the WTO, AD, GATT


Mutually agreed
solution


2003 AD Measures on Oil Country
Tubular Goods (OCTG)


Agreement Establishing
the WTO, AD, GATT


Implementation


2005 AD Determinations regarding
Stainless Steel


Agreement Establishing
the WTO, AD, GATT


consultation


2006 Final AD Measures on Stainless
Steel


Agreement Establishing
the WTO, AD, GATT


implementation


2008 Measures Concerning the
Importation, Marketing and Sale of
Tuna and Tuna Products


TBT, GATT Panel proceedings


2008 Certain Country of Origin
Labelling Requirements


Rules of Origin, SPS,
TBT, GATT


Panel proceedings




  19
Venezuela 1995 AD Investigation in Respect of


Imports of Certain Oil Country
Tubular Goods (OCTG)


AD, GATT withdrawn


Mexico as a respondent
Brazil 2000 Provisional AD Measure on Electric


Transformers
AD, GATT consultation


Chile 2001 Measures Affecting the Import of
Matches


IL, TBT, GATT withdrawn


The EU 1996 Customs Valuation of Imports GATT consultation
2004 Provisional Countervailing Measures


on Olive Oil from the European
Communities


Agriculture, SCM consultation


2006 Definitive Countervailing Measures
on Olive Oil from the European
Communities


Agriculture, SCM,
GATT


implementation


Guatemala 2003 Certain Pricing Measures for
Customs Valuation and Other
Purposes


GATT, Agriculture,
Customs valuation,
Agreement
Establishing the WTO


withdrawal


2005 AD Duties on Steel Pipes and Tubes AD, GATT implementation
Nicaragua 2003 Certain Measures Preventing the


Importation of Black Beans
IL, SPS, GATT withdrawal


The USA 1997 AD Investigation of High-Fructose
Corn Syrup (HFCS)


AD, GATT consultation


1998 AD Investigation of High-Fructose
Corn Syrup (HFCS)


AD, GATT Compliance
proceedings


2000 Measures Affecting Trade in Live
Swine


SPS, Agriculture,
TBT, GATT


consultation


2000 Measures Affecting
Telecommunications Services


GATS implementation


2003 Definitive AD Measures on Beef and
Rice


AD, GATT implementation


2004 Tax Measures on Soft Drinks and
Other Beverages


GATT implementation


SPS - Sanitary and Phytosanitary Measures
AD – Anti-dumping
TBT - Technical Barriers to Trade
SCM - Subsidies and Countervailing Measures
IL - Import Licensing


Source: WTO





  20
DR. E.F. (Ric) Riccio



(S.I.L.O., SOLE, RMSP, CLEP)


Practicing Logistician, Professor of Logistics,
Chair, Society of International Logistics and Operations





Dispute Resolution in Ukraine



Every mature society (cultural unit) has a developed set of norms designed to resolve


disputes by means short of bloodshed. Here in Ukraine such norms are often difficult to


distinguish, and if distinguished one may find that not everyone adheres to the process of


resolution; nor is everyone required to so adhere. The frequent result is that the dispute goes on


until all parties to the dispute have passed on.


This may be, in part, due to the irregular and sometimes irrational history of any process


short of bloodshed. Ukraine has a long history of succumbing to power exerted from without. At


present there is no such external source of power so that Ukraine must rely on its own formal and


informal means of social control. Again, however, one must understand that informal means of


social control are often of minimal effect.


An illustrative case arose near end of 2007 when a foreign professor at a local university


was ordered by the administration to teach Ukrainian third year students a course in


AMERICAN BUISNESS LAW. Although the professor made known his reluctance to teach


such a course on grounds that such course would be of very limited use to Ukrainian students, if


of any use at all, and also on grounds that the overriding difference between Anglo-American


Common law and Continental Civil law was more of a matter of cultural differences, with which


Ukrainian undergrad students are grossly unfamiliar given the over-concentration on “Finance”


by all universities currently allowed by the EDUCATION MINISTRY.


Not only were these objections overruled, but the professor was ordered to select just one


area of the general topic, i.e. American Business Law and build the course around that narrow


sub-topic. The professor dutifully tried to comply with this insane order and decided that in order


for the course to be of any value to the students he should concentrate on the cultural aspect of


the subject, i.e. the reasoning process of those trained in the Common Law vs. the reasoning


process which formed the basis of the European Civil Law.


The differences in thinking process between the two major systems was quite severe and


not really limited only to lawyers and judges in either system. The reasoning process of the law


formed the basic reasoning process for almost all aspects of life in both systems. Thus, the


professor reasoned, while the course would accomplish little if anything by way of teaching




  21
American Business Law, it would impart an understanding of how to cultivate cultural


understanding among business practitioners of both traditions.


Basically, and very briefly, the two systems differed with the Anglo-American Common


Law system adhering to inductive reasoning, with factual content being paramount, while the


Civil law system adhered to deductive reasoning with all decisions being deduced from the


already existing written law of the jurisdiction. The rules were paramount with facts taking a


lowly second place.


In addition to all of the above the course was scheduled as a morning class. This proved


to be another detriment to the entire concept in that simultaneously with assigning these students


to have to study and learn about a totally foreign concept in a morning class, the majority of


these students were also given part time jobs and were encouraged by the university to work at


these jobs in preference to any other duties.


Thus the students, assigned to study a rather esoteric subject matter without the aid of a


textbook, were saddled with a conflict of time which resulted in most of the students thus


assigned arriving in the class about 30 minutes before its conclusion; as a consequence they had


no text book and not even the limited assistance of a lecture.


At the midway point in the semester, the hapless teacher administered a mid-term


examination. More than 50% of the students failed the examination; failed miserably. It could


have been that their failure was due to their ignorance as much as their failure to study


adequately. Rumors circulating within the university gave equal weight to both explanations.


This ambiguity was easily tolerated by observers of the university in question because, it was


claimed, the university’s entrance procedure was tolerant and very “flexible.” Speculation aside,


the fact was the students made a very poor showing in the exam.


In due course the professor handed the papers back to the students, those who were


present, and went through the examination questions, explaining the correct answers. Of course


these students, pampered and cared for throughout their existence, were upset with their grades.


They became unruly and finally even threatening in their attitude toward the professor.


At the midpoint of the class session, the professor declared the usual break and repaired


at once to the office of the Dean in order to request assistance with what had become a


threatening mob of students. Unfortunately, although the Dean was present, she made it clear she


could do nothing in view she was at the time serving tea to a visitor, evidently a personal visitor.


On his return to the classroom the Professor found that the students had given up all


pretense of rational behavior. They embarked, en masse, on the use of threatening physical


gestures, shaking their fists very openly and with matching facial expressions as well as verbal


expression, toward the professor.




  22
The professor had to make a decision. He was sure that if he remained in the classroom


the students would eventually begin a version of fisticuffs. In such an eventuality, the professor


was sure he would prevail but at the risk of injuring quite severely some of the students. The


Professor was a long time Black Belt in the martial art of Ninjitsu.


The only thing the professor feared was that in order to protect the fees being paid by


these students, regardless of their lack of academic prowess, the university administration would


do all possible to put the blame on the professor for instigating the row. Thus the professor


decided, as he had been trained to do, that a physical confrontation would only demonstrate his


continuing capability at self defense and thus such a confrontation was not called for. Being


unable to do anything about the continuing threatening behavior of the students, the professor


merely packed up his brief case, waved cheerily goodbye to the recalcitrant students, and left the


room.


It must have been a serious disappointment to the administration of the university which


had nursed and coddled these students to the point of having them believe they were above and


beyond any restraints imposed by either formal or informal rules of social control.


During this entire incident higher authority of the university were not present, all being


away at the same time. The university was thus left in the hands of the Dean whose prime


concern, at least on that day, was the brewing of tea. Whereabouts of the higher authority were


unknown and there was no way of communicating with them.


Higher authority did not return to duty until five days after the incident. At that time the


professor was summoned to visit the Vice Rector of the university. At said meeting the professor


was asked simply if he intended to return to his students. Failing any indication of disciplinary


action against the threatening students, the professor declined. There the matter ended with no


decision being made about the conduct of the students.


However, the conflict thus generated continued even to this day with the professor having


been black-listed by his former employer. From the very beginning of the situation which


unfolded form the decision that American Law, or some version of it must be taught, up to the


present day, the university administration adopts the historical attitude of the royal prerogative.


That is the notion of the immunity of the sovereign from any and all consequences of its


decisions; the sovereign being considered immune from having its decisions questioned to any


degree whatever. Thus, since the sovereigns entitled never to be challenged, it acts as if it has not


been challenged even to the extent of ignoring challenges which are loud and clear.


This seems to be the general approach to conflict of anyone who has a title of any kind.


As a result any kind of conflict is useless because it is only the challenger who participates in the


conflict with those claiming the royal prerogative ignoring any attacks. This is a problem not




  23
only of modern politics in Ukraine but more frequently a problem of just plain doing business


and resolving all of the myriad misunderstandings which are often unavoidable when two or


more persons attempt to carry on some business process jointly.


Thus, apparent adherence to international norms of behavior is often illusory and used


only as a PR effort.






QUESTIONS FOR DISCUSSION


1) What is meant by Social Control?


2) What is meant by “the royal prerogative?”


3) Give some examples of formal and informal social control.


4) Be prepared to discuss culture and its role in social control.





  24
Nikita E. Lisitsyn



Associate Professor


Department of World Economy
St. Petersburg State University




Russian-Finnish “Raw Wood Dispute”: tactic necessity versus strategic


neighbourliness


Pre-reading (electronically available):


 Sutyrin S.F., Lisitsyn N.E. (2010) Global Economic Crisis and Development of Russian-
Finnish Economic Ties, Economics and Management, No. 5, pp 19-24 (in Russian)


 Palo Matti (2007) High export duties for round wood in Russia? Baltic Rim Economies
electronic publication, No. 5, http://www.tse.fi/pei/publications




1. Traditionally good economic ties


Finland for a long part of its history has been an important economic partner of Russia.


Moreover, importance of Russian-Finnish (earlier Soviet-Finnish) economic ties was even more


significant taking into account relatively small size of Finnish economy, especially compared


with that of Russia’s key trade partners (e.g., Germany, China, France, USA).


During 40 years (1950-1990) Soviet-Finnish mutual economic relations benefited from


the exclusive system of clearing trade and relatively high level of investment and technical co-


operation. Finnish producers enjoyed an opportunity to supply their goods to a huge market of


USSR, and Finnish importers bought Soviet mineral fuel with significant price discount during


the Global Oil Shocks of 1970-ies. Soviet engineering companies built nuclear power plant in


Finnish Loviisa, and a metal processing factory in Raaha. Finnish companies were involved in


creating production facilities for Soviet pulp and paper enterprises, in constructing residential


buildings and hotels in Leningrad.


After breakdown of Soviet Union Finland remained a significant trade and investment


partner for Russia, whereas the character of mutual economic ties has changed. Commodity


structure of Russian exports to Finland shifted toward goods with minimal added value,


dominant items are: crude oil, natural gas, wood logs, metal ores. The share of machines and


equipment has diminished, almost to zero. Structure of Russia’s imports from Finland has


changed as well, but in this case the share of machines and equipment has risen. This, however,


was not the result of Russia’s bigger need in equipment with high added value (like, e.g., sea


vessels, one of the most important items of Finnish exports to USSR). The main growth was




  25
demonstrated by a sub-group of consumer goods (mobile phones, house appliances), together


with increased amount of cars and other vehicles. The latter type of imports uses Finland only as


a transit state, being produced in other parts of the globe. In 2010 Finland was Russia’s key trade


partner, ranked 12th by the value of trade turnover, having a 3.2% share of Russian exports and


2.2% share of its imports. For Finland its eastern neighbour is even a more important actor:


Russia occupies a second position among the biggest trade partners of Suomi.


Despite the cut of traditionally close scientific and technical co-operation ties in early


1990-ies, Finnish investment into Russia was growing throughout the whole period of 2000-ies,


driven by stabilisation and fast economic recovery in Russian Federation. Dynamics of cross-


border investment flow between Finland and Russia is illustrated by Chart 1.




Chart 1. Finnish Investment in Russian Economy, USD million



Source: author’s calculations based on Rosstat data, see www.gks.ru


The main target sector for Finnish investors was wood production or related industries. In


2009, for example, Finland had a 27.9 % share of total foreign investment (FI) coming into


Russian wood processing, and a 15.5% share of FI in pulp and paper industry of its eastern


neighbour.


Russia, being a globally important supplier of raw wood, remained an insignificant actor


in world industry of wood processing and paper production. In 2000-ies Russian Federation had


one fifth of global raw wood exports, being the biggest supplier of this commodity to the global


market. Possessing huge forest resources, the country was able to process only 2-3% of its raw


wood. In addition to that, Russia became one of the biggest importers of paper and other wood


products: by the end of 2006 the value of this type of imports exceeded USD 3 billion. These


facts became the reasons for Russian authorities to launch a multi-stage campaign for raising


export duties on raw wood. In fact, this campaign went in line with the same policies pursued by




  26
the governments of world’s biggest raw wood exporters, namely Canada, USA, and Finland


itself. Comparative description of wood industry of Russia, Finland, and USA is presented


below.




Table 1


Wood industry of certain countries, 2009


Country Wood resources,
cubic metre of wood
per resident


Average
consumption of
paper and
cardboard, kilogram
per resident


Total length of
forest roads, km
per resident


Wood industry
exports, USD
billion


Russia 561 35 1.2 6.6


Finland 370 240 40 10.2


USA 83 340 10 15.3


Source: author’s calculations based on Rosstat data, see www.gks.ru


The first step of this campaign was raising the raw wood export duty from 6.5% up to


20% in February-July 2007. In April 2008 the duty increased once again, reaching the level of


25% or EUR 15 per one cubic metre of exported untreated wood logs. It was announced that the


third step of the campaign would take place on January 1, 2009, raising duties to 50% of raw


wood export value.


These steps of Russian authorities created significant concerns among Finnish pulp and


paper companies and in Finnish society in general. During a long lasting period Finland used to


import up to 80% of its consumed wood from Russia. Finnish wood processing companies had to


change their supply chains. One of the biggest industries of this country was negatively affected,


which had a corresponding impact on employment, especially in depressive Eastern Finland.


Raised tensions led to some forms of negative responses towards Russia from the Finnish side.


First, Suomi tried to link this problem with Russia’s WTO future accession, blaming its eastern


neighbour of breaking its Agreement with WTO signed in 2005. Nevertheless, Finland made no


concrete moves to block Russia’s WTO accession. Another response could be introduction of


certain transit charges on cars and some other goods, transported via Finnish territory to Russian


Federation. This initiative was, however, contradicting EU’s policies in this field and got no


chance to be implemented.


But the new external factor appeared in late 2008, which appeared to be the global


financial crisis, namely Great Recession. This phenomenon had rapidly changed the approaches


of the parties in this developing dispute. Its influence on the issue was the following:




  27
1. The crisis significantly lowered investment activity both in Russia and abroad: expected


projects of developing wood processing inside the country got no chance to be financed and


launched, at least in the mid-term perspective.


2. Russian producers of raw wood faced painful reduction of export price, which had to be


compensated by increasing volumes. It, however, appeared impossible to do: high export duty


had narrowed the supply market for raw wood. As in Finland a year prior to the crisis, economic


disaster affected Russia’s comparatively depressive region, namely Republic of Karelia.


3. Prices on wood logs shank globally, and many developing economies increased their


supplies of raw wood to the world market. Among those Brazil, Malaysia, and Uruguay could be


specially outlined. That enabled Finnish producers of paper (e.g., Stora Enso, UPM Kymmene)


to purchase raw wood at lower process. Moreover, some of the Finnish pulp and paper


companies acquired some of these suppliers from South America and Asia.


4. Negative attitude of Finnish society to duties raising campaign started to harm Russia’s


image in Finland, which was reflected by sociological investigations carried out in 2008. This, in


addition to the image’s dramatic worsening in EU after the conflict with Georgia, could threaten


mutual relations between neighbour states in the long-term.




As a result, these factors forced Russian authorities to postpone the introduction of higher


duties first from January 2009 to January 2010, then until 2011, and finally till year 2012. The


last postponement was announced by Russia’s Prime Minister Vladimir Putin on December 10,


2010. By now the raw wood dispute led mostly to huge losses reported both by Finnish pulp and


paper companies, and by Russian suppliers of raw wood.




Tasks and questions:


1. What were the main reasons for the duty raising campaign? Do you consider these


reasons to be significant enough?


2. What measures, to your opinion, could be taken to avoid the dispute?


3. Could this dispute lead to economic conflict of wider range between Russia and Finland?


4. What sectors of economy in Russia and Finland could potentially benefit from the export


duty on raw wood raised to 50% or higher? What direct and indirect circumstances it could have


on economies of both trade partners?


5. How would you assess the use of unilateral approach in trade disputes between two


countries?




  28
Alexander I. Pogorletskiy



Professor


Department of World Economy
St. Petersburg State University






Liberalization of air Transportation Industry in the European Union: new


opportunities for Travelling and Some Lessons for Russia


Liberalization of the European Air Travelling Industry


Economic liberalization of air travel was a part of deregulation campaign based on the


idea that state-controlled economy is no longer in the focus of public interest. Deregulation of


airlines industry was initiated in the US and later spread globally, being especially intensive in


Asia, Latin America, and European Union (EU). Nevertheless the effects of air industry


liberalization in Europe were undoubtedly quite different in scope and magnitude than in the US.


European Union as well as many other states has followed the initiative, leading to an


increase of free market business strategies throughout the sky industry. The EU has decided that


governments should not be allowed to subsidize their loss-making airlines. Governments'


concerns over their own financial performance and recognition of benefits of privatization have


led to a gradual transfer of ownership from state to private sector elsewhere. In order to attract


prospective shareholders, airline companies are trying to be more efficient and competitive.


Deregulation is also stimulating competition, created by small carriers (low-costers).


Deregulation of air transportation industry in Europe in 1992 gave carriers from each EU


country the right to supply scheduled services in other EU states. The EU's final stage of


deregulation took place in April 1997, allowing an airline from one member state to carry


passengers at another member state's domestic market. Outside Europe 'open skies' agreements


are beginning to dismantle some of the regulations which refer to carriers flying on certain


routes.


After the EU abolished most restrictions on air carriers flying in Europe and what their


tariffs, prices decreased roughly two-fold, but remained still higher than those for comparable


distances in the US. The question is: should deregulation spur competition, resulting in lower


prices? The answer is that many carriers remain state-owned, like Air France, and are only now


beginning to cut operating costs. Nevertheless changes have occurred.


Here are some examples of European air transport fares since 1995:




  29
 Sabena and Alitalia both charge $1,600 for a mid-week, economy and round-trip ticket


between Brussels and Rome;


 Sabena and Austrian airlines charge $1,400 for a round-trip between Brussels and Vienna;
 Sabena and Iberia charge $1,450 for Brussels to Madrid round trips.


While Sabena airlines collapsed in 2001 because of financial difficulties and it was


replaced soon by Brussels airlines, in May 2011 fares for a mid-week, economy and round-trip


ticket on the same routes were as follows:


 $410 by Alitalia and $535 by Brussels airlines for a flight between Brussels and Rome;
 $370 by Austrian airlines and $320 by Brussels airlines on the route between Brussels and


Vienna;


 $720 by Iberia and $800 by Brussels airlines for a trip between Brussels and Madrid.
So the most visible effect of the European passenger air market liberalization was


sufficient price contraction (2 to 4-fold in abovementioned example).


The EU decided to remove the remaining barriers for competition on European routes in


1997 and a growing number of small but motivated carriers are rising up to get better positions


on the busiest routes. Most analysts say that only four or so of dozen of the biggest carriers will


survive in their present form once deregulation is complete, throwing state-owned airlines into


the uncertainties of the private sector. Nevertheless, some of previously unknown companies


became the market leaders. The best example of such a kind is Ryanair – number one low-cost


air carrier in Europe.



Ryanair - The Low Fares Airline



The Ryanair history. Ryanair was founded in 1985 by Christy Ryan (after whom the


company is named), Liam Lonergan (owner of an Irish tour operator named Club Travel), and


noted Irish businessman Tony Ryan, founder of Guinness Peat Aviation and father of Cathal


Ryan and Declan. The airline began with a 15-seat Embraer Bandeirante turboprop aircraft


flying between Waterford and London Gatwick with the aim of breaking the duopoly on


London-Ireland flights at that time held by British Airways (one of the biggest European airline)


and Aer Lingus (the national Irish air carrier).


In 1986 the company added a second route – flying Dublin-London Luton in direct


competition to the Aer Lingus / BA duopoly for the first time. Under partial EU Deregulation,


airlines could begin new international intra-EU services as long as at least one of the two


governments gave approval (the so-called "double-disapproval" regime). The Irish government


at the time refused its approval in order to protect Aer Lingus, but Britain, under Margaret




  30
Thatcher's pro-free-market Conservative government, approved the service. With two routes and


two planes, the fledgling airline carried 82,000 passengers in one year.


Passenger numbers continued to increase, but the airline generally ran at a loss, and by


1991 was in need of restructuring. Michael O'Leary was charged with the task of making the


airline profitable. Ryan encouraged him to visit the USA to study the 'low fares/no frills' model


being used by Southwest Airlines – the world’s first low cost air carrier. O'Leary quickly decided


that the key to low fares was to implement quick turn-around times for aircraft (a standard for


Ryanair is only 25-30 minutes instead of about 1 hour for traditional full-service European air


companies), "no frills", and no business class, as well as operating a single model of aircraft.


O'Leary returned, convinced that Ryanair could make huge inroads into the European air


market, at that time dominated by national carriers which were subsidised to various degrees by


their parent countries. He competed with the major airlines by providing a "no-frills", low-cost


service. Flights were scheduled into regional airports (some of them are situated till nowadays


far away from declared destinations such as Brussels-Charleroi in Belgium or London-Stansted


in the United Kingdom), which offered lower landing and handling charges than larger


established international airports. O'Leary as Chief Executive did a publicity stunt where he


helped out with baggage handling on Ryanair flights at Dublin airport. By 1995, after the


consistent pursuit of its low-cost business model, Ryanair celebrated its 10th birthday by


carrying 2.25 million passengers.


During the 1990s. European Union's deregulation of the air industry in Europe in 1992


gave carriers from one EU country the right to operate scheduled services between other EU


states, and represented a major opportunity for Ryanair. After a successful floatation on the


Dublin Stock Exchange and the NASDAQ Stock exchanges, the airline launched services to


Stockholm, Oslo (Sandefjord Airport, Torp, 110 km south of Oslo), Paris and Charleroi near


Brussels. Flush with new capital, the airline placed a massive $2 billion order for 45 new Boeing


737-800 series aircraft in 1998.


Entering the 21st century. The airline launched its website in 2000, with online booking


initially said to be a small and unimportant part of the software supporting the site. Increasingly


the online booking contributed to the aim of cutting flight prices by selling direct to passengers


and excluding the costs imposed by travel agents. Within a year the website was handling three-


quarters of all bookings, and now accounts for 100% of the total.


Ryanair launched a new hub of operation in Brussels South Charleroi Airport in 2001.


Later that year, the airline ordered 155 new Boeing 737-800 series aircraft from Boeing at what


was believed to be a substantial discount, (taking full advantage of the downturn in aeroplane


orders after the slump in air travel following the September 2001 aircraft attacks in the United




  31
States) to be delivered over eight years from 2002 to 2010. Approximately 100 of these aircraft


had been delivered by the end of 2005, although there were slight delays in late 2005 caused by


production disruptions arising from a Boeing machinists' strike.In 2002, Ryanair launched 26


new routes and established a hub in Frankfurt-Hahn Airport, its European expansion firmly on


track.In 2003, Ryanair announced the order of a further 100 new Boeing 737-800 series aircraft,


and in February a third continental base was opened at Milan-Bergamo in Italy. During the


period of 2000-2008 airline growed very fast by opening new routes and buying a lot of new


planes. The enlargement of the European Union on 1 May 2004 opened the way to more new


routes as Ryanair and other budget airlines tapped the markets of the EU accession countries.


Decrease of a dollar exchange rate to euro was favorable for ordering US made aircrafts Boeings


instead of European Airbuses. The growth of a number of passengers carried by Ryanair for


1985 – 2008 is shown on the Picture 1 (see the Picture). Thus, in 2008 Ryanair carried


58,700,000 passengers, an 18% increase over 2007. Ryanair traffic in 2010 grew by 10% from


65 million in 2009 to over 72 million passengers.





Picture 1. Passenger numbers carried by Ryanair, 1986 – 2008.


Source: http://en.wikipedia.org/wiki/File:Ryanair_pax_fig.JPG



Nowadays. Today Ryanair is the biggest low-cost carrier in Europe. It operates 729


routes across Europe and North Africa from 29 bases (see Picture 2). Ryanair is the third largest


airline in Europe in terms of passenger numbers and the world's largest in terms of international


passenger numbers. Even period of 2008 – 2009 (time of the global financial and economic


crisis) was favorable for Ryanair: many passengers including businessmen turned to low-cost




  32
airlines from traditional full-service air carriers in their attempts to cut costs of air travelling.


While a lot of full-service European airlines did not receive any profits in 2009 and decreased a


number of their passengers for the year (some of them even went bankrupt), Ryanair’s profits in


2009 rose 200% to over €318m and traffic growth continued during a global recession.


Continuing devaluation of the US dollar to euro in 2011 still favorable for Ryanair to order new


Boeing aircrafts.




Picture 2. Ryanair destination map.
Source: http://varyanair.webs.com/destinations.htm



Ryanair: a real leader in price competition in the EU. On flights from Brussels


Charleroi Airport Ryanair proposes following prices for routes to Rome, Vienna and Madrid


(compare with prices of full-service airlines in above done examples):


 $240 for a mid-week, economy and round-trip ticket to Rome (almost 2 times cheaper than
traditional full-service air carriers such as Alitalia and Brussels airlines for the same dates);


 $130 for return flight to Bratislava (only one hour bus trip from Vienna Schwechat
airport), that is 2.5 times lower than the appropriate prices of Austrian airlines and Brussels


airlines;




  33
 $150 for return ticket to Madrid in the mid-week days (5 times less than air charges of


Iberia and Brussels airlines).


So price competitive advantage of Ryanair is unprecedented in comparison with its rivals from


the list of traditional (non low-cost) airlines. As of February 2010, Ryanair had an average fare


of €32. Ryanair stood by that fact that its average fare was less than half of competitor easyJet's


of €66.


One more basing thing to be competitive is a competition between airports of the same


destination. In most cases Ryanair can chose from several alternatives the cheapest airport


serving the same city. For example, where are 5 airport in London: Heathrow, Gatwick, Luton,


Stansted and London-City. So Ryanair fly to Stansted where service fares are more favorable. If


where are no any alternatives, Ryanair try not to serve the destination. The best illustration is


Budapest. On 29 April 2010, Ryanair announced the cancellations of all of its routes from


Budapest Ferihegy Airport, after talks about decreasing taxes with the airports management


failed. Ryanair stated it would have opened 25 new routes from the Hungarian capital, if the


taxes had been decreased. As Ferihegy Airport is the only one serving Budapest, the airline is not


able to operate from an alternative low cost airport in the surroundings.



Analyses of the Price Competition between Airlines on Some Routes from Berlin



With appearance of low cost air carriers, such as Ryanair, European travelers received


good possibilities to spend their weekends abroad for a low price. Moreover, the followers of


Ryanair came to the European deregulated air market quite soon. These circumstances


guaranteed the continuation of air travel price decrease in the EU. One of the most open and


competitive markets for European air transport companies after the liberalization of air transport


industry is Germany. Indeed, almost all popular European air carriers including low cost airlines


are today present on the German market. There are Ryanair (ranked as number one), EasyJet


(ranked as number two), Air Berlin (number three) and Germanwings (low-cost subsidiary of


Lufthansa), which are definitely price leaders on some major routes. Table 1 (see the Table)


indicates several popular destinations from the capital of Germany both for low-cost airlines and


for traditional full-service air carriers. The table contains the lowest prices for a return weekend


trip from Berlin to Milan, London, Oslo, Stockholm, St. Petersburg and Moscow where the low


cost air carriers are flying to. Moreover, all companies are flying to or from the same airports


such as Berlin-Tegel (TXL) and Berlin-Schoenefeld (SXF) situated not far from the city center


(about 30 min trip by public transport from both airports to Alexanderplatz).





  34
Table 1. The cheapest tickets for return direct flights from Berlin (inbound flights on June


3, 2011 outbound flights on June 5, 2011), Internet price in euro on May 5, 2011


Air carriers,
airport


Destinations
Milan London Oslo Stockholm St.Petersburg Moscow


Ryanair
(SXF)


105.19 144.51 48.98 72.98 No direct flights No direct
flights


easyJet (SXF) 96.98 135.32 No direct
flights


No direct
flights


No direct flights No direct
flights


Norwegian
(SXF)


No direct
flights


No direct
flights


87.20 114.10 No direct flights No direct
flights


Air Berlin
(TXL)


219.98 466.98 218.98 313.98 248.98 203.98


Germanwings
(SXF)


No
outbound


flight


No
outbound


flight


No direct
flights


328 No direct flights 208.99


Lufthansa
(TXL)


No direct
flights


250.17 No direct
flights


No direct
flights


No direct flights No direct
flights


British
Airways
(TXL)


No direct
flights


177.33 No direct
flights


No direct
flights


No direct flights No direct
flights


Aeroflot
(SXF)


No direct
flights


No direct
flights


No direct
flights


No direct
flights


No direct flights 277.62


Rossija (SXF) No direct
flights


No direct
flights


No direct
flights


No direct
flights


No inbound
direct flight


No direct
flights


Transaero
(TXL)


No direct
flights


No direct
flights


No direct
flights


No direct
flights


No direct flights 189.10


Sources: composed by A.Pogorletskiy based on Internet sites of air carriers
(accessed on May 5, 2011).




















Some Lessons from the European Air Industry Liberalization
Related to the Internal Market of Air Travelling in Russia



One of the most competitive Russian air route is St.Petersburg – Moscow with at least


seven air carriers in June weekends of 2011 (even eight on working days including Ural


Airlines). Prices for one way ticket for the flight St.Petersburg – Moscow (distance 650 km)


TASKS FOR STUDENTS:


Basing on the analyses of the above-done table which also indicates all direct flights from Berlin
to appropriate destinations and using information about the European air transport market
liberalization and experience of low-cost airline Ryanair please give answers to the following
questions:
 Was the effect of EU air travel industry liberalization on internal EU routes starting from


Berlin positive in general or not?
 Is there any competition between airports of Berlin to attract air carriers?
 How competitive is Ryanair in comparison with its rivals including both low-cost airlines


and full-service airlines?
 Could the EU liberalization of air industry be expanded on the flights from Berlin to


Russian cities (such as Moscow and St.Petersburg)? How Russia’s accession to the WTO
could change the present situation?




  35
booked one month in advance are depicted in the Table 2 (see the Table). In comparison: prices


for one way trip for almost the same distance Berlin – Munich (600 km) in Germany for the


same date also booked one month in advance were equivalent of:


 5 300 Rubles by Air Berlin;
 7 500 Rubles by Lufthansa;
 3 650 Rubles by Germanwings;
 3 200 Rubles for ICE train (analog of the Russian high speed train Sapsan).



Table 2. The cost of the cheapest ticket for one-way trip from St.Petersburg to Moscow


(on June 5, 2011), Internet price in Russian rubles on May 5, 2011.
Carriers Aeroflot Utair Transaero Rossija Sky


Express
S7 Gazpromavia Sapsan


train
Air
carriers


3 752 2 990 2 980 3 050 2 000 3 577 No data
available




Russian
railways


2 355


Sources: composed by A.Pogorletskiy based on Internet sites of Russian air carriers and RZD –
Russian railways (accessed on May 5, 2011).


















Sources



 Airline Deregulation. URL: http://www.econlib.org/library/Enc/AirlineDeregulation.html
 European experience of air transport liberalization. URL:


http://www.icao.int/icao/en/atb/ecp/CaseStudies/EuropeLiberalization_En.pdf
 International Business Still Worlds Apart on Air Fares: European Travelers See Few


Benefits of Deregulation. URL: ttp://www.nytimes.com/1995/12/20/business/international-
businessstill-worlds-apart-air-fares-european-travelers-see-few.html


 Kawagoe M. Air Transport Deregulation in the EU: Study from the Europeanization
Perspective. URL: // http://www.juris.hokudai.ac.jp/gcoe/journal/LPG_vol2/2_8.pdf


 Ryanair Virtual Airlines. URL: http://varyanair.webs.com/


TASKS FOR STUDENTS:


Basing on the analyses of the above-done table give answers on the following questions:
 How could you assess the route St.Petersburg – Moscow for different types of carriers in


terms of the price competition?
 Which are the basic distinctions of the route St.Petersburg – Moscow from the same in


terms of distance route Berlin – Munich?
 Which lessons form the European air transport industry liberalization could be


implemented in the Russian market?
 Some times ago on the route St.Petersburg – Moscow has operated the Russian low-cost airline


Avianova whose prices were less than 2000 Rubles per one-way flight (for some dates prices
were close to 1000 Rubles). Now it leaved the market. Why repetition of the successive story of
Ryanair in the Europe is impossible in Russia where full-service airlines are dominating in the
industry?


 Could Russia’s accession to the WTO change the competitive situation for the domestic air
routes?




  36
 Ryanair. URL: http://en.wikipedia.org/wiki/Ryanair
 Site of Ryanair. URL: http://www.ryanair.com
 The Airline Industry. URL: http://adg.stanford.edu/aa241/intro/airlineindustry.html




  37
Sergey F. Sutyrin



Professor, Head of the World Economy Department


St. Petersburg State University
The WTO Chair holder





Could customs union help Russia to join the WTO?



Disintegration of the Soviet Union in 1991 gave birth to 15 new countries emerged on its


former territory. In addition to many other urgent problems to be solved, they needed to


elaborate their trade policies. The latter had to be in conformity with an overall trend of social


and economic transformation, namely the transition to market economy. Hence, the policies


under review strategically should have been aimed at creating the best opportunities to promote


mutually beneficial trade relations with various foreign partners. The main mean to achieve


afore-mentioned goal was consistent trade liberalization, i.e. reduction or complete elimination


of different barriers hampering this form of economic cooperation.


At the moment World Trade Organization (WTO) is the key institution in charge of


working out of international trade rules. It was established in 1994 on the basis of General


Agreement on Tariffs and Trade (GATT). Marrakesh Declaration of 15 April 1994 officially


announcing an appearance of the WTO in particular runs: “2. Ministers affirm that the


establishment of the World Trade Organization (WTO) ushers in a new era of global economic


cooperation, reflecting the widespread desire to operate in a fairer and more open multilateral


trading system for the benefit and welfare of their peoples. Ministers express their determination


to resist protectionist pressures of all kinds. They believe that the trade liberalization and


strengthened rules achieved in the Uruguay Round will lead to a progressively more open world


trading environment”.


For overwhelming majority of the former Soviet republics – with the only exception of


Turkmenistan – accession to the WTO (consisting currently of 153 members) became one of


their priorities in the field of foreign economic relations. Eight countries (Armenia, Georgia,


Kirgizstan, Moldavia, Ukraine and three Baltic States) already joined “the club”. Six other


economies are at the different stages of negotiations on accession. It is worth mentioning that


some of them have initially applied either for GATT membership, or before the official launch of


the WTO. According to www.wto.org, history of Russian accession started in June 1993. In case


of Belorussian accession it happened in September 1993, in case of Uzbek one – in December


1994.




  38
In terms of their geo-economic preferences new independent countries clearly split up


into two groups. Baltic States from the very beginning strived for EU membership perceiving


relations with the former Soviet republics as something inferior (if not totally insignificant) in


comparison with the main goal. In contrast to that, the others performed in a bit more diverse


way. Of course, they tried to expand their trade with Western Europe and Asian-Pacific region.


At the same time, some efforts were made in order to secure economic ties within post-Soviet


space and fill these ties with a new content. In order to do that certain re-integration initiatives


were introduced. Commonwealth of Independent States (CIS) and Eurasian Economic


Community (EurAsEC) have been two the most large-scale projects of this type.


Within the framework of the latter Republic Belarus, Kazakhstan and Russian Federation signed


the “Treaty on the creation of the common customs territory and establishment of the customs


union of 6 December 2007”. Preamble of the document stipulated that the signatories


endeavored “to ensure the free movement of goods in mutual trade, favorable conditions for


trade between the customs union and the third countries and the advance of economic integration


of the Parties”.


It should be emphasized that development of regional economic integration constitutes


one of the basic global trends. It has manifested itself most vividly during last decade. The total


number of various regional trade arrangements (RTAs) for these years has grown substantially.


The WTO reports that by 31st of July 2010 as much as 474 RTAs have been notified in the


organization. At the same data, 283 agreements were in force. Thus, decision in favor of customs


union made by Republic Belarus, Kazakhstan and Russian Federation was anything but


extraordinary one.


As it was already mentioned above, all three countries negotiated their WTO accession.


In June 2009 Russia's Prime Minister Vladimir Putin announced that RF together with Belarus


and Kazakhstan would halt their separate negotiations on joining the World Trade Organization.


Instead they would apply to join the WTO as a single customs union.


In principle, Article XII of Marrakesh Agreement Establishing the World Trade Organization


stipulates: “Any State or separate customs territory possessing full autonomy in the conduct of


its external commercial relations and of the other matters provided for in this Agreement and the


Multilateral Trade Agreements may accede to this Agreement, on terms to be agreed between it


and the WTO. Such accession shall apply to this Agreement and the Multilateral Trade


Agreements annexed thereto”. Nevertheless, international reaction on Putin’s statement varied


from perplexity to disapproval.


About a month later Russian President Dmitry Medvedev practically repudiated


declaration made by Prime Minister reintroducing separate accession mode. In November 2009




  39
President Medvedev once again corrected RF stand. At the final press-conference after Russia-


EU summit in Stockholm he in particular said that he was very pleased by the fact that that


decision to establish customs union increased international interest to Russia’s WTO


membership. As for specific format of accession – separate or as a customs union, President


Medvedev claimed it to be relatively insignificant and concluded: “What is important for us is


the speed: whichever way is the shortest, we will use that way. If it turns out to be the way of


concerted but individual accession, we will choose that way”. Finally, the choice was made in


favor of separate but coordinated accession. Currently this is an official Russian attitude.


A new Custom Code common for all three members of the customs union came into force


on 1 July 2010. Starting from 2012 common economic space operate. Tajikistan and Kirgizstan


being the members of EurAsEC have plans to join it.



Questions for discussion:

1. Why expansion of a foreign trade enhances growth of national economy?


2. What is a customs union and how does it differ from other institutional form of regional


economic integration?


3. How do the ends perused by the WTO correspond to the ends perused by RTAs?


4. Why do the WTO members disagree with accession of Belarus, Kazakhstan and Russia


as a single customs union?


5. How could you explain transformation of Russian position on a format of the WTO


accession during 2009?


6. How could creation of customs union influence the prospects of Russia’s accession?





  40
Sergey F. Sutyrin


Professor, Head of the World Economy Department
St. Petersburg State University


The WTO Chair holder




“Rolekas?”



It was spring 2004 when Mr. Sidorov first came to Shanghai. The city impressed him by


its scale and twice as much by its dynamics patently felt at every step. Strolling around Old


Town, walking along Huangu River embankment, looking at the city panorama from TV tower


observing ground – all that was so nice and pleasant. And practically in each place attracting


tourists Mr. Sidorov was approached by Chinese, who smiled and asked (sometimes more than


once) the same question: “Rolekas?”




Could you guess what did Chinese want from Mr.Sidorov?




Pretty soon Mr. Sidorov understood that he was offered to buy watch, moreover not just a


kind of watch but a product allegedly made by leading Swiss manufacturers. It was Rolex which


Chinese traders chose as a distinctive symbol of Swiss watches. Probably, on the one hand, to


pronounce Rolex was easier for Chinese, on the other hand, they considered this brand to be the


most famous and attractive.


One day while walking at Old Town with his Chinese colleagues Mr. Sidorov wondered


whether it would be safe enough to accept the offer and scrutinize “Rolekas”. An answer was: “If


you wish we can easily do that”. The first next “Rolekas” trader to whom Mr.Sidorov expressed


his interest invited potential client to follow him and brought Mr. Sidorov accompanied by his


friends to a tiny room of small house in a dark side-street quite close to shining shopping area.


The room from the floor to the ceiling was crammed with attaché-cases full of various watches


(Pic.1 depicts a very small share of the total stock). There were Rolex, Patek Philippe, Tissot,


Breitling, and other famous brands. One could select either quarts watches or mechanic ones.




  41





Of course, all these were fake products, and Mr. Sidorov understood that perfectly clear.


Nevertheless, many watches at the first glance didn’t differ from the originals. More than


that, even obvious counterfeits looked relatively good. Finally, Mr. Sidorov decided to buy three


“Rolex” watches (see Pic.2). He perceived them as interesting and reasonably chip souvenirs for


himself and his two sons









  42
It goes without saying that Shanghai is far from being the only place on the globe to buy


a counterfeit. Mr. Sidorov knew that from his own experience. In December of the same 2004


Mr. Sidorov was on holiday in Dubai. In famous Gold Suk several traders also offered him to


buy “Swiss” watches, though for a price 2-3 times higher than in Shanghai. In December 2007


Mr. Sidorov came to Hong Kong. As is generally known, official PRC policy towards this


territory sounds as “one country – two systems”. More than that, it is publicly advertized that


Hong Kong business environment (including existing level of intellectual property rights


protection) corresponds with best international standards. Meanwhile, Mr. Sidorov could easily


buy «Rolex», «Patek Philippe» or some other Swiss brands in this city. The only difference in


comparison with previous cases related to the fact that this time “a shop” was located on the


sixth floor of a large business-center in the heart of downtown. As for the prices, they were even


higher than in Dubai.


Nevertheless, since it was Shanghai where Mr. Sidorov happened to come several times


in 2006-2010, he could retrace developments of the issue under discussion with regard to this


very city. Being impelled by a desire for learning Mr. Sidorov during each of his visits to


Shanghai investigated specific conditions existed at that moment for purchasing of “Swiss”


watches. Major changes for the whole period of observation he paid attention to could be


summarized as following:


- total number of traders both on Huangu River embankment and in the main Shanghai shopping


street Nanjing Dong Lu tended to decrease substantially;


- in most cases traders started to use for advertizing laminated booklets;


- nowadays “Good watch” are offered instead of “Rolekas”;


- price level generally increased;


- in addition to watches bags, knapsacks and some other leather accessories are frequently


offered, sometimes this items even dominate in supply.




At the same time, there were significant elements of continuity. In particular, watches as


previously could be bought directly in the streets. As before, both RMB and USD were accepted.


Haggling was not just possible. In most cases it constituted an important element of the whole


purchasing process. Haggling turned the latter into a fascinating game for both participants of the


transaction. As a result the final price might differ from initially asked quite substantially. In


June 2010 Mr.Sidorov couldn’t resist temptation and bought yet another watch (see Pic.3).





  43





One can easily notice one small but significant change. Any reference to a “Swiss” origin


disappeared from the face.


In addition to selling of counterfeit goods, Chinese market of watches demonstrates yet


another dimension of international non-observed economy, namely selling of smuggled products.


Abovementioned type of goods in particular is delivered from Hong Kong. These are mainly


luxury brandname watches made by Swiss watchmakers including «Rolex», «Vacheron


Constantin» or «Longines». Following data allow assessing the scale of illegal operations. Hong


Kong daily «The Standard» quoting mainland customs statistics claimed that 10,000 brandname


watches were legally imported to China in the first half of 2007, with an estimated 20,000 to


25,000 smuggled in3.




Questions for discussion:





3 HK syndicate wound up in $45m luxury watch scam//The Standard Dec.15-16, 2007, Vol.1, No
81.
http://www.thestandard.com.hk/news_detail.asp?pp_cat=12&art_id=58696&sid=16764267&con
_type=3




  44
1. What was from your point of view the price Mr. Sidorov paid for the “Rolex” watches he


bought in Shanghai in 2004?


2. Several days after Mr. Sidorov had returned from Shainghai in 2004 his “Rolex” stopped


dead. He took it to a watchmaker. What did watchmaker say to Mr.Sidorov?


3. Should protection of intellectual property rights be seriously taken under consideration


regarding production and sale of watches? Who are the main stakeholders in this case?


4. Do you think that Chinese authorities are aware of the situation with counterfeit watches


in Shanghai?


5. What might be the most appropriate and efficient methods to struggle against production


of counterfeit products?


6. Did abovementioned developments in marketing of counterfeit watches in Shanghai


(including the way they looks) result from Chinese membership in the World Trade Organization


or were generated by other causes?


7. What are the main factors generating large-scale selling of smuggled in mainland China?


8. Is there any type of connection between the markets of counterfeit and smuggled


watches?




  45
Olga Y. Trofimenko



Associate Professor


Department of World Economy
St. Petersburg State University





Foreign investments in Russia: The case of Segezhabumprom - AssiDoman


The city of Segezha is located in the heart of Karelian Republic (270 km. to the north of


Petrozavodsk). The basis of the name "Segezha" conducts the origin from Finnish "sees" – pure,


light. Population of the city is 35170 inhabitants, about 27% of the population are pensioners,


and 20% – children.


"Segezha Pulp and Paper Mill" was put into operation in the summer of 1939. It took


only 28 months to build the mill. The new enterprise produced paper sacks and solved the


problem of their lack in the growing economics of the Soviet Union.


The site for the mill was chosen not by chance; this region was rich with raw materials. It


is close to the railway and motor road St.-Petersburg – Murmansk and Belomor-Baltic Canal.


The town of Segezha was built together with the mill.


In 1948 the mill was awarded with the Order of Lenin for its contribution into economic


development of the country during the Second World War. That was the highest government


reward from the government of the Soviet Union.


While operating the mill has passed through several stages of modernization and


reconstruction, now it has facilities for production of 350,000 tons of unbleached sulphate pulp,


350,000 tons of sack craft paper and 702 million items of paper sacks.


In 1992 the mill was reorganized into a joint stock company "Segezhabumprom". In 1999


the mill was reformed into a joint stock company “Segezha Pulp and Paper Mill”.


Nowadays the company performs quite successfully. In the rating of the 200 largest


Russian companies in terms of sales volume (provided by a leading Russian economic magazine


“Expert” in the year 2000) Segezha Pulp and Paper Mill took a 180th place. The place is quite


modest, but during the previous years it did not even appear in such ratings. At the same time the


company keeps 65th position in the top 100 rating in terms of best Russian performing exporters


and 8th place among the Russian producers with the largest geographic distribution of export.


One can find the companies’ products in various European countries, China, and many others. It


supplies more than half volume of Russian production of extra-strong paper.


In the summer of 2004 the company installed a new plant of continuous pulping. The cost


of the project was USD 15.4 million. This gave an opportunity to increase production volumes




  46
and improve quality of pulp. The support of Karelian government plays an important role in the


company’s development. For example, it is much easier to get bank loans if local authorities


provide guarantees. In 2003 the company signed an agreement with Sberbank of Russia. Under


the agreement Segezha pulp and paper mill got in the 5 following years $150 million for further


modernization of production facilities.


Segezha pulp and paper mill is the largest employer in the city of Segezha. More than


5000 people work there. It is also a largest tax payer in the region. It supplied the entire city with


hot water for heating and other purposes.


The company experienced a difficult period of time in its development in 1990s.


Economic situation in Russia at the end of 1980s – beginning of 1990s negatively influenced the


company. Volumes of production had decreased; salaries to workers were not paid for several


months, the company used to sell its goods on terms of barter. By the beginning of 1990 most of


the equipment was either out of order or depreciated. In order to save the company, large scale


investments were desperately needed. Due to the very high level of economic instability Russian


investors were not ready to take the risk of investing into the company.


Despite high economic risk Swedish company AssiDoman AB in 1996 bought


controlling interest (57% of the shares) of Segezhbumprom. It leaded to positive changes for


Segezhabumprom. Foreign investor bought black oil (mazut) for heating system, employees


began to receive salaries. Swedish managers announced their plans to invest up to $100 million


in renovation of production process. In order to reach a high level of efficiency Swedish


managers decided to introduce Western standards of doing business.


Their programme of recovery contained (among others) the following issues:


 invitation of Swedish specialists and consultants;
 costs reduction (cutting down the number of personnel from 5300 to 1600 employees);
 rent of 40 per cent of Karelian forests for 49 years in order to secure access to raw materials;
 refuse to provide heating and hot water supply for Segezha city free of charge; and
 dismantling of all old equipment and development of new production lines.


At the initial stage of the project AssiDoman invested $25 million into the company. It


was just enough to cover fees for consultants, fuel for Segezha city, salaries to workers, and


removal of the old equipment. Quite soon AssiDoman met various problems. Despite the


promises of the local authorities to help the company in solving tax debts problems,


Segezhabumproms’ bank accounts were blocked. Another problem was the access to raw


materials. They did not manage to lease forests.




  47
As the result, the Swedish investor decided to leave Segezha. The company announced that


Russia is not a very good place to invest in, peculiarities of doing business in Russia are too


complicated and local authorities do not understand the needs of foreign companies.


AssiDoman left the company in a very bad condition. Its production volumes decreased


substantially in 1997, almost all equipment was destroyed, but new equipment was not placed in


operation. By the mid of 1998 the company was put trough a bankruptcy procedure. The team of


Russian managers came and took anti-crisis measures.




Questions to discuss


1. Try to imagine what kind of other problems AssiDoman could face (in addition to those


mentioned in the case)?


2. What would be your recommendations with regard to the recovery plan for the company?


3. On the basis of the case, what would you recommend to do/ not to do for foreign investors in


Russia?




  48
Olga Y. Trofimenko


Associate Professor
Department of World Economy
St. Petersburg State University





Olympia’s Preferential Tatiff Quotas


The goal of the case is to study one of the key principles of international trading system: most-


favoured nation treatment (MFN).


Olympia is a small country with the population of 10 million inhabitants and a signatory of


the GATT agreement. It is well located near main trading crossroads. Regardless this fact, the level


of economic development of Olympia is far behind its closest neighbours: members of Progressia


Customs Union (hereinafter referred to as Progressia or PCU). Unstable political environment,


series of coup d'états (rapid changes from monarchy to military dictatorship and then to


democracy) hamper sustainable economic growth of the country. It has a relatively low level of


GDP per capita (in comparison with PCU members), a large share of public sector in the economy


and a high ratio of internal debt. The main economic sectors of Olympian economy are agriculture,


tourism, construction, and shipping.


Progressia unites nine high-income countries; all of them are signatories of the GATT. It is


one of the leading trading partners of Olympia. At the same time, goods from Olympia are not


competitive enough at Progressia’s market; the country can’t offer any industrial goods that could


be in demand with exceptions of some. The main export articles of Olympia to the PCUare fruits,


sheep meet, oils, and vegetables. In order to accelerate economic growth and achieve a greater


level of economic development, Olympia started its accession process to the PCU. Good political


relations with Progressia are very important for Olympia, the latter hopes to receive financial


support from the PCU after its accession, as well as foreign direct investments and technology


transfer. As a first step for its further membership, Olympia signed an Agreement of Association


with Progressia and reduced its tariff for industrial products vis-à-vis the PCU.


Plandria is a big country that stays away from the GATT agreement. The government of


Plandria doesn’t want to bind itself with obligations rising from the GATT due to peculiarities of


its political and economic system. At the same time, it is an active actor of international trade. The


country looks for new markets for goods produced by its booming industrial enterprises. These


goods are not welcomed everywhere and main consumers of them are political allies of Plandria




  49
with similar types of economic regulation. Being a planned economy, Plandria monopolizes,


among other things, all external trade flows. In order to control trade balance, it actively uses


clearing schemes (Long-Term Clearing Agreements) in trade financing with the bulk of its trading


partners.


In December 1969 the Government of Olympia signed a Special Protocol with the


Government of Plandria. The protocol reduces Olympia’s external tariff rates by 50 per cent for


specified quantities of certain commodities of Plandria production without making these tariff


reductions applicable to all GATT contracting parties. The protocol was signed for three years.


The objective of the Special Protocol was to facilitate imports of industrial products from


Plandria in order to restore a balance in the Clearing Agreement between two countries, which


showed a large credit balance ($6,000,000) in favour of Olympia. Such situation couldn’t satisfy


neither Plandria (because of trade deficit), nor Olympia (Plandria couldn’t maintain its purchases


of Olympia’s agricultural products). The problem for Olympia was worsened by the fact that these


goods couldn’t be easily re-directed to other markets; Progressia couldn’t consume these amounts


of products as it was to a large extent self-sufficient in agricultural production. Olympian export


earnings were under serious risks.


Under the Special Protocol, the countries elaborated the following mechanism of Plandria’s


trade deficit reduction. Benefits for Plandria took a form of tariff quotas that covered seventy-five


products for the amount of $4,000,000. This represented 0.30 per cent of total Olympia’s import


and one-sixth of imports from Plandria. In practice, not all products were imported under quotas.


Only thirty of seventy-five mentioned were delivered and the actual import of these thirty products


was almost four times less than it was stipulated by the protocol.


Due to relatively low amounts of trade governed by the protocol and in order not to break


international trade rules and get support for its actions, the Government of Olympia submitted an


official request to the GATT asking for a waiver from its obligation under Article XXV:5 in view


of its special circumstances. The Working Party was created to examine this case. After the


meeting and discussion, it expressed its view over the action taken by Olympia.




Tasks and questions for students:


1. Read the case and study GATT Article I and Article XXV.


2. Discover and explain the nature of clearing agreements.


3. Decide whether the conditions of "exceptional circumstances" took place for Olympia.


Why/Why not?


4. Was there a violation of GATT Article I? Why/Why not?




  50
5. Create the arguments of Olympia for the Working party.


6. Present the attitude of Progressia towards Olympia’s actions.


7. Identify terms of reference for the Working Party.


8. Describe possible concerns of GATT signatories from the trade policy perspectives.


9. Write communications for the meeting of the Working Party on behalf of any GATT


contracting parties.




Legal Text


General Agreement on Tariffs and Trade


Article I


General Most-Favoured-Nation Treatment


1. With respect to customs duties and charges of any kind imposed on or in connection with
importation or exportation or imposed on the international transfer of payments for imports or
exports, and with respect to the method of levying such duties and charges, and with respect to all
rules and formalities in connection with importation and exportation, and with respect to all matters
referred to in paragraphs 2 and 4 of Article III,* any advantage, favour, privilege or immunity
granted by any contracting party to any product originating in or destined for any other country shall
be accorded immediately and unconditionally to the like product originating in or destined for the
territories of all other contracting parties.


Article XXV


Joint Action by the Contracting Parties


1. Representatives of the contracting parties shall meet from time to time for the purpose of
giving effect to those provisions of this Agreement which involve joint action and, generally, with a
view to facilitating the operation and furthering the objectives of this Agreement. Wherever
reference is made in this Agreement to the contracting parties acting jointly they are designated as
the CONTRACTING PARTIES.


2. The Secretary-General of the United Nations is requested to convene the first meeting of the
CONTRACTING PARTIES, which shall take place not later than March 1, 1948.


3. Each contracting party shall be entitled to have one vote at all meetings of the
CONTRACTING PARTIES.


4. Except as otherwise provided for in this Agreement, decisions of the CONTRACTING
PARTIES shall be taken by a majority of the votes cast.


5. In exceptional circumstances not elsewhere provided for in this Agreement, the
CONTRACTING PARTIES may waive an obligation imposed upon a contracting party by this
Agreement; Provided that any such decision shall be approved by a two-thirds majority of the votes
cast and that such majority shall comprise more than half of the contracting parties. The
CONTRACTING PARTIES may also by such a vote


(i) define certain categories of exceptional circumstances to which other voting
requirements shall apply for the waiver of obligations, and


(ii) prescribe such criteria as may be necessary for the application of this paragraph*.

* The authentic text erroneously reads "sub-paragraph".

Source: www.wto.org




  51
Maryana A. Gubina


Seniour Lecturer
Department of World Economy
St. Petersburg State University




Services in the System of International Trade: the Example of Health-Related


Services


Readings:


 Россия и международная торговая система / Под ред. Ван Дузера Е., Капусткина
В.И., Сутырина С.Ф. – СПб: Петрополис, 2000.


 Дюмулен И.И. Международная торговля услугами. М.: Экономика, 2003.




The international trade in services is a rapidly growing area of trade creating new


opportunities as well as new threats for the health sector. There are difficulties with the


estimation (measuring) of the volume of international trade in health related services because of


a lack of really consistent data. Still there is no doubt that such trade has a growing potential for


both developing and developed countries.


The customary definition of services trade under the GATS is based on the four so


called “modes” of services supplied. These modes depend on the territorial presence of the


supplier and the consumer at the time of the transaction (see Picture 1).4 Mode 1: Cross-border


supply (CB); Mode 2: Consumption abroad (CA); Mode 3: Commercial presence (CP); Mode 4:


Temporary movement of natural persons (NP).



Picture 1: Main modes of international trade in services


Source: Patients without borders: an overview of the medical travel industry
in Asia, its challenges and opportunities //UNESCAP, EGM, Bangkok, 9-11 October 2007




4 Article I:2. General Agreement on Trade in Services// World Trade Organization, 1994




  52


Question for discussion №1:
Give examples of each modes of international trade in health-related services.

Questions for discussion №2:
1. In what exactly cases the supply of health related services for each four modes is impossible?
2. Are there any medical services which can be provided by all four modes?


According to the Services Sectoral Classification List used by GATS5 , there are twelve


sectors of services. At least five of them are closely related to the healthcare system. Firstly,


those are the Professional services under the Business service sector. These deal with services of


health professionals (“Medical and Dental Services” (1.A.h) and “Services Provided by


Midwives, Nurses, Physiotherapists and Para-medical Personnel” (1.A.j). Second is the health


and social services sector including “Hospital Services” (8.A) and “Other Human Health


Services” (8.B). Third comes the distribution service sector relates to services in pharmaceutical


retailing (4.C). The fourth is the education service sector which involves training and education


of health professionals (5.B-D). Finally the fifth is the financial sector dealing with health


insurance “All Insurance and Insurance-Related Services” (7.A) and the flows of foreign capital


of investments in private hospitals. The three last among the mentioned subsectors are not related


to the supply of medical services directly. Nonetheless, they are also the integral elements of the


healthcare system, since they help to provide and guarantee the secure operation (functioning) of


the entire national healthcare system. However, so far we’ve considered only those sectors which


are linked with the medical services directly. That’s why some of sectors above are not a part of


this case-study.


International trade in health-related services development can result absolutely


differently from the points of view of equity, efficiency, quality and access to health care.


Competitive health-related services can attract responsible customers to health facilities, creating


a direct contribution to the GDP of the exporting country. Let’s consider more thoroughly what


the opportunities and threats that may result in international trade in health-related services for


the exporting countries are. (see Table 1).


Table 1
Opportunities and threats from liberalization


of trade in health-related services for exporting countries


Pros Cons
Mode 1: Cross border delivery


Upgrade skills, disseminate knowledge through
interactive electronic means


Capital-intensive, possible diversion of
resources from basic preventive and curative
services


Mode 2: Consumption abroad



5 GNS/W/120 Services Sectoral Classification List




  53
Generate foreign exchange earnings to increase
resources for health


Create dual market structure


Upgrade health infrastructure, knowledge,
standards and quality


May crowd out local population-unless these
services are made available to local population


Diversion of resources from the public health
system


Mode 3: Commercial presence
Generate additional resources for investment in
upgrading of infrastructure and technologies


Large initial public investments needed to
attract FDI if public funds/subsidies used-
potential diversion of resources from the public
health sector


Reduce the burden on public resources Two-tier structure of health-care
establishments


Create employment opportunities Internal brain drain from public to private
sector


Raise standards, improve management, quality,
improve availability, improve education
(foreign commercial presence in medical
education sector)


Crowding out of poorer patients, cream
skimming phenomena


Mode 4: Movement of personnel
Economic gains from remittances and transfers
of health-care personnel working overseas


Permanent outflows of skilled personnel-brain
drain


Promote exchange of knowledge among
professionals


Loss of subsidized training and financial
capital invested


Upgrade skills and standards (provided
services providers return to the home country)


Adverse effects on equity, availability and
quality of services


Source: Drager N. Trade in health services and GATS: Implications for health policy // Compilation of Presentations
made at the Inter-regional Workshop. World Health Organization, 2002

Question for discussion №3:
Make the similar analysis of advantages and disadvantages of trade in health-related services for
importing countries. Try to use each proposed mode of health-related services supply.




What is especially important, similar effects in the system of international trade


liberalization depend on a whole number of characteristic features, identifying concrete


countries. E.g., for country A (the situation more characteristic in the developed countries), mode


4 may create an opportunity to increase the national health workforce through import. For


country B, mode 4 can secure foreign income and training through export. Finally, for the


majority of developing countries there is a risk of domestic brain drain, causing a loss of human


capital and education expenditure.


Mode 2 enables country C to increase earnings through exports. At the same time,


country D imports such services and thus relieves the pressure of demand on the domestic public


system. However, there is a possibility of appearing of a very specific “two-tier” system,




  54
providing domestic patients with far much lower quality healthcare services than those for


foreign ones. That can also entail higher overall health-care costs.6


There are no universal policy recommendations which can be used by each country


mainly because of a lack of comparable, adequate information and other data problems. Instead,


to responsibly estimate the consequences of such trade on its key areas of concern, each country


has to collect relevant information individually.


Let's consider the example of such Asian countries as India, Thailand and Singapore


which are pursuing successful health policy in the field of promoting international trade in


health-related services, especially services proposed by Mode 2 (medical tourism).


Medical tourism is a rapidly growing industry attracting patients travelling across the


national borders to receive specified medical treatment. Medical travel has become the most


visible part of global trade in health related services by now. Nevertheless, the other three modes


are expected to increase in significance in the forthcoming years. During the last decade the


world market of medical tourism has been demonstrating stable growth. Surely over the last two


years this growth wasn’t observed because of the global crisis which influenced tourism and


transportation services much stronger than other service sectors.


Medical tourism is quite a common phenomenon for Southern and South-Eastern Asia


countries. The annual growth of the total number of medical travellers here is more than 20 per


cent. The world market of medical tourism (according to reliable estimates) is about 60 billion


dollars; all along the share of Asian countries isn’t quite large (some 5 per cent). Experts are


expecting this share to rise by 2012 up to 6.7 per cent.


India, Thailand and Singapore have more impressive growth of medical tourism income


than other Asian countries. For example, recent Deloitte report shows that medical tourism sector


in India is expected to grow 30 percent annually from 2009 to 2015. Over 180,000 patients


visited the medical centers in India during the first eight months of the 2008 fiscal year.


There are several reasons why the medical tourism in Asia is developing that fast. First,


the costs of healthcare services in developed countries are constantly increasing. In most


developed countries (such as the US, the United Kingdom, Canada, and Australia) the accepted


standards of medical services quality are extremely high, either is the state-of-the-art equipment


and the qualification of medical personnel. Thanks to the successes of contemporary medicine


and pharmacy the life expectancy in developed countries is far much higher than similar


indicators in the developing countries. All this results in the increase of consumer costs,



6 Richard D Smith, Rupa Chanda, Viroj Tangcharoensathien. Trade in health-related services// January 22, Lancet
2009; 373: 593–601




  55
rationing and queues (“lines”) in developed countries. That’s why some consumers prefer to get


medical services abroad, where the cost of healthcare services is much less than similar costs in


the developed world (see Table 2).


Table 2


Costs of surgery procedures, US dollars
United States Singapore Thailand India
Heart bypass 122 000 20 000 12 000 10 000
Heart valve replacement 159 000 13 000 10 500 9 500


Source: Medical Travel Singapore // Parkway Group Healthcare, 2007


Second, Asian countries can offer relatively cheap and high-quality (hence, more


competitive) medical services. Indian, Thai, Malaysian medical specialists frequently participate


in short-term and long-term training programs abroad. It helps to spread the knowledge and skills


among the health personnel. Moreover, the governments of these countries have special


programs of medical tourism development. They actively support the promotion of medical


services in the world market. India’s National Health Policy 2002, for example, says: “To


capitalize on the comparative cost advantage enjoyed by domestic health facilities in the


secondary and tertiary sector, the policy will encourage the supply of services to patients of


foreign origin on payment. The rendering of such services on payment in foreign exchange will


be treated as ‘deemed exports’ and will be made eligible for all fiscal incentives extended to


export earnings”.


Box 1: Medical Tourism in Thailand


The number of foreign patients in Thailand increased from 0.55 million in 2001, to 1.3 million in
2005, which is the highest result in Asia. More than half of the patients (mainly from Japan, the
USA and the UK) are treated in three private hospitals that are accredited by the Joint
Commission International (Bumrungrad, Bangkok General, and Smithivej). These hospitals have
got internationally trained physicians and US management.


Substantial growth in the scale and revenues acquired via medical tourism prompts long-term
investment in the capacity expansion of outpatient, inpatient, and other specialised service
facilities. It encourages vivid private-sector growth for the domestic population, and provides
extra revenues for the government (30% corporate tax rate). However, it increases demand for
physicians and other health professionals. By 2015, about 7 million outpatients and 0.4 million
inpatients from medical tourism are expected (est.); 200–303 extra physicians will be necessary,
which is about 20–30% of the total number of private medical doctors or 9–12% of total doctors
in Thailand. This increased demand places the public-health system under pressure, especially
teaching hospitals there a large pool of specialists is needed.


It is easy to see why. Private physicians can earn some four to ten times more than their public
counterpart, given equivalent qualification. There are three clear patterns of internal brain-drain:
(1) from public provincial hospitals to private hospitals; (2) from public hospitals to teaching
hospitals; and (3) specialists, such as cardiac surgeons, from teaching hospitals to private
hospitals. India has a similar experience of the effect of medical tourism on internal brain-drain.
Source: abbreviated from Smith R.D., Chanda R., Tangcharoensathien V. Trade in health-related services Lancet,
Vol 373, February 14, 2009




  56


Home task №1:
Make a short SWOT analysis of healthcare sector in Thailand. Find the necessary information
using the Internet.



Home task №2:
Try to determine the competitive advantages of health-related services in Russia.
Which type of health-related services could be exported?




Although India, Thailand and Singapore have actively developed a “medical hub” in


Asia, they have not made (signed) special commitments presupposed by GATS on health and


social-related services (see Table 3). According to Article XX:1 of the GATS each WTO


member-state is to provide a so called “schedule of commitments”. However, the sector coverage


and the extent of liberalization are not strictly specified. Furthermore, even in sectors where such


commitments are undertaken, member-countries may specify the limitations, concerning the


market access or national treatment, related to some of the four modes or even completely


exclude individual modes. Moreover, some segments can be excluded from the scope of a sector.


It is determined and defined in the non-mandatory Classification List which generally employed


for scheduling purposes (W/120) 7.


Table 3
Scheduling of limitations for hospital services: example of India



Sector or subsector Limitations on


market access
Limitations on


national treatment
Additional


commitments
8. Health related and
social services
A. Hospital services


1). Unbound*
2). Unbound
3). Only through
incorporation with a
foreign equity ceiling
of 51 per cent
4). Unbound, except
as indicated in the
horizontal section


1). Unbound*
2). Unbound
3). None
4). Unbound except as
indicated in the
horizontal section




Source: Services Database. WTO. Data available on May 2011.

Modes of supply: 1). Cross-border supply; 2). Consumption abroad; 3). Commercial
presence; 4). Presence of individual persons.
Note: This sector entry should be read in conjunction with the limitations, formulated in the
horizontal section of the schedule, including such kinds of national treatment: 'unbound' for
subsidies under mode 2, and 'unbound' for the 'temporary entry and stay of natural persons'
under mode 4 (without further qualifications).





7 Rudolf Adlung. Trade in healthcare and health insurance services: WTO/GATS as a supporting actor (?) //
Intereconomics, Volume 45, Number 4, 227-238




  57
The key principles of GATS are the Market Access (MA, Article XVI) and the National


Treatment (NT, Article XVII) which applies only to those sectors for which commitments are


made. The MA provisions of GATS cover six types of restrictions which are to be maintained


without any further limitations. The restrictions relate to:


a. the number of service suppliers;


b. the value of service transactions or assets;


c. the number of operations or quantity of output;


d. the number of natural persons supplying a service;


e. the type of legal entity or joint venture;


f. the participation of foreign capital8.


The National Treatment implies the absence of all discriminatory measures that may


modify the conditions of competition to the detriment of foreign services or service suppliers.


Limitations may be listed in a sequence of inconsistent measures, such as discriminatory


subsidies and tax measures, residency requirements, etc. The NT obligation applies regardless of


whether or not foreign services and suppliers are treated in a formally identical way to their


national counterpart. What matters is that they are granted equal opportunities to compete9.


Generally, in spite of many countries are active participants of international trade in


health-related services, the healthcare is one of the most enclosed service’s sector. Let’s prove


this thesis. For example, more than 90 per cent of WTO Members have taken some form of


commitment on tourism services. Approximately 70 per cent of countries have included financial


or telecommunication services in their schedules of commitments. However, less than 40 per


cent have undertaken commitments on education and health (see Table 4).



8 General Agreement on Trade in Services// World Trade Organization, 1994
9 ibid




  58
Table 4



Specific Commitments of WTO Members on Individual Health-related Services, May 2011



Members 1.A.h 1.A.j 8.A 8.B Members 1.A.h 1.A.j 8.A 8.B


Albania X X X X *Lesotho X X
Antigua &
Barbuda X Lithuania X X X


Armenia X X X *Malawi X X X X
Australia X X Malaysia X X
Austria X X X X Mexico X X X X
Barbados X Moldova X X X
Belize X X *Nepal X
Bolivia X Norway X X
Botswana X X Oman X X
Brunei
Darussalam X Pakistan X X


Bulgaria X Panama X
*Burundi X X X Poland X X X
*Cambodia X X Qatar X
China X *Rwanda X
*Congo RP X Saint Lucia X
Croatia X X X X Saudi Arabia X X


Costa Rica X X Saint Vincent and Gren. X


Czech Republic X *Senegal X
Dominican Rep. X X X *Sierra Leone X X X X
Ecuador X Singapore X


EC (12) X X X Slovak Republic X


Estonia X X X Slovenia X X X
Finland X South Africa X X
FYR Macedonia X X X X Swaziland X X
*Gambia X X X X Sweden X X
Georgia X X X Switzerland X
Guyana X Chinese Taipei X X
Hungary X X X Tonga X X


India X Trinidad & Tobago X X


Jamaica X X X Turkey X
Japan X Ukraine X X X X
Jordan X X X X USA X
Kuwait X X Viet Nam X X
Kyrgyz Rep. X X X X *Zambia X X X X
Latvia X X X TOTAL 65 35 47 25


No commitments: Argentina, Aruba, Bahrain, Brazil, Canada, Chile, Colombia, Cuba, Cyprus, Egypt, Gabon, Ghana,
Guinea, Haiti, Honduras, Hong Kong (China), Iceland, Indonesia, Israel, Kenya, Korea (Rep. of), Liechtenstein, Macau,
Malta, Mauritius, Morocco, New Zealand, Nicaragua, Nigeria, Paraguay, Peru, Philippines, Romania, Solomon Islands, Sri
Lanka, Thailand, Tunisia, United Arab Emirates, Venezuela.
EC Member States are included in the list individually.
In addition to the sectors above, the definition of medical and health services used by most WTO Members for scheduling
purposes also includes veterinary services and a non-specified category of other health-related and social services.
* Least developed countries
Source: Compiled by the author on the basis of Services Database WTO (date accessed - 13
May 2011).




  59


The analysis of GATS commitments shows the following results. Medical and dental


services have less restrictions than other subsectors (65 country have obligations for


liberalization trade at this sector). Hospital services were opened by 47 countries and 35


countries make available the MA and the NT for Services Provided by Midwives, Nurses,


Physiotherapists and Para-medical Personnel. Developing countries from the quantitative point


of view dominate among other countries because they use the business practices of cheap costs


of medical treatment (either cost-cutting or implicit international dumping) as their competitive


advantage to attract foreign customers. The least developed countries (such as Burundi, Gambia,


Zambia, Lesotho, Malawi, Sierra-Leone) provide free market access (zero entry barrier for FDIs)


at least in three service’s subsectors.


Home task №3:
Using the WTO Services Database, prepare the similar table of commitments for WTO members
for the services sector “All Insurance and Insurance-Related Services” (7.A). Try to make the
analysis of results.




In the key areas of GATS, the governments face choices concerning the scale and scope


of liberalization of trade in health-related services and the impact of such liberalization on


national health policies. In fact, countries are free to decide whether liberalization in the health


sector should be pursued or not.


Countries are not obliged to liberalize their health services if they do not wish to do so.


These choices compel the health officials to properly understand the structure and essence of


GATS, negotiate and collaborate with other government agencies on GATS health-care ideology


implementation and market liberalization, and act to guarantee the GATS process not to


adversely affect the national health policy.10


Question for discussion №4:
Developing countries have more competitive advantages in the sphere of medical services than
developed countries. True or false? Explain your answer.







10 A Handbook of International Trade in Services. / Ed. by Aaditya Matoo, Robert M. Stern and Gianni Zanini. New
York: Oxford University Press, 2010




  60

WORKING PAPERS




  61
Snježana Brkić



Assistant Professor, Ph.D.


School of Economics and Business
University of Sarajevo


Bosnia and Herzegovina


Integrating Bosnia and Herzegovina
into the International Trading System


I. Introduction


After years of isolation caused by the war, Bosnia and Herzegovina (BiH) became a


country largely dependent on its external trade and investment flows. Intending to influence


those flows more significantly and aiming to integrate completely into the world economic


system, the country has launched a rapid reform of its foreign economic relations sector,


especially foreign trade11, within the framework of the overall transition process to market


economy. As it has been recommended according to the “Washington Consensus”12 concept that


BiH has been following, the reform has entailed the outward orientation; with regard to foreign


trade, it has meant export promotion combined with import liberalization over a relatively short


period of time.



Although a country with weak economic performance, BiH has however failed to


promote exports and almost completely devoted its efforts to the other component of the foreign


trade reform. For over a decade already, the trade (i.e. import) liberalization has been going on


simultaneously at all levels although with different intensity: the unilateral level (through foreign


trade legislation), the regional level (in the process of integration in South East European region


and association to the European Union) and the multilateral level (in the process of accession to


the World Trade Organization). Different aspects of BiH experience in those processes such as


performed activities, challenges, sensitive issues, lessons learned, will be described and


explained in this paper, in order to define BiH current position as well as the prospects of its


performances in the international trading system.




11 In the situation characterized by reduced international aid and an insignificant investment inflow, foreign trade has


been considered of a particular importance for the recovery and further economic development.
12 "Washington Consensus" is a popular name for the program of economic reforms in the former socialist


economies that has been promoted by international financial institutions (the International Monetary Fund and the
World Bank). The main hypothesis of the Washington Consensus is that economic growth of transition countries
comes as a result of free market and foreign direct investment. (See in: Dragoljub Stojanov. Međunarodne
finansije u globalnoj ekonomiji. Ekonomski fakultet Univerziteta u Sarajevu. Sarajevo, 2000, p. 388.)




  62


II. Integrating on Multilateral and Regional Levels
(The Problem in Context)




In line with one of the country’s main economic goals - to integrate into the international


trading system on the new, reformed basis, the membership in the WTO and the association to


the EU are viewed in BiH as high strategic priorities. According to experiences of other


transition countries, processes of multilateral and regional liberalization have been developed in


parallel, interrelating in many aspects. Almost at the same time when the country applied for the


WTO membership, it started with regional trade liberalization within the framework of the


Stability Pact for the South East Europe. The process gradually evolved in the regional


integration – „the new“ CEFTA established in 2007 as well as Stabilization and Association


Agreement with the European Union signed in 2008. Outcomes of all three processes will


essentially determine future foreign trade regime of BiH and its position in the world market.




1. Accession to the World Trade Organization

“The WTO membership will also accelerate structural reforms necessary for the transition to a
market-based economy and the creation of a liberal and open foreign trade system.”


(Memorandum on BiH Foreign Trade Regimes, p. 8)


1.1. History of Relations with the WTO

Bosnia and Herzegovina as a part of former Yugoslavia (SFRJ) was the member of the


General Agreement on Tariffs and Trade (GATT) from 1966 until the dissolution of Yugoslavia


and recognition BiH as a sovereign state in 1992. However, after the dissolution of Yugoslavia,


numerous international organizations, among which GATT as well, did not recognize legal


continuity of SFRJ. For that reason BiH and other Yugoslav republics could not inherit the status


of the GATT member, so they had to apply anew and negotiate individually on their membership


in the WTO, which had been established in the meantime.


So far, three of the total five of the newly established succession states have succeeded in


ensuring their membership in the WTO – Slovenia, Croatia and Macedonia, while Bosnia and


Herzegovina, Montenegro and Serbia are still in the process of negotiations on the accession to


the WTO.




  63


Table 1 – Current Status of Western Balkans Countries plus Slovenia in WTO




No Country Status Date


1. Albania Member 08/09/2000


2. Bosnia and Herzegovina Observer 15/07/1999


3. Croatia Member 30/11/2000


4. Macedonia Member 04/04/2003


5. Montenegro Observer 15/02/2005


6. Serbia Observer 15/02/2005


7. Slovenia Member 30/07/1995


Source: www.wto.org


Activities on the accession to the WTO officially started on May 1st 1999, when the


Presidency of BiH took the decision on starting negotiations for the accession and adopted the


activity plan of the State and Entity authorities. In accordance with the decision, the request for


BiH accession was submitted to the WTO Secretariat on May 11th, 1999. At its session of July


15th the same year, the WTO General Council formed the Working Party for BiH13 with the task


to “examine the request by BiH Ministers’ Council for the accession to the WTO in accordance


with Article XII of Marrakesh Agreement Establishing the World Trade Organization and submit


recommendations.”


The following step was made in September 2002, when the application for the full


membership was submitted by BiH. BiH sent to the WTO Secretariat the “Memorandum on


Foreign Trade Regimes of BiH for Accession of BiH to the World Trade Organization (WTO)”


as the basis for entering accession negotiations on multilateral, bilateral and plurilateral level.


The first meeting of the Working Party for Accession was held in November 2003.


In the meantime BiH has advanced its negotiations in the process of accession to the


WTO. The WTO Working Party met seven times so far. Bilateral market access negotiations are


underway on the basis of revised offers in goods and services. At the present BiH is engaged in


bilateral market access negotiations with nine members (Brazil, Ecuador, El Salvador, the


European Union, Japan, the Republic of Korea, Switzerland, Ukraine and the United States).


Bilateral agreements have been concluded with two members (Canada and Norway). Multilateral


discussions on domestic support to agriculture and export subsidies are proceeding on the basis



13 Members of the Working Party for BiH are the following countries: Armenia, Australia, Brazil, Bulgaria, Canada,


China, Croatia, European Union, India, Indonesia, Japan, Korea, Norway, Pakistan, Switzerland, Chinese Taipei,
Turkey, USA, Panama, Honduras, El Salvador.




  64
of a revised draft Report of the Working Party, circulated in December 2010. The Eighth


Working Party meeting has been scheduled for January 25th 2011.




Table 2 – WTO Ongoing Accessions: Bosnia and Herzegovina




No




Activity






Date


1. Application Received 11th May 1999


2. Working Party Established 15th July 1999


3. Memorandum on Foreign Trade Regimes 10th October 2002


4. Questions and Replies 5th September 2003


5th November 2003


5. Meetings of the Working Party 7th November 2003


6th December 2004


22nd March 2007
8th November 2007


18th July 2008
19th March 2009


February 2010


6. Recently submitted documentation
Additional Questions and Replies


Agriculture (WT/ACC/4)


Services (WT/ACC/5)


SPS/TBT checklists (WT/ACC/8)




TRIPS checklists (WT/ACC/9)


Legislative Action Plan




28th October 2009
11st November 2009
5th September 2003


22nd August 2007 (TBT)
22nd August 2007 (SPS)


5th September 2003
4th November 2009 (General)


7. Market Access Negotiations
Goods Offer


(a) initial
(b) latest



Services Offer


(a) initial
(b) latest





15th October 2004
14th February 2007



14th October 2004


9th February 2007


8. Factual Summary
latest revision


19th February 2007
8th October 2007


9. Draft Working Party Report


latest revision


23rd February 2009
17th December 2009


Source:http://www.wto.org/english/thewto_e/acc_e/a1_bosnie_e.htm




  65
1.2. Accession Strategy and Foreign Trade Regime14



In the meantime BiH has progressed in harmonizing its relevant legislation with the WTO


requirements. Although BiH is not a member of the WTO as yet, its laws and trade agreements


largely correspond to the WTO principles, establishing a significantly liberal foreign trade


regime: no quantitative restrictions and measures with equivalent effects; very low tariff


protection, even of agricultural products; no export subsidies; free trade with the South East


European region.


It is not prescribed within the overall WTO rules how liberal a country’s trade regime


should be to ensure accession. Every single candidate country is allowed to choose it own


accession strategy deciding on the maximum level of binding tariffs, the scope of liberalization


of trade in services and support provided for agriculture that it will present in its initial offer.


Contrary to the practice widespread among less developed acceding countries which could be


described as “trying to liberalize as little as minimally necessary to ensure accession”, but more


in line with theoretical view of main-stream economists related to trade liberalization, at the


moment of entry into the accession process BiH has already applied low protection of its


economy.


Movement toward the unilateral trade liberalization, based on the concept of the so called


"Washington Consensus," is mirrored in the BiH Law on Foreign Trade Policy and in the BiH


Law on Custom Tariffs that have established a very liberal foreign trade regime, non typical for


countries at a such a low level of economic development. The foreign trade regime of BiH has


been based on the principles of market economy, non-discrimination and free trade. It has been


largely liberalized by the tariff reduction and elimination of quantitative restrictions and


measures with equivalent effects. In general, import and export are free - Article 1 of the Law on


Foreign Trade Policy guarantees free flow of goods and services in international trade.15




Customs tariff:


According to the WTO principles, the main instrument of BiH protection policy is


customs tariff that is uniform and generally very low - ad valorem tariff structure is in groups of


0, 5, 10 and 15%. These rates are applied to commodities originating from countries that have


signed a trade agreement including the MFN clause with BiH, or with countries that apply MFN


clause on commodities originating from BiH. The simple average ad valorem customs duty rate



14 According to the Memorandum on Foreign Trade Regimes, submitted to the WTO at the beginning of the


accession process.
15 Law on Foreign Trade Policy. Official Gazette of Bosnia and Herzegovina. No. 12/97




  66
was the lowest in the SEE region in 2003 and amounted to only 6.395 % (for agricultural


products 6.60% and for industrial products 6.30%).16




Table 3 - Tariffs in SEE Countries (2003)




No Country Simple Average Tariff Min / Max Tariff


1. Albania 7.8 0-15


2. Bosnia and Herzegovina 6.4 0-15


3. Bulgaria 12.4 0-74


4. Croatia 7.1 0-90


5. Macedonia 15.2 0-60


6. Romania 19.5 0-248


7. Serbia and Montenegro 9.4 0-30


Source: IMF (in: Readings for Modul 3 „Regional Cooperation“, The Coimbra Group Winterschool. Negotiation a


Common Future for South East Europe: Regional Cooperation and European Integration., Split, February


2003)




The Law on Customs Tariff of BiH has prescribed application of compound duty rates on


agricultural products, i.e. of ad valorem customs duty in the range of 0, 5, 10 or 15 per cent as


well as per unit duty in the range of 0.08 KM/kg to 6 KM/kg17. Simple average ad valorem


customs duty rate has amounted to 5.26% plus specific tariff for 851 tariff items, and has been


considerably lower than in other SEE countries or EU member countries. For textile products ad


valorem customs duty rate has been 10.45 per cent.



Non-Tariff Barriers to Trade:


Quantitative restrictions: Article 6 of the Law on Foreign Trade Policy has eliminated all


quantitative restrictions and abolished the measures with equivalent effects both on imports and


exports. For imports and exports of few types of commodities an approval or license is


required.18 According to the Law, BiH retains the right to impose quantitative restrictions, as



16 Ministry of Foreign Trade and Economic Relations of BiH. Memorandum on Foreign Trade Regimes of BiH for


Accession of BiH to the World Trade Organization (WTO). Sarajevo, August 2002
17 KM or BAM stands for BiH currency, Convertible Mark, which has been tied to EURO at a fixed exchange rate


1KM : 0.51129 EUR, i.e. 1 EUR : 1.955830 KM.
18 Prior approval of the Entity Ministry of Agriculture, Water Management and Forestry is required for the imports


of goods intended for animal and plant reproduction and animal and plant health care. Import licence is required
only for the imports of drugs, medicines, blood, as well as for explosive, arms and military equipment. There is a
rather short list of products subject to export licensing (which is in line with international practice): national arts
treasures, precious metals, then drugs and medications and explosive, arms and military equipment.




  67
provided for by Articles XI and XII of GATT ’94 and by the WTO Agreement on Protection


Measures.


National Treatment Clause: Sales tax and excise tax are paid at the same rates on


domestic and on imported products, enabling full satisfaction of the principle of national


treatment (the Article III of GATT ’47).


Customs Valuation: The system of customs valuation as defined in the BiH Law on


Customs Policy is in full compliance with WTO rules – it relates to transaction value.


State-Trading Practices: State-owned companies act on commercial basis in the same


way as private companies, and without any exclusive right or special privileges in imports or


exports that is – in the manner consistent with Article XVII of GATT ’94.


Technical Regulations and Standards: Legislation in this area has been drafted with the


assistance of European Commission experts and is in conformity with European regulations and


WTO TBT Agreement.


Special treatment of agricultural and textile products: BiH has no quantitative restrictions


to imports/exports of agricultural or food products. Total support measures for agricultural


products are below the permitted percentage for developing countries, which envisages so-called


de minimis (Article 6 of GATT ’94). Only two products (tobacco and soy beans) have had


support above de minimis (5-10 per cent of total production.)19 In period 2000-2002 BiH had no


direct exports subsidies, which were not allowed in accordance with WTO provisions. With


regards to textile products, there are also no quantitative restrictions on imports/exports of those


products nor subsidies, credits or credits guarantees for exports that would in any way contradict


the WTO rules.



Other trade flows and aspects:


Trade in Services: Services can be freely provided within BiH territory, and also


purchased abroad by BiH nationals. There are no special requirements or limitations with respect


to GATS rules for services in BiH legislation.


Industrial Property Rights: BiH Law on Industrial Property has been harmonized with


the international standards of industrial property protection and with the TRIPs Agreement, and


with the European Patent Convention in terms of patent protection. BiH Law on Copyright and


Related Rights has been drafted in accord with TRIPs Agreement and EC directives. However,


there remains a considerable gap between the legislation, almost completed, and the level of


implementation in practice.

19 Ministry of Foreign Trade and Economic Relations of BiH. Memorandum on Foreign Trade Regimes of BiH for


Accession of BiH to the World Trade Organization (WTO). Sarajevo, August 2002




  68
Trade-Related Investment Measures: BiH legislation and practice have been harmonized


with TRIMS rules, allowing for free access of foreign capital into the country.




***


Although the process of accession of Bosnia and Herzegovina to the WTO was started


over a decade ago, it is still ongoing. Despite of repeatedly expressed political willingness to join


the WTO and despite developing one of the most liberal foreign trade regimes among transition


countries, BiH still has an observer status. Liberal foreign trade regime at entry, contrary to the


expectations, has not facilitated negotiations and accelerated accession. Although it is well-


known that the accession to the WTO is a demanding and time-consuming process, and that


delays have been common in accession of most countries, it seems that it has taken even longer


for BiH than for many other transition countries. Reasons for too lengthy and complex accession


process could be found in a relatively long period spent on preparing the Memorandum on


Foreign Trade Regime (three years), and then on “the question and answer process” and a


negotiation phase, but also the lack of institutional capacities for support to the accession process


because of the focus on the EU accession process, and difficulties in accepting commitments to


reduce already low protection. Additionally, for countries pursuing the WTO and EU


membership simultaneously, such as BiH, some special problems arise causing delays. BiH has


to review its liberal foreign trade regime and WTO policy commitments in some sectors


(especially agriculture) in the light of its future joining to the EU. The country has faced delays


because of the disagreement between EU and USA over the appropriate commitments.


According to the statements by the state officials and other political figures, the accession


was anticipated in 2004 or 2005 at the latest. However, taking into account the pace of the


ongoing negotiations, a realistic estimate is that the accession will take place no earlier than the


end of 2011.




2. Regional Trade Liberalization


In the early nineties of the last century, a new wave of regionalism spread throughout the


world. Among few exceptions was the region of the South East Europe – where, contrary to the


trends in the rest of the world, the nineties started with the disintegration processes caused by the


collapse of socialism and war in former Yugoslavia. Due to the potential destabilizing impact on


European integration processes and peace in the European Continent, the SEE became the stage


of numerous initiatives at the time with the aim of initiating a dialogue, cooperation and




  69
economic integration among its countries.20 In the second half of 1990s, all countries of the


region joined different initiatives and integrations, and BiH was one of the most active


participants in that process. However, the final goal of BiH, as well as of other SEECs, has not


been to integrate between themselves, but to integrate into the European Union. The belief


widespread in BiH, and not dissimilar from those in other SEECs, is that accession to the


European Union would be the optimal way for the country to join so-called new wave of


regionalism and certainly the most rapid route to achieving political stability and economic


prosperity.



2.1. Path to the European Union




Beyond any doubt, the European Union was and has never really ceased to be the most


influential external factor in BiH in both political and economic sphere. This has been one of the


rare points of full consensus among politicians from all three constitutive peoples in BiH, who


extend their full support to it. The motivation of country to integrate is the result of expectations


related to both economic and non-economic integration benefits: political stability both in the


country and in the region, accelerated economic growth, employment, strengthening of the


country’s international position, better life quality etc.


Leaving aside the crucial role played by the European Union in the political life of BiH


and the region as a whole, what is of particular importance is that the EU is an indispensable


economic partner. The economic reasons for the integration of BiH into the European Union are


based on the constant lack of capital and on the need for broader market that might give an


impulse to the economic development. The European FDI and structural and cohesive EU funds


could promptly provide a critical mass of investments. Above all, the European Union is a


leading foreign trade partner to all countries of the region – the EU foreign trade share in BiH


foreign trade amounts to 50.68 % (2009).21 The importance of the European Union for the BiH


trade is increasingly growing especially in the context of the EU enlargement. It is obvious that



20 The eldest and largest sub regional initiative for cooperation is the CEI - The Central European Initiative (1989);


followed by: Royaumont Process (1996) incorporated in SP later, the SECI - The Southeast European Economic
Cooperative Initiative (1996) as only American initiative, the SEECP - The South East European Cooperation
Process, The Stability Pact for Southeast Europe (1999) etc. The SEECP is the only cooperative initiative that
has been generated from "inside", from the SEE region, while other initiatives have come either from USA
Government or the European Union.


21 Ministarstvo vanjske trgovine i ekonomskih odnosa BiH. Analiza vanjskotrgovinske razmjene Bosne i
Hercegovine za 2009. godinu. Sarajevo, januar 2010
http://www.mvteo.gov.ba/izvjestaji_publikacije/izvjestaji/Archive.aspx?template_id=50&pageIndex=1 (last
access on 31/01/2011), p. 3




  70
being an outsider in the expanding market which has 497.4 million consumers and with the GDP


of more than 12,500 billion EUR (2008)22 means lagging far behind the development.


However, despite enormous importance of trade between BiH and the EU, trading


arrangements have been inadequately regulated for years. Until the country established


contractual relations with the EU (signing the Stabilisation and Association Agreement in 2008),


BiH had benefitted from the preferential treatement unilaterally granted by the EU. The country


had been permitted free access to the European market of numerous products originating from


BiH. It has also meant exemption from customs duties and abolition of quantitative restrictions


for BiH industrial and agricultural products (except for some products subjected to quota system


- wine, some types of fish and baby beef). The condition had been that all products had to satisfy


the technical and technological regulations and standards, as well as the rules of origin


prescribed by the EU.


The Stabilisation and Association Agreement and Interim Agreement signed in the


meantime also guaranteed zero duty regime to BiH goods effectively creating a free trade area.


Asymmetrical agreements in terms of trade continue to allow BiH a preferential treatment


without reciprocity for some time. During transitional period BiH will gradually grant the same


treatment to goods imported from the EU. However, as EU duties for industrial goods have been


relatively low, the main obstacles to BiH exports to the EU market are not tariffs but non-tariff


barriers, especially technical requirements.


Process of integration into the EU structures requires stronger economic development,


comprehensive reforms, and adjustment of policies, institutional framework and legal system in


order to acheive European standards in all areas of political and economic life. Clearly however


BiH is not yet ready to meet the fundamental requirements of a full EU member. Therefore


integration of BiH into the EU will be done gradually.


The process started in 1996 when the European Union formulated the common strategy,


so-called "Regional Approach"23, towards the SEE countries with which it did not have regulated


contractual relations. The concept covered the countries of the so-called Western Balkans:


Albania, Bosnia and Herzegovina, Croatia, the FR Yugoslavia (today Serbia and Montenegro)


and FYR Macedonia.



22 European Union. Europe in Figures: Eurostat Yearbook 2010. Eurostat Statistical Books. 2010


http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-CD-10-220/EN/KS-CD-10-220-EN.PDF (last access
on 25/01/2011)


23 The basic characteristic of the Regional Approach is giving support to the mutual coordination between the
countries of the South East Europe, providing financial and economic assistance as well as offering the prospects
for the integration into the particular European institutions and organizations. The Regional Approach was
accompanied by a detailed political and economic conditionality.




  71
In the period following the Kosovo conflict (1999) the EU created a new policy towards


the SEE based on further development of the Regional Approach and on establishment of the


Stability Pact for Southeast Europe and the Stabilization and Association Process (SAP). The


Stability Pact is a multilateral (regional) instrument for the SEE region in whole, whereas the


SAP is a bilateral instrument for the West Balkan countries. The SAP provides dialogue, trade


liberalization, financial assistance24 and close cooperation in many areas of economic and social


life.25 The SAA treats four main areas which refer to EU conditionality, free trade with the EU,


acquis communitaire and regional cooperation. A final goal of the SAP and the Stability Pact is


identical – preparation of the SEE countries for the integration into the European Union


sometime in future; therefore, the European Union policy towards the SEE countries is


characterized by efforts to coordinate bilateral and multilateral, national as well as regional


approaches.



Table 4 – Relations between Bosnia and Herzegovina and the European Union (Key Developments)


Date Activity
1996 Assistance for BiH under the Phare and Obnova programmes.
1997 EU Regional Approach.


Autonomous trade preferences granted to BiH.
1998 EU/BiH Consultative Task Force (CTF).
1999 Stabilization and Association Process (SAP).


Stability Pact for South East Europe.
2000 EU Road Map (18 essential steps to be undertaken by BiH before work on a Feasibility


Study for the opening of negotiations on SAA).
Statement by European Council: All the countries in SAP are potential candidates for EU


membership.
Extension of duty-free export of products from Bosnia and Herzegovina onto the EU market.
CARDS - Community Assistance for Reconstruction, Development and Stabilization (designed for


the SAP countries).
2001 Country Strategy Paper (2002-2006).
2002 EU Road Map substantionally fulfilled.
2004 European Partnership for Bosnia and Herzegovina.26
2005 Negotiations on the Stabilization and Association Agreement officially started in Sarajevo (25


November 2005).
2007 IPA - Instrument for Pre-Accession Assistance (designed for all pre-accession activities and


financed by the European Commission).
Stabilization and Association Agreement initialled (4 December 2007).


2008 Stabilization and Association Agreement signed (16 June 2008).
2008-2009 Ratification of SAA by BiH Presidency and the following EU members: Estonia, Hungary,


Slovenia, Bulgaria, Slovakia, Lithuania, Finland, Denmark, Ireland, Portugal, Cyprus,
Czech Republic, Germany.


Source: http://www.dei.gov.ba/bih_i_eu/?id=57

24 Community Assistance for Reconstruction, Development and Stabilisation (CARDS)
25 Wim Van Meurs. The Stability Pact beyond EU Enlargement. Betelsmann Foundation and Centre for Applied


Policy Research (in: Working Paper for Coimbra Group Winterschool, Split, February 2003)
26 At the summit held in Thessaloniki 19-20 June 2003, the European Council passed the decision on establishment


of the European Partnership for Western Balkans countries, that for BiH was announced in June 2004. Within the
framework of the European Partnership short-term and mid-term priorities have been determined to serve as a list
of commitments for measuring of improvement of BiH and other potential candidates on their path to European
integrations.




  72


Table 5 - Relations of WB Countries with the European Union (2011)


Country Status SAA
(signed)


Applied for
Membership


Albania potential candidate 22 May 2006 -
BiH potential candidate 16 June 2008 -
Croatia candidate country 29 October 2001 21 February 2003


(accepted June 2004)
Macedonia candidate country 9 April 2001 22 March 2004


(accepted Dec. 2005)
Montenegro candidate country 15 October 2007 15 December 2008



Serbia potential candidate 29 April 2008 -
Source: http://ec.europa.eu/enlargement/index_en.htm


Despite the fact that integration into the EU has been frequently declared a strategic


priority for BiH by different political actors at all levels27, the latest Progress Report by the


European Commission has emphasized a little domestic consensus on the main EU related


reform priorities, such as establishing single economic area. With exception of fairly high level


of integration of trade with the EU, regional cooperation and maintaining macroeconomic


stability, the progress made by the country on EU-related reforms towards meeting Copenhagen


political and economic criteria in the most areas has been described as low or limited.


„Bosnia and Herzegovina has made limited progress in addressing key reforms...


Developing a shared vision by the leaders on the overall direction of the country and on key EU-


related reforms remains essential for further progress towards EU membership. The country


needs to increase efforts to establish a satisfactory track record in implementing the provisions of


the Interim Agreement... and to improve the efficiency and functioning of its institutions. The


country must be in a position to adopt, implement and enforce the laws and rules of the EU.“28



2.2.Integration Process in South East Europe

All the concepts developed by the EU in its policy to the region - the Regional Approach,


the Stability Pact, the Stabilization and Association Process - require the engagement of the SEE


countries in enabling closer coordination and integration as one of the means as well as


conditions for deeper integration with the EU. The Balkan regionalism was launched mainly



27 Deklaracija o specijalnim odnosima sa EU iz 1998.; Odluka Vijeća ministara BiH o pokretanju inicijative za


pristupanje BiH EU; Rezolucija Parlamentarne skupštine BiH o evropskim integracijama i Paktu stabilnosti za
Jugoistočnu Evropu iz 1999.; Izjava predsjednika političkih stranaka br. 01-50-3-180/04 od 18.2.2004.; Zaključci
Parlamentarne skupštine BiH br. 01-02-661/03 od 23.4.2003.


28 European Commission. Communication from the Comission to the European Parliament and the Council:
Enlargement Strategy and Main Challenges 2010-2011. Brussels, COM(2010)660, 09/11/2010
(http://www.dei.gov.ba/bih_i_eu/najvazniji_dokumenti/dokumenti_eu/?id=6196 (last access on 29/12/2010), pg.
16




  73
from outside, by the international community, as opposed from inside, by actors themselves.


Even now, there is the strong impression that pressure of the EU is the driving force of “Balkan


regionalism”. The value of having their own regional integration has not been recognised in the


SEECs; they see it only as temporary solution until the final accession to the EU.


With the purpose of facilitating trade and creating preconditions for the increase in


exchange of goods, an important initial progress on trade liberalization in the region has been


made under the Stability Pact. Among numerous regional initiatives the Stability Pact has been


the only one that, besides cooperation in different areas, has envisaged one-step further - creating


the regional economic integration in the form of the Balkan free trade area. By signing the


Memorandum of Understanding on Trade Liberalization and Facilitation (MoU) in June 2001,


eight countries - Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FR Yugoslavia, FYR


Macedonia, Moldova, and Romania - undertook the commitment to create a network of bilateral


agreements on free trade in the region by the end of 2002, aiming to establish a regional free


trade area in the SEE and thus at opening free market in the Balkan with over 60 million


consumers.


“… The creation of the set of regional FTAs in the SEE has taken place in the context of


further integration with the EU, and the provisions of the FTAs closely follow the usual EU trade


integration practices.”29


The belief widespread in BiH on the necessity of involvement into the new integration


processes and international trading system resulted in an active participation in the regional


cooperation and trade liberalization. In the period 1996 – 2002 BiH joined almost all regional


initiatives for cooperation (and integration); it became a member of 6 initiatives – CEI,


Royaumont Process, SECI, SEECP, the Stability Pact for Southeast Europe and the Adriatic-


Ionian Initiative. By 2003 BiH, as one of the most active participants in the process of trade


liberalization within the framework of the Stability Pact, concluded bilateral FTA agreements


(ten in total) with the all countries in the region: Albania, Bulgaria, Croatia, FYR Macedonia,


Moldova, Romania, Slovenia30, Serbia and Montenegro, Turkey and UNMIK Kosovo.31


Free trade agreements signed by BiH as well as other FTAs in the region are in full


compliance with the Article XXIV of the GATT '9432 that sets conditions under which countries



29 Center for Social and Economic Research – CASE. Regional Free Trade Agreements of Bosnia and Herzegovina:


Analysis and Policy Recommendations. CASE Report No. 69. Warsaw, 2007, p. 29
30 Agreements with Bulgaria, Romania and Slovenia are no longer in force as a consequence of the countries’


accession of to the European Union.
31 Before the signing of MoU, BiH had one free trade agreement – in March 1995, during the war, the free trade


agreement was signed with Croatia. In 2000, the Agreement was revised and harmonized with the WTO
principles. Consequently, it is applied on the whole territory of BiH today.


32 The original GATT Article XXIV, complemented by an “Ad Art XXIV”, has been updated in 1994 with an
Understanding on the Interpretation of Article XXIV of the GATT1994.




  74
are allowed to establish economic integrations, and with other WTO provisions. Rules of the


WTO multilateral system have also served as the common denominator and provided sound


ground for facilitating compromise arrangements and faster liberalization at the regional level.


The Contracting Parties of those FTAs stated that they were“… resolved … to eliminate


progressively the obstacles to substantially all their mutual trade in accordance with the


provisions of the General Agreement on Tariffs and Trade and the Marrakesh Agreement


Establishing the World Trade Organization, having in mind the objective of both Contracting


Parties for membership in WTO…” (Preamble) Transitional period for completion of FTA is


limited to three or five years that corresponds to the GATT requirements. Furthermore, the


agreements refer to free trade of goods, covering agricultural and industrial products with almost


no exceptions and without so-called positive and negative lists of products. It is requested that at


least 90% of goods33 be exchanged freely without tariffs and quantitative restrictions


("substantially all the trade").


Transitory exceptions are explicitly listed in the annexes. In addition, the agreements


regulate agricultural policy, services and investment34, balance-of-payment difficulties as well as


the application of some indirect protectionism measures such as internal taxation, state aid,


public procurement, rules of origin, sanitary and phytosanitary measures, technical barriers to


trade, dumping, rules of competition between undertakings etc., referring to the corresponding


WTO agreements such as GATT, GATS, TRIPs, Agreement on technical barriers to trade etc.


WTO agreements are mentioned in a similar way in the preamble and as many as 12 out of 35-40


articles of each of the listed FTAs.


Although many provisions of the bilateral FTAs of SEECs have been to the large extent


uniform, there are some specific articles as well which cover varying level of liberalization in


different agreements. Three agreements, those which BiH signed with Albania, Bulgaria and


Romania, do not cover agricultural products, meaning that those agreements did not fulfill 90%


trade coverage requirement. Given a special sensitivity of the agricultural sector in every


country, agricultural products face different barriers in practice even in trade between SEECs


that agreed to the liberalization of trade in those products. Different from other agreements that


stipulated liberalization of trade in services according to the GATS rules, two agreements – with


Macedonia and Moldova - were limited to the trade liberalization of goods only.



33 The double criterion applied: 90% of HS tariff lines and 90% of trade value.
34 For example, the Article related to investment and trade in services, says that Contracting Parties “will co-operate


with the aim of achieving a progressive liberalisation and mutual opening of their markets for investments and
trade in services, taking into account relevant provisions of the General Agreement on Trade in Services
(GATS)”34.




  75
Asymmetry is the specific characteristic of the FTAs concluded by BiH, aimed to ensure


more time and preferences for improving economic performances of the country, as one of the


less advanced transition economies. Almost all the partner countries took in account a complex


situation in BiH, so that seven of nine concluded FTAs contain asymmetry to the benefit of BiH


(exceptions are FTAs with Albania and Moldova, also economically underdeveloped countries,


with which BiH has insignificant trade). The asymmetry is related to the customs duties because


quantitative restrictions on exports and imports of goods are to be immediately abolished on both


sides. The Parties to agreement consented to the immediate abolition of customs tariffs for the


import of products originating in BiH and to the progressive reduction in customs tariffs on the


import of these countries' products into BiH over a period of 3 to 5 years. In the meantime all


free trade agreements concluded by BiH became symmetric in terms of customs duties.


All those free trade agreements signed by BiH, with exception of the agreement with


Turkey, together with free trade agreements mutually concluded by other Western Balkans


countries, were replaced by signing the regional free trade agreement CEFTA 2006 (Bucharest


19/12/2006). BiH was the last country to sign CEFTA, after a satisfactory compromise in


negotiations had been reached.35 The CEFTA Agreement entered into force for BiH 22/11/2009.


Trade agreements with the countries that have become EU members in the meantime (Czech


Republic, Hungary, Slovenia, Bulgaria, Romania) were replaced by the Stabilisation and


Association Agreement with the European Union and its Member States (SAA) and the Interim


Agreement on Trade and Trade-related Matters (IA) signed in 2008.


The main objectives of the Agreement on Amendment of and Accession to the Central


European Free Trade Agreement (“new CEFTA” or CEFTA 2006) are to create favourable


conditions for development and diversification of trade in the region and to promote commercial


and economic cooperation, thus contributing to the process of integration in the EU.


The Preamble of the Agreement reads that Parties are “resolved to this end to eliminate


the obstacles to their mutual trade in accordance with the provisions of the Marakesh Agreement


Establishing the World Trade Organisation…and to establish progressively closer trade


relations” and “resolved to conduct their mutual trade relations in accordance with the rules and


disciplines of the WTO whether or not they are members of WTO”. CEFTA 2006 has been


established in conformity with the relevant rules and procedures of the WTO regarding scope


and “depth” of trade liberalization (meaning sectoral coverage and number of restriction types),


transitional period and relationship to the outsiders. WTO agreements are mentioned in the



35 “The compromise can be summarized as follows: BiH resigned from its protective measures for selected


agricultural products in return for ensuring that the Articles of CEFTA 2006 allow special safeguard measures
enabling the introduction of protective measures (especially in agriculture) in the event of any significant market
disturbance caused by excessive imports from another party.” (CASE Report, p. 50)




  76
preamble and in 16 out of 52 articles of “New CEFTA” agreement. Issues in relation to customs


fees, sanitary and phytosanitary measures, technical barriers to trade, state aid and state trading,


safeguard measures, trade in services, government procurement, protection of intellectual


property shall be governed by the related WTO agreements and provisions. Any provision of


CEFTA may not be interpreted as exempting the Parties from their obligations in WTO


agreements. In addition to the Agreement the Parties have signed a Joint Declaration Concerning


the Application of the WTO Rules and Procedures irrespective of whether or not they are


members of the WTO.


The findings arising from the previous analysis are relevant for the “New CEFTA” as


well, because many features of the FTAs concerning the concessions for trade in goods have


been preserved in the CEFTA. At the same time, the new CEFTA has been a step forward,


improving some instruments and including the new ones. Amendments to the former CEFTA on


trade in agricultural products (introducing a relatively high level of liberalization of trade in


agricultural products) and services, investment, government procurement and intellectual


property rights, have made the CEFTA 2006 more advanced both in comparison with the


previous one and the network of bilateral FTAs as well. Inheriting achievements in trade


liberalization of the network of more than 30 bilateral free trade agreements, the new CEFTA


provided for the immediate liberalization of trade in industrial products and the gradual


liberalization of trade in agricultural products and services.


„In addition to implementing traditional trade-related liberalizations such as tariff


reductions and elimination of non-tariff barriers, CEFTA 2006 obliges the adhering Parties to


undertake certain commitments: to co-ordinate their investment policies, progressively open their


government procurement markets and effectively protect intellectual property rights. As such,


CEFTA 2006 constitutes a truly modern and ambitious free trade agreement.“36

3. Regionalism vs. Multilateralism


In 2001 at the Fourth Ministerial Conference in Doha the WTO proclaimed that regional


trading arrangements can play an important role in advancing trade liberalization and


strengthening economic development and stressed the need for existence of harmonized links


between multilateral and regional processes. Following those WTO principles, in BiH and the


rest of the region both the process of multilateral trade liberalization and the regional economic



36 OECD Investment Compact for South East Europe (OECD-IC), European Commission, CEFTA. CEFTA


Brochure - Implementing CEFTA 2006 Agreement: Reaping the benefits of trade and investment integration in
South East Europe. 2010, http://www.cefta2006.com/sites/default/files/CEFTA_brochure05c_BD.pdf (last access
on 26/01/2011), p. 3





  77
integration have intensified in parallel. A strong mutual interdependence between the two


processes, having the same main goal – to help BiH and other SEECs to achieve political


stability and economic prosperity through integrating into the international trade system, is


evident.


In the case of BiH and SEE region there is no place for the years-long debate whether the


regional trading arrangements obstruct or facilitate the process of multilateral trade


liberalization. Its RTAs are consistent with the process of accession of BiH to the WTO,


functioning more as “building blocks” rather than “stumbling blocks”. They have to be


considered a bypass towards free trade at the global scale. Reasons are numerous.


At the first place, BiH has reduced or eliminated most of its trade barriers unilaterally


when the processes of accession to the WTO and regional integration have just been started. In


the early phase of the Regional Approach it was even requested from the BiH and other SEECs


to become members of the WTO and CEFTA in order to start with establishing institutional


relations with the EU, but in the end these commitments have been left for later on.


At the present all the countries in the region are either the members of WTO or are “about


to acquire” the status of member. Taking into consideration that their trade policies are different,


the acceptance of the WTO principles creates a certain common basis that facilitates an easier


implementation of the trade liberalization and integration through trade. Unilateral liberalization


that commenced in BiH as well as introduction of the WTO principles into the foreign trade


policy have facilitated the inclusion of BiH into the regional integration processes.


The structural analysis of BiH trade flows shows that BiH total trade is growing and that


this growth results both from the increase in intra-regional and from the increase in extra-


regional trade value. This analysis does not detect a significant presence of trade diversion effect.


Irrespective of regional integration processes, BiH has quite high trade flows with the


SEE region (30.31% of BiH total trade in 2009), and with some of the EU members, that are


already around their potential levels. However, the question arises as to whether the extra-


regional trade would be greater without regional integrations or not.


Alongside the analysis of contemporary trends in extra- and intra-regional trade, other


research was conducted that was supposed to point to the reasons why regionalism in the case of


BiH and other SEE countries has mainly a non-negative impact on the outsiders and global


liberalization. Besides, the pending establishment of CEFTA and future association to EU will


gather, in the same group, the so-called “natural” trade partners – countries that have had an


extremely extensive mutual exchange for years already, and the outsiders are therefore unlikely


to be affected by strengthening of regionalism in this part of the world.




  78
In the case of BiH intra-regional trade (“intra-regional” in a broader sense – as trade with


WB countries plus EU members) is not much different than the country’s total trade. In 2008 and


2009 BiH trade with EU-27 and WB-6 cover more than 80% of its overall trade. Seven of ten


main trade partners are EU members or SEE countries; the other three from the list of “top ten”


are China, Turkey and the USA. In this light the trade liberalization in the relations with the EU


and WB member countries i.e. the regional trade liberalization, including also the FTA with


Turkey, presents de facto multilateral liberalization for BiH since BiH has effectively eliminated


and/or reduced trade barriers in relation to all countries with which it normally trades and has


done so in a far greater scope than it would have been done under the WTO negotiations.


However despite the process of regional integration being consistent with the WTO


principles on regional integration, it has slowed down accession to the WTO. First of all, more


attention has been paid to the regional integration and EU, weakening interest and capacities for


accession to the WTO. Secondly, BiH customs tariff and trade regime as a whole had to be


adjusted to the EU trade policy that for some goods and services requires higher protection than


BiH performs. However, when entering the accession process to the WTO BiH was required to


commit to “standstill”, meaning that BiH is now not allowed to increase protection compared to


the regime described in the Memorandum of Foreign Trade Regime. Quite the opposite, the trade


barriers are to be further reduced according to the concessions requested in the accession


negotiations.


“WTO negotiation are proving to be somewhat complicated by the future possible


accesion of BiH to the EU, as BiH needs to get clearance for its negotiation offer from the


European Commission before starting negotiations with the WTO WP. BiH’s initial WTO offer


included far reaching provisions on liberalising agricultural and services trade. The EC asked


BiH to reduce them, because they were seen as being beyond the EU provisions.”37 (CASE


Report, pp. 48-49)



III. Challenges, Perspectives and Recommendations

1. Challenges Faced


The challenges that BiH faces are generated by the interaction of internal and external


conditions, both of non-economic and economic nature, and they significantly affect BiH


performance and its future position in the international trading system,. Most of them refer to the


overall problems of the country, which influence not only its economy but also all spheres of


life, while others are much more specific i.e. trade- and integration-related.



37 “And once BiH joins the EU, the Commission would be obliged to compensate for the difference.”




  79

Internal problems in general:

Non-economic problems:


 complex state structure and political instability;
 institutional weaknesses;
 widespread corruption and the lack of rule of law.



Bosnia and Herzegovina is a state with an extremely complex state structure as a


consequence of its creation during the most difficult period of the country’s history – the end of


the war. Under the Constitution, which constitutes a part of the Dayton Peace Agreement


(December 1995), BiH consists of three main administrative units: two entities - the Federation


BiH (composed of ten cantons) and Republika Srpska, and a unique administrative unit Brcko


District, which does not fall under the jurisdiction of either of the entities but enjoys special


status under the sovereignty of BiH. The constitutional administrative structure provides for


governments at several levels - State, Entity, District and Cantonal levels. Additionally, on the


basis of the Dayton Peace Agreement, the international community has been maintaining a


significant presence in Bosnia and Herzegovina for years.38 The complicated state and political


structure and continuous international presence are seen as necessary for creating sustainable


peace in the situation of pronounced ethnic fragmentation and inter-entity tensions as well as still


evident secessionist tendencies that deprive the country of political stability. However such


constitutional arrangements and overall political situation considerably affect BiH economy.


BiH institutional framework has been usually described as complex, inefficient and


expensive, reducing the country's capacity to pass structural reforms and to make more significant


progress at its path towards the WTO and the EU. Due to the lack of coordination, overlapping


authorities and failure to harmonise legislation at different levels of government, decision-


making processes and reforms have been often delayed, even blocked. Progress of Bosnia and


Herzegovina’s transition has been effectively stalled for some years, and as a result the country


lags behind all others in South East Europe.


„The country’s complicated political and constitutional structure is a major hindrance to


reform and good governance... The major challenge in Bosnia and Herzegovina remains


constitutional reform, without which further progress towards a more efficient state,



38 The Office of the High Representative (OHR) that has existed in Bosnia and Herzegovina since 1995 is an ad hoc


international institution responsible for overseeing implementation of civilian aspects of the Peace Accord. The
main coordinating body of International Community activity in BiH is the Board of Principals consisting of OHR,
EUFOR, NATO HQ Sarajevo, OSCE, UNHCR, EUPM, European Commission and international financial
institutions such as the World Bank, the IMF and the UNDP.




  80
implementation of a comprehensive reform and growth agenda and EU approximation will be


difficult to achieve.“39


According to the general opinion of the business community in BiH, government and


policy instability and inefficiency, coupled with corruption and inadequate tax policy remain


among the most problematic barriers to business success, totally unlike the problems


encountered by business communities in other countries of the region.40



Economic problems:


 inefficient macroeconomic management;
 absence of comprehensive and consistent economic policy;
 supply side constraints.



The last one is rather a consequence of previously specified non-economic and economic


disadvantages. Institutional and policy deficiencies are very costly for the economy and tend to


slow down structural reforms. This fails to produce business friendly environment, weakening


productive capacity and international competitiveness.


In general, economic performance41 of BiH is rather low and with no prospects for rapid


considerable progress, although macroeconomic indicators report a certain improvement over


last few years: total GDP growth for around 40%, GDP p/c exceeding 3,000 EUR, increased


export/import coverage (from 29% to 45%) and reduced trade deficit (from 47,4 to 28,3% of


GDP), relatively moderate debt-to-GDP ratio of 35% (up from 28% in 2008) and a budget deficit


of 4.4% of GDP (2.2% in 2008), as well as maintaining monetary stability (low inflation42, stable


currency, stable official foreign exchange reserves).43 The impact of crisis has been less negative


than many expected and better than in other countries in the region. In 2009, the country endured


recession with real GDP dropping by 2.9% after a 5.7% increase in 2008. At the beginning of


2010, there have been first signs of recovery and stabilising output in the country but in the


coming years the growth rates are likely to be lower compared with those seen in the few years


before the crisis.44



39 European Bank for Reconstruction and Development (EBRD). Transition Report 2010: Recovery and Reform.


October 2010. http://www.ebrd.com/downloads/research/transition/tr10.pdf (last access on 31/01/2011), p. 106
40 Zlatko Lagumdžija. Izvještaj o kompetitivnosti Bosne i Hercegovine 2009-2010. Sarajevo: Akademija nauka i


umjetnosti BiH i MIT Centar, 2009.
41 For the purpose of this paper, economic performances of the country have been expressed through aggregate


indices of competitiveness, intra-industry trade and main macroeconomic and trade indicators.
42 Annual inflation was negative in 2009, reaching -0.4%, down from 7.4% in 2008. Annual inflation rose to


moderate 1% in 2010.
43 Since its establishment in 1997 the Central Bank of BiH has been conducting monetary policy through a currency


board arrangement, with the Euro as the anchor currency.
44 Peter Sanfey. South-Eastern Europe: Lessons from the Global Economic Crisis. EBRD, February 2009, p. 3




  81
Despite achievements in several previous years, BiH has been lagging behind most


transition countries in many areas.45 Formerly aid-driven economy has transformed into an open


but import-driven economy (average trade-to-GDP ratio more than 90% and average import-to-


GDP ratio 64% over the last decade). Absence of comprehensive industrial restructuring and


insufficient investment, especially due to a sharp fall of FDI inflow in the last two years (from


1,499 mil EUR in 2007 to 184 mil EUR in 2009), has resulted in weak production of a traditional


structure, low international competitiveness and increasing unemployment (around 40%).


Although exports have been increasing faster than imports (average annual growth rate of export


22.87% and of import 14.64% in period 2003-2008), due to its narrow base export is still more


than two times lower than import, which means that large disbalance in trade is maintained year


after year. Export structure indicates a predominance of resource based and low-skill labour


intensive product groups (base metals and metal products, wood and wood products, textile


products).


Evidently, BiH has failed to adjust its economy which would enable it to respond


adequately to the requirements of the broader international market; the country has difficulties to


compete even in the regional market and has a deficit with all trade partners.46 But there is a real


risk of locking BiH exports within the narrow framework of the regional market in near future


which, once associated to the EU, can be lost for BiH.


An analysis of intra-industry trade (IIT) supports the above findings: significant


domination of inter-industry trade (though in decline)47 and prevalence of the vertical component


of intra-industry trade both in total BiH trade and in trade with WB and EU is observed, which


indicates low international competitiveness as well as a low level of convergence between BiH


economy and economies of its main trading partners. Relatively low indices of marginal IIT,


especially in the trade in agricultural products, predict that high adjustment costs could be


expected for BiH in the process of integration with the EU, especially in the agricultural sector.


Several major indices of competitiveness (GCI, DBI, ETI, NRI)48 have shown a slight


downward trend since 2007, indicating a continuous decline in the overall competition of BiH.


Although in 2010 some improvement in GCI has been recorded, BiH still ranks at the very


bottom in the WB region by its competitiveness. The difference between the first one among WB


countries - the regional leader Croatia and the last one BiH - amounts to 47 positions (2009).

45 Data for period 2005-2009
46 For example, deficit in trade in agricultural products with CEFTA countries amounts to 46.3% of total BiH deficit


in those products in 2009.
47 Average Grubel-Lloyd index of IIT for the period 2003-2008 amounts to 0.39.
48 Indices reported by the World Economic Forum: GCI – Global Competitiveness Index (BiH ranks 102 out of 139


countries) , ETI – Enabling Trade Index (BiH ranks 80 out of 125 countries), NRI – Network Readiness Index
(BiH ranks 110 out of 133 countries) etc.; or by the World Bank: DBI – Doing Business Index (BiH ranks 110
out of 183 countries).




  82
Concerning the rest of the world BiH ranking is continuously in the last quarter of the total


number of countries covered by analyses.


Some reports,49 taking into account competitiveness ranking and GDP p/c ranking, have


placed BiH in the second stage of national competitiveness in which efficiency of management


determines the economic development based on investment. According to our analysis BiH is


still somewhere in transition from the first i.e. factor-driven stage to the second i.e. investment-


driven stage.



Internal problems, trade- and integration-specific


Problems of domestic nature particularly related to the process of integrating into the


international trading system through accession to the WTO and economic integration, also arise


from institutional deficiency and inadequate policy.


 lack of specialised institutions and capacities;
 inconsistent and inappropriate trade policy.


Lack of institutional capacities, especially specialised ones, has been complicating trade


and slowing down demanding processes such as the accession to the WTO and integration to the


EU. The country’s administrative structures still are not quite capable to respond effectively to


the requirements of those processes. For that reason, European Union (IPA 2008) has launched


the project „Support to Trade Policy and Capacity Building in Bosnia and Herzegovina“, the


main objective of which is to provide for the assistance in promotion of the country's integration


into the world economy in general, and into the EU economy in particular, through trade


expansion. The project EU TTP 2 will support institutional capacity development in BiH related


to the implementation of CEFTA and SAA and negotiations for the accession to the WTO.


Institutional weaknesses and various lobbies have contributed to creating a trade policy


that one can describe only as inconsistent and inadequate. Relatively low and inappropriately


determined customs tariff, elimination of quantitative restrictions, insufficient support to


agriculture, and absence of export promotion measures, are among the failures of BiH trade


policy. Contrary to the experiences of other transition countries, which have had much more


“closed” economies at the beginning of the transition process, BiH has opened up its market too


early. This particularly holds for agriculture.


Since the existing BiH customs tariff is already low and subjected to further reductions


within the negotiations in the course of the accession to the WTO and SAP, and since it is not



49 Zlatko Lagumdžija. Izvještaj o kompetitivnosti Bosne i Hercegovine 2009-2010. Akademija nauka i umjetnosti


BiH i MIT Centar, Sarajevo, 2009.




  83
applied in trading with CEFTA members, the country is not able to make a significant use of


customs tariff as the only instrument of domestic production protection allowed by the WTO.


Additionally, unlike many countries that are far more developed, such as the USA or EU


members, let alone other transition countries, that still partly use various forms of quantitative


restrictions and although faced with permanent balance-of-payments problems, BiH has


immediately eliminated all quantitative restrictions, instead of doing so gradually and selectively


or decreasing them, or at least replacing them with customs in the tariffication process.


Sensitivity of agricultural products trading issue for many world countries has been


confirmed in the case of BiH as well. In comparison to other transition countries, BiH has


opened its agricultural market too early. Although agriculture is not a key sector of BiH


economy (contributing less than 9% to GDP in 2009),50 the extent of liberalization in this trade


sector, i.e. underdeveloped protection mechanisms and absence of subventions, has become a


neuralgic point of BiH trade policy. Besides, since agriculture is the responsibility of Entities


rather than the State, the development of and support to this sector is a separate problem. When


asymmetries of FTAs signed with neighboring countries ceased to exist, agriculture in BiH


encountered the increased presence of foreign competition on its own market. Protectionist


pressures on the government have become very strong and have led to introducing trade barriers


from time to time in order to protect agriculture from “unfair competition” in the region. Faced


with intensive pressures in 2005, BiH unilaterally suspended some of the provisions of FTAs


with Croatia and Serbia and Montenegro, by introducing tariff restrictions on selected


agricultural products (milk, diary products, meat and meat products) originated from those


countries without applying safeguard procedures prescribed in FTAs. As a consequence, BiH has


also insisted on extending the safeguard provisions in the new CEFTA. In September 2009 the


Constitutional Court of BiH abolished a controversial customs law that protected domestic


agricultural and related products by reintroducing customs duties, contrary to the CEFTA and to


the Interim Agreement.


If the foreign trade policy makers do not take into account the overall economic and


political situation of the country when creating trade policy especially determining the speed and


scope of trade liberalization, as has been the case with BiH, the country will inevitably face


negative consequences. Unilateral and comprehensive trade liberalization performed rapidly and


failing to meet development needs has resulted in a relatively low protection of the domestic


production, and at the same time a large trade deficit compared to the size of the economy



50 Agency for Statistics of Bosnia and Herzegovina. Bosnia and Herzegovina in Figures 2010. Sarajevo, 2010


http://www.bhas.ba/Arhiva/2010/BIH_brojke10-en.pdf (last access on 31/012011)




  84
(average around 38% of GDP in period 2003-2009). Intensification of protectionist pressures on


the government could be expected in the forthcoming years due to the accumulation of problems


related to unilateral liberalization that had taken place prior to the application for WTO


membership and regional integration processes as well as multilateral liberalization required


during the negotiations and regional liberalization within the framework of CEFTA and SAP.


Early and extensive trade liberalization could become one of the “stumbling blocks” for later


implementation of the WTO and CEFTA trading rules.



External problems:



External constraints to effectively integrating of BiH into the international trade system


mostly refer to higher criteria for the accession to the WTO and integration into the EU.


The requirements that an acceding country should meet in order to become a WTO


member nowadays are considerably higher than they used to be at the moment when WTO came


into being. Besides, the WTO agreements contain very few exceptions for transition countries


regarding implementation of some provisions. WTO members will not lower their requirements


during negotiations. What could be expected is that transition countries are given more time to


meet those requirements (for example, time extensions in elimination of export subsidies or in


implementation of the TRIPS provisions).


Implementing the SAA commitments and meeting the EU membership criteria have been


even more demanding because both require reforms in all spheres of economy and society as a


whole, and “smooth adjustment” cannot be expected in the case of BiH. After the last wave of


EU enlargement it has become quite clear that new candidates will face even higher criteria for


membership and longer procedures. Merely declaratory political consensus has proven


insufficient even in the countries with less complex political structure. A major challenge for


BiH will therefore not be to amend its legislation and transform the institutions and policies


governing economy and trade in order to bring them in conformity with the WTO principles and


disciplines as well as with the EU acquis and practice, but to implement those changes.



2. Recommendations


Leaving aside the constitutional reform aimed at improvement of the state structure and


political situation that is a very sensitive political issue requiring a broader elaboration, some


recommendations focusing on the institutional and economic policy deficiencies however have


to be and can be addressed:


- acceleration of structural reforms;




  85
- improvement of macroeconomic policy management;


- further strengthening of institutional capacities, especially in the sense of “building” trade


policy-specific institutions able to deal with requirements of the process of accession to


the WTO and the EU as well as with future implementation of their regulation and


disciplines;51


- improvement of trade-related services (financial services, customs administration, trade


statistics, export promotion services etc.);


- improvement of business environment and investment climate in the areas of registration


procedures, anti-corruption, tax policy, labour market, infrastructure etc.;


- analyzing situation by sectors and creating appropriate and coherent sectoral policies in


accordance with general development strategy; etc.




IV. Concluding Remarks


Being largely dependent on its external economic flows, at the early beginning of its


transition process Bosnia and Herzegovina has recognised the necessity of integrating into the


international trading system on the new, reformed basis. By adopting the neo-liberal


“Washington Consensus” approach in its external sector reform and the so-called open


regionalism52 concept, since the end of nineties the country has been conducting trade


liberalization in parallel on different levels - unilaterally, multilaterally (process of accession to


the WTO), and regionally (integration in “new” CEFTA and association to the EU).


In case of BiH, multilateral liberalization and regional integration co-exist as


complementary processes. Regionalism in South East Europe, started as a network of bilateral


free trade agreements within the framework of the Stability Pact for Southeast Europe and


evolved in the CEFTA 2006 and SAP, has been a very example of the harmonized links between


multilateral and regional processes. Principles and rules of WTO multilateral system have served


as the common denominator, the basis for easier compromises and faster liberalization at the


regional level. And vice versa, free trade in the SEE region and association process with the EU


contributes to ongoing accession of some of SEE countries to the WTO.


Facing with considerable challenges, mostly of domestic nature, BiH has been rather


slow on its path to the WTO and EU in comparison with some other transition countries. Ten



51 For example, institutions for certification; namely, technical regulations and standards and lack of recognition of


BiH certificates seem to be one of the most significant barriers for BiH to increase share in markets of EU and in
markets of some large extra-regional partners.


52 Open regionalism implies the preservation of liberal regimes in trade relations with third countries i.e. lowering
trade barriers for non-members of an integration to a certain extent.




  86
years after the process of accession to the WTO started, BiH has only an observer status. For the


EU, BiH is only a potential candidate.


Non-economic problems, such as complicated and inefficient state structure, political


instability, institutional deficiencies, lack of business friendly environment, seem to be the most


serious problems BiH has to obtain in order to improve its economic performances and to meet


criteria for the WTO and EU membership. Additionally, applying strategy of rapid and extensive


unilateral trade liberalization at the beginning of reforms, has proved as a wrong choice for a


post-war economy with a weak economic performances and complex political situation,


confirming the hypothesis that foreign trade policy in general and tempo of trade liberalization in


particular should be to the full extent determined by the relative level of economic development


and international competitiveness of a country.53 Prominently liberal foreign trade regime rise


significant protectionist pressures and in the case of BiH can be even a “stumbling block” in the


process of negotiations for accession to the WTO and integration with the EU. However, any


retardation of BiH in the process of accession to the organization which rules cover more than


90% of total world trade and in the process of adjustment to the standards and requirements of


the EU - market all BiH main trading partners already belong to or aspire to it, would result in a


weakening presence of BiH in the world market. Although large adjustment costs will affect the


country much before it experiences full benefits of the membership, integration into the


international trading system through the accession to the WTO and the EU has to be accelerated.





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24. Kaminski Bartlomiej, Zhen Kun Wang and L. Alan Winters. Foreign Trade in the Transition: The International
Environment and Domestic Policy. World Bank, Washington D.C., 1996


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BiH i MIT Centar, Sarajevo, 2009.


26. Lagumdžija, Zlatko. Kompetitivnost Bosne i Hercegovine 2010-2011. (Competitiveness of Bosnia and
Herzegovina 2010-2011). Regional Economic Forum of South East Europe & MIT Center, Sarajevo, 2010.


27. Lagumdžija, Zlatko. Kompetitivnost Bosne i Hercegovine i regiona Jugoistočne Evrope 2008-2009.
(Competitiveness of Bosnia and Herzegovina and the region of South-East Europe 2008-2009.). Regional
Economic Forum of South East Europe & MIT Center, Sarajevo, 2008.


28. Lagumdžija, Zlatko. Kompetitivnost zemalja i regiona Jugoistočne Evrope 2008-2009. (Competitiveness of the
Countries and the Region of South-East Europe 2008-2009). Regional Economic Forum of South East Europe
& MIT Center, Sarajevo, 2008.


29. Lagumdžija, Zlatko. Kompetitivnost zemalja i regiona Jugoistočne Evrope 2009-2010. (Competitiveness of the
Countries and the Region of South-East Europe 2009-2010). Regional Economic Forum of South East Europe
& MIT Center, Sarajevo, 2009.


30. Law on Foreign Trade Policy. Official Gazette of Bosnia and Herzegovina, No. 12/97
31. Vanjskotrgovinska komora BiH. International agreements in the field of trade and economic cooperation.


http://www.komorabih.ba/index.php?option=com_content&view=article&id=172&Itemid=116 (last access on
14/01/2011)


32. Michalopoulos, Constantine. WTO Accession for Countries in Transition. Working Paper No. 1934. World
Bank, Washington, D.C., 1998




  88
33. Ministarstvo vanjske trgovine i ekonomskih odnosa BiH. Analiza vanjskotrgovinske razmjene Bosne i


Hercegovine za 2009. godinu. Sarajevo, januar 2010
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access on 31/01/2011)


34. Ministarstvo vanjske trgovine i ekonomskih odnosa BiH. Informacija o provođenju Sporazuma o izmjeni i
pristupanju CEFTA 2006 u 2009. godini. Sarajevo, juni 2010.


35. Ministarstvo vanjske trgovine i ekonomskih odnosa BiH. Robna razmjena Bosne i Hercegovine sa Evropskom
unijom i svijetom Prvo polugodište 2010. Sarajevo, septembar 2010.
http://www.mvteo.gov.ba/izvjestaji_publikacije/izvjestaji/?id=2931 (last access 31/01/2011)


36. Ministry of Foreign Trade and Economic Relations of BiH. Memorandum of Foreign Trade Regimes of BiH for
Accession of Bosnia and Herzegovina to the World Trade Organization (WTO). Sarajevo, August 2002


37. Organisation for Economic Co-operation and Development, Centre for Co-operation with the Economies in
Transition. Trade Policy and the Transition Process. 1996


38. OECD Investment Compact for South East Europe (OECD-IC), European Commission, CEFTA. CEFTA
Brochure - Implementing CEFTA 2006 Agreement: Reaping the benefits of trade and investment integration in
South East Europe. 2010, http://www.cefta2006.com/sites/default/files/CEFTA_brochure05c_BD.pdf (last
access on 26/01/2011)


39. Sanfey, Peter. South-Eastern Europe: Lessons from the Global Economic Crisis. EBRD, February 2009
40. Stojanov, Dragoljub. Međunarodne finansije u globalnoj ekonomiji. Ekonomski fakultet Univerziteta u


Sarajevu. Sarajevo, 2000.
41. Vijeće ministara BiH, Strategija integrisanja Bosne i Hercegovine u Evropsku uniju. Sarajevo, april 2006.
42. Vijeće ministara BiH, Direkcija za evropske integracije. Analiza razvoja principa uslovljenosti EU (EU


Conditionality). Sarajevo, mart 2010
43. Wim Van Meurs. The Stability Pact beyond EU Enlargement. Betelsmann Foundation and Centre for Applied


Policy Research (in: Working Paper for Coimbra Group Winterschool, Split, February 2003)
44. World Bank. World Trade Indicators 2009/10: Trade-at-a-Glance Table Bosnia and Herzegovina.


http://info.worldbank.org/etools/wti/docs/Bosnia%20and%20Herzegovina_taag.pdf (last access on 31/01/2011)
45. World Trade Organisation. Tariff Profiles 2010.


http://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm (last access 24/01/2011)
46. World Trade Organisation. WTO Ongoing Accessions: Bosnia and Herzegovina.


http://www.wto.org/english/thewto_e/acc_e/a1_bosnie_e.htm (last access on 29/12/2010)




Appendix

Table 1 - Bosnia and Herzegovina in Figures


Bosnia and Herzegovina


Location: South East Europe
Boundaries: with Croatia (932km), with Serbia (357km), with Montenegro (249km)
Surface area: 51,209 km2
Coastline: 21.2 km
Capital: Sarajevo (population: approximately 400,000)
Population: 4,354,911 (1991.); present estimation 3,842,566
Constitutive nations: Bosniacs, Croats and Serbs
Official languages: Bosnian, Croatian and Serbian
Alphabets Latin and Cyrillic
Administrative units: Two entities (Federation BH and Republic of Srpska) and Brčko District
State structure: Parlamentary democracy with bicameral parliament (House of Representatives


and House of Nations), three-member rotating Presidency, Councile of Ministers
and Constitutive Court


Currency: Convertible Mark (KM or BAM); fixed exchange rate 1KM = 1.95583 EUR







  89

Table 2 - Tariffs in WB Countries (2009)




No




Country


Simple Average MFN Applied


Total Agriculture Non-Agriculture


1. Albania 5.0 7.9 4.5
2. Bosnia and Herzegovina 6.6 10.8 5.9
3. Croatia 4.9 10.7 4.0
4. Macedonia 7.3 13.4 6.4
5. Montenegro 4.9 10.9 4.0
6. Serbia 7.3 14.2 6.3
7. Comparator:European Union 5.3 13.5 4.0


Source: WTO. Tariff Profiles 2010. www.wto.org

Table 3 - Trade Indicators of BiH (2003-2009)


2003 2004 2005 2006 2007 2008 2009


Export (mil EUR) 1,223.83 1,540.36 1,934.29 2,640.46 3,035.33 3,431.63 2,827.60


Import (mil EUR) 4,205.02 4,810.72 5,716.36 5,822.63 7,042.75 8,329.69 6,313.64


Export/GDP ratio / 27.8 30.4 32.9 32.9 32.4 /


Import/GDP ratio / 66.9 68.9 59.2 60.8 61.1 /


Trade Balance -2,981.19 -3,270.36 -3,782.07 -3,182.17 -4,007.42 -4,898.06 -3,486.04


Trade Balance/GDP 47.40 40.52 43.7 32.55 36.02 38.76 28.27


Exp/Imp Coverage 29.10 32.02 33.84 45.35 43.10 41.20 44.79


Source: Author’s calculation on the basis of trade data of BiH Agency for Statistics and data on GDP of Central
Bank of BiH.


Table 4 – Main Macroeconomic Indicators of BiH


Indicators 2005 2006 2007 2008 2009


GDP (mil EUR) 8,757 9,844 11,126 12,630 12,268


GDP per capita (EUR) 2,279 2,561 2,896 3,287 3,192


Real GDP growth rate (%) 3.9 6.1 6.2 5.7 -2.9


Annual average inflation rate (CPI, %) 3.8 6.1 1.5 7.4 -0.4


Net FDI (mil EUR) 493 608 1,499 627 184


Government deficit/surplus to GDP (%) 2.4 2.9 1.2 -2.2 -4.4


Government debt to GDP (%) 25.3 21.1 18.2 17.2 21.8


Source: Central Bank of BiH. Statistics – Main Economic Indicators and GDP (2005-2009).
http://www.cbbh.ba/index.php?id=32&lang=en (last access on 14/01/2011)




  90
Nikolai V. Hovanov



Professor, Department of Economic Cybernetics


St. Petersburg State University


Maria S. Yudaeva


Assiatent Professor, Department of Economic Cybernetics
St. Petersburg State University





Consequences of Russia’s Accession to the WTO for Electricity Sector:


Estimations on Basis of Expert Information


In this working paper we consider a problem of consequences evaluating of Russia's


accession to the WTO for the electricity sector. The uniqueness of the WTO accession process


complicates the use of numerical (eg, statistical) information on possible outcomes of Russia's


accession to the WTO. In case of shortage of reliable numerical information concerning trade


liberalization one can refer to expert estimates which are usually imprecise and non-numeric.


Special mathematical methods were developped to proccess imprecise and non-numeric expert


information. In this case we describe an application of imprecise probability theory ideas to


obtain numerical estimates of probabilities of Russia's WTO accession scenarios on basis of


imprecise expert information.




Accession to the WTO can change Russian economy dramatically. Some researches


(Jensen, Rutherford, Tarr, 2004; Tarr, Volchkova, 2010) point out growth of consumption,


foreign direct investments increase, better institutions, reduced poverty as possible outcomes of


Russia’s accession to the WTO. Some experts worry about possible decreased competiveness


and recession in certain industries like agriculture and car manufacturing. To understand possible


outcomes for electricity industry, we turn to expert estimates.


According to opinion of Russian electricity market participants54 the most significant


obstacles to industry development in 2009 were:


 lack of financial resources (52%55 of respondents in December 2009);
 uncertainties concerning Russian and world economies (47% in December 2009);
 lack of modern equipment (36% in December 2009);
 high level of taxation (27% in December 2009);



54 Goskomstat. Russia in figures, 2010. http://www.gkm.ru.
55 Respondents could choose several options




  91
 low domestic demand (24% in December 2009).
How Russia’s accession to the WTO can help with above-mentioned problems?


Accession to WTO can increase foreign direct investment (FDI) inflow and facilitate


access to relatively cheap credit, which can solve financial funds problem.


Stabilization of world economy and improvement in financial system can reduce


uncertainties in electricity market, enable access to relatively cheap credit resources and lead to


electricity industry growth.


Lack of modern equipment in power generation is a very serious problem56. Renewal of


fixed assets can be stimulated by reduction of custom tariffs on imported goods and services


used in power generation.


If Russia agrees on gradual liberalization of foreign direct investment access in the


electricity sector (including possible acquisitions of electric power companies), it may also help


financial fund rising and increased investment in fixed assets necessary for development.


The level of domestic demand partly depends on energy prices. On the one hand increase


in energy prices helps to increase profits in electricity industry, on the other hand it can reduce


the effective demand due to lower competitiveness of Russian manufacturers. During the


negotiations the European Union and Russia reached an agreement under which Russia is


gradually increasing energy prices to access the WTO.


To estimate possible consequences of WTO accession for Russian electricity industry we


should take into account all mentioned factors. It is reasonable to analyze joint influence of


custom tariffs reduction on imported goods and services used in power generation, liberalization


of FDI access and uncertainties in world economy within event tree framework.



1. Event tree framework


The event tree framework is widely used for decision-making under risk when transition


(conditional) probabilities are known. This approach became useful instrument in complex


systems faults analysis (e.g., see Dugan, Sullivan, Coppit, 1999, Fragole et al., 2002, Sullivan,


Coppit, Dugan, 1999, Vesely et al., 1981). In practice expert rarely can provide precise


information concerning conditional probabilities and reliable empirical data is missing.


In this case we study event tree framework with imprecise conditional (transition)


probabilities. We assume that an expert provides ordinal and interval information concerning


transition probabilities. We form a set of admissible transition probability distributions according


to available expert information to obtain numeric estimates of event tree probabilities.

56 Depreciation of fixed assets in the production and distribution of electricity, gas and water at the end of 2009
amounted to 55,5%, which is higher than the depreciation in the manufacturing industry (39,9%) and in mining
(50.3%). Coefficient of renewal of fixed assets in the production and distribution of electricity, gas and water is
lower (3.6%) than the corresponding figures in the manufacturing industry (6,3%) and mining (6.3%)




  92


Event tree T(0,1,...,k) is defined as k-level oriented rooted tree. It consists of root node )(0A that
match the initial state of a system, intermediate nodes A(1)[i1] ,..., A(k1)[i1,...,ik1] ,
i1 1,...,r ( l ),…, ik1 1,..., r (k1)(i1,...,ik2) that may represent intermediate state or decision, and end
nodes A(k)[i1,...,ik] , ik 1,..., r (k)(i1,...,ik1) that correspond to final alternatives. End node
A(k)[i1,...,ik] can also be considered as the end of an event chain A


(0) A(1)[i1]…A(k)[i1,…,ik].
We will denote such a chain as scenario.


An example of 3-level event tree is presented on figure 1. Four nodes that form scenario


A(0) A(1)[1] A(2)[1,1]  A(3)[1,1,1] are marked with gray filling.





Figure 1. 3-level event tree


Transition from node A(s1)[i1,...,is1], s1,...,k to one of subsequent nodes
A(s)[i1,...,is1,is], is 1,..., r (s)(i1,...,is1) is represented by oriented edge
A(s1)[i1,...,is1],A


(s)[i1,...,is1,is]  with assigned value of conditional (transition) probability
p(s1,s)(is1,is)  P(A(s)[i1,...,is]// A(s1)[i1,...,is1]), p(s1,s)(is1,is)  [0;1],
p(s1,s)(is1,1) ... p(s1,s)(is1,r (s)(i1,...,is1)) 1.


Under assumption that nodes A(0),A(1)[i1],..., A
(k)[i1,...,ik] form a simple Markov chain a


formula for scenario probability (or transition through the event chain A(0)
A(1)[i1]…A(k)[i1,…,ik]) can be obtained:




  93
p(0,1,...,k)(i1,...,ik) 
 P(A(1)[i1]//A(0))  P(A(2)[i1,i2]// A(1)[i1])  ... P(A(k)[i1,...,ik]// A(k1)[i1,...,ik1] 
 p(0,1)(i1)  p(1,2)(i1,i2)  ... p(k1,k)(i1,...,ik)


(1)


Sometimes several scenarios (event chains) lead to the same consequence and therefore


several final nodes ],...,[ )()(1
)( s


k
sk iiA , nSs ,...,1 can be grouped in a corresponding complex


event (complex scenario) , n 1,...,N. Under simple Markov chain
assumption probability P(Bn)  pn(B ) of such complex scenario Bn can be received with formula










 nn


S


s


s
k


sk
S


s


s
k


sk
n


B
n iipiiAPBPp


1


)()(
1


),...,1,0(


1


)()(
1


)()( ),...,(],...,[)(  , (2)
where ),1()(1 ,...,1


ss ri  ,... , ),...,(,...,1 )()(1),( sksskk iiri  , N1n ,..., .

2. Imprecise probabilities in event tree


In decision process precise (numeric) information concerning probabilities seldom can be


obtained. Experts due to human nature meet certain difficulties when estimating probabilities


(Hogarth, 1975; Kahneman, Tversky, 1974). A concept of imprecise probabilities introduced to


economics by Maynard Keynes (1921) and developed by Isaac Levi (1981) and Peter Walley


(1991) can be adopted to model uncertainty resulted from imprecise expert knowledge (see e.g.


Hovanov, Yudaeva, Kotov, 2005). In this case we consider expert opinion concerning


probabilities delivered in form of expressions:


“Given state A event B is more likely then event C” (i);


“Given state A event B and event C have the same probability” (ii);


“Given state A probability of event B falls into interval [a,b]” (iii).


We group comparative suggestions (i) and (ii) as ordinal information and formalize them


with a set of equalities and inequalities OI  { pi  pl , pu  pv;i, l,u,v 1,...,r} . Interval
information (iii) for probabilities p1,..., pr can be described with a set of intervals II  {[ai,bi ]},
0  ai  bi , i 1,..., r. Ordinal and interval information forms non-numeric, non-exact and non-
complete information (NNN-information) I  pi  pl , pu  pv; at  pt  bt; i, l,u,v, t 1,..., r  for
probabilities p1,..., pr .


Consider a set P(r)  p (p1,..., pr )  Rr : pi  0, p1  ... pr 1  of all possible
probability vectors (probability distributions) p (p1,..., pr ) and then distinguish a set


)();( rPIrP  of all admissible (according to information I) probability vectors. Following
basic idea of Thomas Bayes (1763) concerning uncertainty randomization we model uncertain


choice of probability distribution p (p1,..., pr ) from the set P(r;I) by random choice of this




  94
distribution. As a result we receive random probability vector p(I )  p1(I ),..., pr (I )  ,
˜ p 1(I)  ... ˜ p r (I) 1, uniformly distributed on the set P(r;I). Obtained random variable ˜ p i (I)


can be regarded as random estimate of probability pi according to NNN-information I.


Mathematical expectation i (I)E ˜ p i (I) can be considered as numeric estimate of random
probability ˜ p i (I) and standard deviation  i (I)  D˜ p i (I) can be interpreted as a measure of
obtained estimate exactness. For further calculations we also use covariance


cov( ˜ p i (I), ˜ p j (I))  cij (I) of random probabilities ˜ p i (I), ˜ p j (I), i, j 1,..., r , i  j .
Calculations can be provided by decision support system ASPID-3W (Hovanov N.,


Hovanov K., 1996). In complex cases, when NNN-information is obtained from different


sources of information with different reliability, a mechanism of twice randomized estimates can


be applied (Hovanov N., Yudaeva, Hovanov K., 2009).



Consider node A(s1)[i1,...,is1], s1,...,k with subsequent nodes A(s)[i1,...,is1,is],


is 1,..., r (s)(i1,...,is1) and NNN-information concerning conditional (transition) probabilities
p(s1,s)(is1,1),..., p


(s1,s)(is1,r
(s)(i1,...,is1)), provided by an expert. We regard random conditional


probabilities ˜ p ( j1, j )(i1,...,i j ;I) as randomized estimates of probability p
( j1, j )(i1,...,i j ) according


to information I, mathematical expectation ( j1, j )(i1,...,i j ;I) as averaged estimate of probability
of event A( j )[i1,...,i j ] and standard deviation  ( j1, j )(i1,...,i j ;I) as exactness measure of obtained
estimate.


Substituting probabilities )(),( 1
10 ip , ),(),( 21


21 iip ,..., ),...,(),( k1
k1k iip  with their


randomized estimates in formula (1) we receive random estimate


);,...,(~ 1),...,1,0( Iiip kk );,...,(~...);,(~);(~ 1),1(21)2,1(1)1,0( IiipIiipIip kkk (3)
of probability p(0,1,...,k)(i1,...,ik) of scenario A


(0) A(1)[i1]…A(k)[i1,…,ik] realization.
From formula (3) we can derive formula for mathematical expectation






k


j
j


jj
k


k
k


k IiiIiIiiIiipE
1


1
,1


1
),...,1,0(


1
),...,1,0( );,...,();();,...,();,...,(~  , (4)


variance


  





 


k


1j


2
j1


j1j
k


1j


2
j1


j1j2
j1


j1j


k1
k10


IiiIiiIii


IiipD


);,...,();,...,();,...,(


);,...,(~


,,,


),...,,(


(5)


and covariance




  95


cov( ˜ p (0,1,...,k)(i1,...,i j ,i j 1
(1) ,...,ik


(1);I), ˜ p (0,1,...,k)(i1,...,i j ,i j 1
(2) ,...,ik


(2);I)) 
 r1,r (i1,...,ir ;I)2  r1,r (i1,...,ir ;I)2 


r1


j 
 c( j1)(i1,...,i j1; j (1), j (2);I)  r1,r (i1,...,i j ,i j 1(1) ;I)r1,r (i1,...,i j ,i j 1(1) ;I) 
 r1,r (i1,...,i j ,i j 1(1) ,...,ir(1);I)r1,r (i1,...,i j ,i j 1(1) ,...,ir(1);I) 
r j 2


k 
 r1,r (i1,...,ir ;I)2


r1


j r1,r (i1,...,i j ,i j 1(1) ,...,ir(1);I)r1,r (i1,...,i j ,i j 1(1) ,...,ir(1);I) 
r j 1


k ,


(6)


of random estimate );,...,(~ 1
),...,1,0( Iiip k


k of probability ),...,(),...,,( k1
k10 iip of transition


through the chain (A(0) ,A(1)[i1], A
(2)[i1,i2],.., A


(k)[i1,...,ik]), where );,...,( 1
,1 Iii j
jj – mathematical


expectation, );,...,( 1
,1 Iii j
jj – standard deviation of );,...,(~ 1),1( Iiip jjj , and


);,;,...,( )2()1(11
)1( Ijjiic j


j


 denote covariance of random estimates of transition


probabilities ),...,( )1(
)1(


1
),1(


j
jj iip  , ),...,( )2(


)2(


1
),1(


j
jj iip  .


Using expressions in formulas (2),(4)-(6) one can obtain formulas for mathematical expectation


E˜ p n
(B )(I)  n(B )(I)  E ˜ p (0,1,...,k)(i1(s),...,ik(s);I)


s1


Sn




 E˜ p (0,1,...,k)(i1(s),...,ik(s);I)
s1


Sn  (i (s);I)
s1


Sn
, (7)


and variance


D˜ p n
(B )(I)   n(B )(I) 2  cov( ˜ p (0,1,...,k)(i1(s),...,ik(s);I), ˜ p (0,1,...,k)(i1(t ),...,ik( t );I))


s,t1


Sn 
 D˜ p (0,1,...,k)(i1(s),...,ik(s);I)  2


s1


Sn cov( ˜ p (0,1,...,k)(i1(s),...,ik(s);I), ˜ p (0,1,...,k)(i1( t ),...,ik( t );I))
s,t1,
s t


Sn (8)


of random estimates )(~),...,(~ )()(1 IpIp
B


N
B of probabilities )()(1 ,...,


B
N


B pp of complex scenarios


N1 BB ,..., .


3. Russia's accession to WTO event tree
Taking into account the importance of custom tariffs reduction, liberalization of foreign


direct investment access and stabilization of world economy for electricity industry an event tree


to estimate consequences of Russia’s WTO accession can be formed.


At the first level of event tree we consider possible outcomes of the negotiations on the terms of
Russia's accession to the WTO.


The first possible outcome would be (1) Russia's agreement on significant gradual rise in


domestic prices for electricity services up to the level of world market prices. At the moment this


alternative is approved by bilateral agreement with the EU. The increase in energy prices can




  96
increase industry return on sales; however, the long-term impact of higher energy prices can be


negative due to decrease of Russian manufacturers competiveness and subsequent demand fall.


The second possible outcome of negotiations on the conditions of Russia's WTO


accession will be (2) significant gradual decline of custom tariffs on imported goods (equipment


of power stations, measuring equipment, etc.) and services (design and construction of power


facilities, etc. etc.) used in power generation, in addition to (1) significant gradual rise in


domestic prices for electricity services up to the level of world market prices. Realization of this


alternative may help the fixed assets renewal due to lower imported equipment costs.


A third possible outcome of negotiations on the conditions of Russia's WTO accession


will be (3) significant gradual liberalization of foreign direct investment access to the electricity


sector, including possible acquisitions of electric power companies, in addition to (2) significant


gradual decline of custom tariffs on imported goods and services used in power generation and


(1) significant gradual rise in domestic prices for electricity services up to the level of world


market prices. If this option is realized, then the renewal of fixed assets may be facilitated by


possible foreign direct investment and become cheaper due to lower imported equipment costs.


At the second level of event tree we consider possible periods of Russia’s WTO


accession. It is assumed that timing of WTO accession does not depend on the outcomes of


negotiations mentioned above as custom tariffs and foreign direct investments in electricity


industry are not the major obstacles to Russia’s WTO accession (some other factors like conflict


with Georgia, possible agricultural subsidies and export taxes on timber play crucial role in this


question). Such assumption about event independence diminishes necessary information.


We have identified three possible period of entry into the WTO.


In the first case, Russia will join the WTO before Russian presidential elections in 2012,


when global economic crisis can reduce the possibility of foreign investments and fixed assets


renewal.


In the second case, Russia will join the WTO in the period 2012-2016 (up to presidential


elections in 2016), when we can expect a gradual recovery of world economy and increased


possibility of foreign investment. Also Russian companies will have the opportunity to prepare


for entry into fierce competition with foreign companies.


In the third case, Russia joins the WTO after 2016 (after the presidential elections in


2016) or will not be accepted.


At the third level of event tree we consider possible states of the world economy at the


moment of Russia's accession to the WTO, which largely depend on the timing of the accession,


but do not depend on negotiations on the terms of Russia's accession to the WTO in the


electricity sector.




  97
We distinguish three alternative global economy states. In the first case global economy


at the time of Russia's accession to the WTO will be in decline and the major financial and


economic indicators will go bad compared to the level of mid-2010. In the second case we will


observe the stagnation of the world economy compared to mid-2010 level. The third alternative


involves significant growth of the world economy compared to mid-2010 level.


At the forth level of event tree we consider possible consequences of Russia's accession


to the WTO for the Russian electricity companies, depending on the outcome of the negotiations,


the timing of accession and the state of global economy. In the first case, electricity industry will


decline and industry profit measured in a stable aggregate currency (Hovanov, Kolari, Sokolov,


2004) three years after Russia's WTO accession will significantly decrease (on average 10-30%


per year). The second case is characterized by industry stagnation, when the profit change is


insignificant (less than 10%). In the third case rise in the industry will be observed, characterized


by a significant increase (10% -30%) in annual profit.


Fig. 2 shows the event tree, graphically displaying various scenarios of Russia's accession


to the WTO. The first level of event tree represents possible outcomes of Russia’s accession


negotiations. At the second level different periods of Russia’s accession to WTO are considered.


At the third level possible states of the world economy at the time of Russia’s accession to WTO


are taken into account. At the fourth level the variants of electricity industry state (decline,


stagnation and growth) are considered.





  98


Figure 2. Russia’s accession to the WTO event tree


Alternatives to the fourth level (81 pcs.) are combined into complex scenarios:


• B1 – “Fall of electricity industry: profits of Russian energy companies will fall by more than
10%”;
• B2 – “Stagnation of the electricity industry: profits of Russian energy companies will change by
no more than 10%”;
• B3 – “Growth of electricity industry: profits of Russian energy companies will increase by more
than 10%”.


We have collected suggestions concerning event tree conditional probabilities from two


independent highly qualified experts.


Lets consider estimation of first level conditional probabilities. The first expert


formulated his opinion concerning first level probabilities p1  p(0,1)(1), p2  p(0,1)(2), p3  p(0,1)(3)
in the form of NNN-information I  I1(0,1)  {p2  p1  p3; p2  0.45; p1  0.35; p3  0.2}.


We form a set of all admissible probability vectors (distributions) according to first expert


NNN-information I. Figure 3 demonstrates how NNN-information I helps to diminish a set P(3)


of possible probability distributions (fig. 3a) to a set P(3;I) of admissible probability


distributions (fig. 3b).





a) b)


Figure 3. Sets of possible (a) and admissible (b) probabilities p1,p2 according to first expert NNN-information


We randomize the uncertain choice of probability vector p=(p1,p2,p3) from the set P(3;I)


of all admissable probability vectors and receive a random estimate p(I )  p1(I ), p2 (I ), p3(I )  of
probability vector (distribution). To obtain numeric probabilities' estimates we calculated




  99
mathematical espectations µ(0,1)(i;I1(0,1)), i=1,2,3 and standard deviations


 (0,1)(i;I1(0,1)) (see table 1).
The second expert opinion can also be represented as NNN-information


I 2
(0,1)  p1  p2  p3; p1  0, 6; p2  0, 2; p3  0,1 


and corresponding conditional probabilities estimates can be obtained (see table 1).
Table 1. Probability estimates of negotiation outcome realization


i Negotiation outcome Expert 1 Expert 2
µ (0,1)(i;I1(0,1))  (0,1)(i;I1(0,1)) µ (0,1)(i;I2(0,1))  (0,1)(i;I2(0,1))


1 A(1)[1]: significant gradual rise in domestic prices for
electricity services up to the level of world market
prices


21,83% 8,27% 63,33(3)% 2,36%


2 A(1)[2]: A(1)[1] + significant gradual decline of custom
tariffs on imported goods and services used in power
generation


69,50% 11,46% 23,33(3)% 2,36%


3 A(1)[3]: A(1)[2] + liberalization of foreign direct
investment access to the electricity sector


8,67% 5,62% 13,33(3)% 2,36%


Source: authors' calculations


Proccessing first expert data allows us to predict the second outcome of negotiations,


when Russia agrees on (1) significant gradual rise in domestic prices for electricity services up to


the level of world market prices and (2) significant gradual decline of custom tariffs on imported


goods and services used in power generation with probability estimate 69.5%±11,5%. The


second expert information prossesing allows to forecast first outcome of negatiations with


probability estimate 63.3%±2,4%.


If we continue to process expert NNN-information


I1=I1(1,2)={p2>p1>p3; p2 ≥ 0,7; p1 ≤ 0,2; p3≤0,1},
I2=I2(1,2)={p2>p1; p2 ≥ 0,5; p1 ≤ 0,1}
concerning second level conditional probabilities p1  p(1,2)( j,1), p2  p(1,2)( j, 2), p3  p(1,2)( j,3),
j=1,2,3 we obtain probabilities estimations µ (1,2)(j,i;In) ± (1,2)(j,i;In),n=1,2,i,j=1,2,3 (presented
in table 2) and forecast Russia's accession to the WTO during the period 2012-2016 with


probability estimate 83,3%±6,2% (first expert information I1(1,2)) and 72,6%±13,2% (second


expert information I2(1,2)). Each estimate can be applied to three events due to independence of


the negatiation outcome and Russia's accesstion to the WTO timing.
Table 2. Probability estimates of realization of possible Russia’s accession to the WTO period, j=1,2,3
i Events Periods of Russia’s


accession to the WTO
Expert 1 Expert 2


µ (1,2)(j,i;I1)  (1,2)(j,i;I1) µ (1,2)(j,i;I2)  (1,2)(j,i;I2)
1 A(2)[1,1], A(2)[2,1], A(2)[3,1] before 2012 12,22(2)% 4,78% 4,82% 2,88%
2 A(2)[1,2], A(2)[2,2], A(2)[3,2] 2012 – 2016 83,33(3)% 6,24% 72,59% 13,15%
3 A(2)[1,3], A(2)[2,3], A(2)[3,3] after 2016 4,44(4)% 0,28% 22,59% 13,15%


Source: authors' calculations




  100
To estimate third level conditional probabilities both expert provided NNN-information


concerning propabilities of decline ( p1  p(2,3)( j,k,1)), stagnation ( p2  p(2,3)( j,k, 2)) and growth
( p3  p(2,3)( j,k, 3)), j=1,2,3 of world economy before 2012 (k=1)
I1(2,3)(1) ={ p2>p3 >p1; p1≤0.15, p2≥0.6, p3≤0.25},
I2(2,3)(1)={ p2>p1, p1≤0.25, p2≥0.5},
during 2012-2016 (k=2)


I1(2,3)(2) ={ p3>p2 >p1; p1≤0.1, p2≤0.2, p3≥0.7},
I2(2,3)(2) ={p3>p2>p1; p1≤0.1, p2≤0.25, p3≥0.5},
and after 2016 (k=3)


I1(2,3)(3) ={ p3>p2 >p1; p1≤0.05, p2≤0.15, p3≥0.8},
I2(2,3)(3) ={p3>p2>p1; p1≤0.1, p2≤0.2, p3≥0.5}.




Third level probabilities' estimates (table 3) allows us to forecast stagnation of world


economy before 2012 (averaged probability estimate equals 77,9% following first expert


information and 69,4% following second expert information) and economic growth after 2012.
Table 3. Probability estimates of realization of possible Russia’s accession to the WTO period, k=1,2,3
i World


economy
state


before 2012 2012 - 2016г. after 2016г.
Expert 1


µ (2,3)(k,1,i;I1)  (2,3)(k,1,i;I1) µ (2,3)(k,2,i;I1)  (2,3)(k,2,i;I1) µ (2,3)(k,3,i;I1)  (2,3)(k,3,i;I1)
1 decline 6,43% 4,20% 4,4(4)% 2,83% 2,3(3)% 1,43%
2 stagnation 77,86% 8,36% 12,2(2)% 4,78% 8,6(6)% 3,75%
3 growth 15,71% 5,88% 83,3(3)% 6,24% 89,00% 4,26%
Expert 2


µ (2,3)(k,1,i; I2)  (2,3)(k,1,i;I2) µ (2,3)(k,2,i;I2)  (2,3)(k,2,i;I2) µ (2,3)(k,3,i;I2)  (2,3)(k,3,i;I2)
1 decline 11,1(1)% 7,08% 4,58% 2,86% 4,4(4)% 2,83%
2 stagnation 69,4(4)% 11,95% 14,79% 6,12% 12,2(2)% 4,78%
3 growth 19,4(4)% 11,95% 80,63% 7,33% 83,3(3)% 6,24%


Source: authors' calculations


Similarly, we calculated estimates for the conditional probabilities of the fourth level.


Based on estimates of the conditional probabilities for 1-4 event tree levels (tables 1-3) using


formulas (7) and (8) we calculated mathematical expectations Epn(B)(I ),n=1,2,3 and standard


deviation  n(B)(I ), n=1,2,3 of randomized probability estimates pn(B) (I ) of complex scenarios
(table 4).


Table 4. Probability estimates of complex scenario realization
Epn(B)(I (1) )  n(B)(I (1) ) Epn(B)(I (2) )  n(B) (I (2) )
B1: Profit fall (more than 10%) 19,12% 3,86% 15,13% 2,96%
B2: Profit stagnation
(-10%...10%)


37,18% 2,16% 24,78% 4,33%


B3: Profit growth (more than 10%) 43,70% 4,34% 60,09% 5,33%
Source: authors' calculations




  101
Expert information suggests that Russia's accession to the WTO will most probably rise


electricity companies profit. First expert information allows us to predict profit growth of more


than 10% with probability estimate 43.7%±4.3% and processing second expert information


results in 60%±5,3% estimate. Stagnation (industry profit changes not more than 10%) is also


possible with the average probability estimate of 37,2% (first expert) and 24.8% (second expert).


The decline in industry is possible with probability estimate of 19,1% (the first expert) and


15.1% (second expert).



4. Conclusion
In this case we considered various scenarios of Russia’s accession to the WTO that took


into account possible influence of custom tariffs reduction, liberalization of foreign direct


investment access and stabilization of world economy for electricity industry. These 81 scenarios


were combined into 3 complex scenarios representing fall, stagnation and growth of electricity


industry profit. We processed imprecise experts’ information concerning conditional


probabilities and obtained numeric estimates of complex scenarios probability. These estimates


can be used to evaluate investment plans concerning power generation objects, to form tariff


policy or to assess Russian electricity companies’ shares.



5. Guidelines for a case discussion


1. Name possible outcomes of Russia’s accession to the WTO.


2. Discuss possible factors of electricity industry development. How they can be influenced


by Russia’s accession to the WTO.


3. Form your own event tree to estimate outcomes for electricity industry.


4. How you can use obtained probability estimates in investment decisions?





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  103
Nikita A. Lomagin


Professor, Department of World Economy
St. Petersburg State University




Medvedev’s ‘Fourteen Points”: Russia’s Proposal for a New European


Security Architecture


‘Security’ means the ‘ability of states and societies to maintain their independent identity


and their functional integrity’ (Buzan, 1991).



There are few things in Russia’s foreign policy today that occupy as much attention


worldwide as Medvedev’s 2008 call for a new European security architecture and his further


‘fourteen points’ proposal for a European Security treaty. Throughout 2009 a large number of


government officials and politicians, analysts and experts from Russia, Europe, the US and other


countries played an active part in the numerous discussions held on the Russian initiative in


numerous intergovernmental and non-governmental forums. On the basis of the results of those


discussions a draft European Security Treaty has been prepared and passed on by President


Medvedev to the leaders of the Euro-Atlantic States and the executive heads of the relevant


international organizations operating in our common space, such as NATO, the European Union,


the CSTO, the CIS, and the OSCE. In his message President Medvedev emphasized that Russia


is open to any proposals on the subject matter of its initiative and counts on the positive response


from its partners. Russia’s perception of security fits to the classical definition by Barry Buzan


cited above. Indeed, the primary goal of the Russian state is to be able to maintain its


independent identity and its functional integrity.


Although Medvedev’s call for a new European security architecture was interpreted ,


especially in the U.S., as a ploy to pry Europe from its strategic alignment with the United States,


this program is perhaps one of the most important initiatives in the international arena by


Moscow since the break-up of the Soviet Union in 1991. As Jeffrey Mankoff observed, ‘In the


early 1990s, the hope was that Russia itself would eventually make its way into NATO. In the


early twenty-first century, that prospect looks exceedingly remote: Russia’s authoritarian


political system disqualifies it, and few Europeans or Americans would seriously contemplate


extending NATO’s Article 5 collective security guarantee all the way to the Russo-Chinese


frontier … For a time, Moscow hoped to use the OSCE as an alternative, only to sour on the idea


when the OSCE began openly criticizing the conduct of Russian elections’. (Mankoff, 2009, p.


308)




  104
Thus, the Kremlin has long given up on joining NATO or forging a substantive


partnership with the European Union in the area of security or even defense. Russia views


NATO as a Cold War remnant and the EU as little more than a common market with some crisis


management capabilities, even after ratification of the Lisbon Treaty. As a result, the Russian


leadership is doing is best to rally bilateral support for its initiative among major European


powers such as France, Germany, Italy, Spain and some traditionally loyal states such as Finland


and Greece. Of course, it realizes that the greatest and most pressing challenge is to convince


Washington to take the Russian proposal seriously and, thus, to define a road map in order to set


out a credible process to a new pan-Eurasian security settlement.


How should one read the Russian initiative? Is it a merely a reflection of Russia’s


traditional identity as one of the Great Powers that want to be visible and, thus, actively


participate in agenda setting in the security area? Does Medvedev’s plan have any substance or is


it just empty rhetoric? Are Russia’s calls for new European security architecture about avoiding


deciding decision with whom to tie the country’s fate – with the West or with rising centers of


power in Asia? To what extent is the idea of building a 21st-century pan-European security


community realistic, since East and West continue to diverge, as they have done since at least


2003?


Contrary to a widely shared view in the West that ‘those who speak for Russia have made


plain what they oppose but not what they propose instead’, (Legvold, 2009) Medvedev’s


proposal seems to have both real substance and all the symbolic features of the major foreign


policy initiative of his presidency so far. This paper addresses three interrelated issues. First, why


did he introduce the new security doctrine and into which theoretical framework does it fit?


Second, given the current and likely future security challenges confronting Russia and Eurasia,


in general, how can one attain a politically acceptable security framework to replace the old one


inherited from the Cold-war era. Finally, given the scepticism on a side of the U.S. and NATO


leadership regarding Russia’s proposal, how might one achieve the major objectives of


Medvedev’s security plan.


The theoretical framework of the causes of the long peace in Europe and Eurasia, which


means inter alia security for Russia, is well established in the literature. Two of the most popular


theories of peace -- economic liberalism and peace-loving democracies – are not relevant to the


issue at hand. (Mearsheimer, 1999, p. 128) A third theory of peace, obsolescence of war,


proposes that modern conventional warfare had become so deadly by the twentieth century that it


was no longer possible to think of war as a sensible means to achieve national goals. This theory


does not ascribe the absence of war to nuclear weapons, but instead points to the horrors of


modern conventional war. (Mueller, 1989) But, many recent cases have shown that it is possible




  105
to score a quick and decisive victory in a conventional war and avoid the devastation that usually


attends a protracted conventional war. (Mearsheimer, 1999, p. 129) Thus, the main wisdom from


a realist perspective insists that the only option left is reliance on nuclear weapons, for nuclear


war cannot be won, since neither side can escape devastation by the other, regardless of the


outcome on the battlefield. Hence, it would be logical to expect that nuclear deterrence should


remain the backbone of any future security architecture in the region.


Indeed, nuclear weapons occupy an exceptional role in Russia’s contemporary military


doctrine. At the same time, a nuclear arsenal is not the only instrument to guarantee national


security. Its role might change if a new security community were to emerge in the area bordering


Russia on the West and the East. The term ‘security community’ was coined by Karl Deutsch.


According to Deutsch it was the security communities that had eliminated ‘war and the


expectation of war within their boundaries’. (Deutsch, 1969) A security community was defined


as ‘a group of people which has become “integrated” in the sense that there is real assurance that


the members of the community will not fight each other physically, but will settle their disputes


in some other way’. (Deutsch, 1969, p. 5) In his research Deutsch concluded that there were


three conditions essential for the success of a pluralistic security community, namely


‘compatibility of major values relevant to political decision-making’, ‘the capacity of the


participating political units or governments to respond to each other’s needs, messages and


actions quickly, adequately, and without resort to violence’, and the ‘ mutual predictability of


behaviour’. (Deutsch, 1969, pp. 66-67)In Deutsch’s work emphasis was placed on


communication between political units: increased transactions between them brought increases


in mutual dependence. For a community to be created, this high level of transactions must be


accompanied by mutual responsiveness, so that the demands of each side on the other can


receive adequate and sympathetic treatment. This would not only preclude the need for


aggressive action to achieve ends but would also build up a feeling of trust.


The concept of a security community corresponds with a regime theory -- a theory within


international relations derived from the liberal institutional tradition that argues that international


institutions, or regimes, affect the behaviour of states (or other international actors). It assumes


that cooperation is possible in the anarchic system of states. While realism predicts that conflict


should be the norm in international relations, regime theorists say that there is cooperation


despite anarchy. Often they cite cooperation in trade, human rights and collective security among


other issues. The most commonly cited definition of regimes comes from Oran R. Young


(Young, 1980) and Stephen Krasner. Krasner defines regimes as ‘institutions possessing norms,


decision rules, and procedures which facilitate a convergence of expectations’. (Krasner, 1983)


Regimes are social structures, and as with other social institutions, regimes may be more or less




  106
formally articulated -- in our case Medvedev proposed to develop a legally binding European


Security treaty – and it may or not be accompanied by explicit oranizational structure.



From the ‘Berlin Doctrine’ to a Draft Treaty of European Security




Politics is a very symbolic business. It is not surprising that President Dmitrii Medvedev


delivered a major foreign policy speech on June 5, 2008 in Berlin, the city that used to symbolize


the East-West divide. Medvedev’s speech in Berlin on his first trip to the West as President set


the tone for renewed reflections on an expanded Euro-Atlantic Community that includes Russia


not on Western but instead on shared terms.


The fall of the Berlin Wall was perceived in Russia as a huge leap towards the unification


of Europe. Many dividing lines have been removed since then -- above all relations between East


and West have been liberated from the constraints of the ideological confrontation. At the same


time Pan-European military-political collaboration has yet to make the qualitative leap and create


a strong and cohesive partnership, in other words a ’common Pan-European home’ stretching


from Vancouver to Vladivostok, in order to meet effectively the new challenges and threats.


The underlying idea of President Medvedev’s ‘Berlin Doctrine’ was to formalize in


international law the principle of indivisible security as a legal obligation pursuant to which no


nation or international organization operating in the Euro-Atlantic region is entitled to strengthen


its own security at the expense of the security of other nations or organizations. The initiative


had a unifying character and was designed to harness the potential of states and international


organizations to create a truly indivisible space of equal security for all the states of the Euro-


Atlantic region within a framework of common ‘rules of the game’ and mechanisms for their


application.


Medvedev’s ‘Berlin Doctrine’ contained several basic principles for building such a Pan-


European Security architecture. First, every Euro-Atlantic state should have a voice; second, all


relevant international organisations – the European Union, NATO, the OSCE, CSTO, CIS –


should be included; third, the treaty should be based on new rules binding on all; and, fourth, it


deals with a wide range of trans-regional security threats in the wider Eurasian space. Medvedev


proposed a new kind of cooperation in the field of hard security, to upgrade the current system of


Euro-Atlantic security to become a long-lasting one based on legally binding reciprocal and


common commitments.


Later the same year President Medvedev repeatedly called upon his European and


Atlantic counterparts to put in place a Treaty on European Security. In his address to the World


Policy Conference in Evian on November 8, 2008 President Medvedev stated that his idea is to




  107
convene a pan-European security conference with the participation not only of individual states,


but also of international organizations active in Eurasia.The Russian representatives have


insisted in the true spirit of modern democracy that such a conferences they have been


advocating should be held with open, not closed, doors.


Helsinki was chosen by Medvedev as yet another symbolic place to specify Medvedev’s


views on Europe’s future security architecture. In the early 1970s Helsinki was the home city for


a three-stage Conference for Security and Co-operation in Europe (CSCE) and for the so-called


‘Helsinki process’ that resulted in the CSCE Helsinki Final Act which was signed by the 35


participating nations on August 1, 1975.


Thus, it is not surprising that in his speech at the University of Helsinki on April 20, 2009


President Medvedev referred to ‘the spirit of Helsinki’ – i.e., openness, a spirit of collaboration,


new attitudes, and mutual respect, all of which became the key for resolving international


problems at that point. Medvedev called for a future treaty of European security as a kind of


‘Helsinki Plus’ treaty, that is as a confirmation, continuation and effective implementation of the


principles and instruments born out of the Helsinki process, but adapted to the end of ideological


confrontation and the emergence of new subjects of international law in the twenty-first century.


The proposals were based on the view that, although the world has changed, European security is


still far from perfect.


In words of the Russian president, ‘certain political forces are still obsessed by the need


to expand what they see as obligatory military-political alliances, which by the way often act to


the detriment of European security. The rules of international law are applied selectively, based


on so-called political expediency, and sometimes simply ignored…. There are quite a few


examples of this in contemporary Europe: the military operation in the Balkans, the recognition


of Kosovo, the Caucasus crisis resulting from the attack on South Ossetia last year, and the crisis


in talks on the Treaty on Conventional Armed Forces in Europe. These examples could be


multiplied indefinitely’. (Medvedev, 2010) In general, across the post-Soviet space and


elsewhere in Eurasia, territorial borders are notoriously unstable. Moreover, unless a new


security umbrella is put in place, violence could erupt in the other “frozen conflicts.” (Pabst,


2009)


Indeed, the Georgian crisis revealed once more how inadequate the prevailing security


arrangements in the wider European and Eurasian space are. None of the existing organizations


is capable of adjudicating transnational, inter-state territorial disputes or resolving the fate of


regions that seek autonomy. What Europe and Eurasia require is a different security architecture


that can minimize the ubiquitous risk of conflict contagion and provide long-term political


settlements. The dominant security organizations in Eurasia are all ill adapted to this imperative.




  108
NATO in particular lacks a coherent conceptual basis. Originally designed to provide collective


defense guarantees in exchange for limited national sovereignty, the North Atlantic Treaty


Organization has been transformed into an attacking alliance, waging ’humanitarian warfare‘ in


the Balkans and converting Afghanistan to democracy by force. The NATO-Russia Council is


nothing more than a talking shop designed to pacify Moscow and to provide a semblance of


Euro-Atlantic cooperation. Eastward expansion has already proven to be divisive and


destabilizing, precisely in Georgia and the Ukraine. Obviously, many in the West call for a


return to a situation in which military action cannot be undertaken by anyone without there being


a wide consensus and without it being based on serious justifications. As Eric Hobsbawm has


said, ’The world cannot function if someone can just say, “I am strong enough to do what I want,


and therefore I will do it”’. (Hobsbawn, 2003, p. 22) Thus, a new approach to the architecture of


European security is needed.


Medvedev suggested that such solutions could be developed through multi-faceted


cooperation between the Russian Federation, the European Union and the United States of


America. The idea is ’to develop a large-scale legally binding European treaty on security, which


is based on the equality and mutual respect of all the signatories.’ For this reason, Russia has


invited all states and organisations operating on the European continent to work together to come


up with coherent, up-to-date and, most importantly, effective rules of the game. Medvedev has


called for holding a summit with all Euro-Atlantic states and international organizations. ‘In that


way we could identify the best platform for further negotiations and agree on an agenda,’ he


concluded.



Medvedev’s Fourteen Points




On November 29, 2009 the Kremlin published a draft of a European Security Treaty.


Medvedev’s program, at least in a number of its points, resembles the program by Woodrow


Wilson who had enunciated peace aims in his famous “Fourteen Points”. Contrary to popular


belief, Wilson’s program was concerned less with lofty ideals of humanitarianism than with


quite specific proposals to achieve national and international justice by making states more


perfect nation-states. As Davis Thomson has noted, “The first five points, indeed, outlined


general principles of peacemaking. But none of these proved practicable or acceptable after


1918.”57 Still, there are at least two things in the above-mentioned programs in common in terms



57 The remaining nine points covered all the main territoarial changes that seemed to be required for a stable
settlement in Europe, and they were quite specific. President Wilson elaborated and extended the more general
principles of peacemaking in a number of further speeches between February and September 1918, but these
specific points were never modified. The lofty idealism infused into Allied peace aims by Wilson was to be a heavy
liability in the years to come. See Thomson (1966, pp.571-572).




  109
of tone and content. First, both documents advocate multilateralism in the security area and


adherence to law. Second, they are quite idealistic and maybe even naïve in terms of the tools


needed for their implementation. But, if Wilson from the very beginning put international public


opinion above all else as a key instrument to influence decision-makers around the world58,


Medvedev will have yet to explore such an option in the future.


The Russian proposal is based upon almost all existing norms of international security


law set forth in the Charter of the United Nations, Declaration on Principles of International Law


concerning Friendly Relations and Cooperation among States, (1970), the Helsinki Final Act of


the Conference for Security and Cooperation in Europe (1975), as well as provisions of the


Manila Declaration on the Peaceful Settlement of International Disputes (1982) and the Charter


for European Security (1999).


The essence of the Russian program can be reduced to the following six points: first,


parties should cooperate on the basis of the principles of indivisible, equal and undiminished


security; second, a Party to the Treaty shall not undertake, participate in, or support any actions


or activities significantly detrimental to the security of any other party or parties to the treaty;


third, a party to the treaty which is a member of military alliances, coalitions or organizations


shall seek to ensure that such alliances, coalitions or organizations observe principles set forth in


the Charter of the United Nations, the Declaration of Principles of International Law concerning


Friendly Relations and Cooperation among States in accordance with the Charter of the United


Nations, the Helsinki Final Act, the Charter for European Security and other documents adopted


by the Organization for Security and Cooperation in Europe; fourth, a party to the treaty shall not


allow the use of its territory and shall not use the territory of any other party with the purpose of


preparing or carrying out an armed attack against any other party or parties to the treaty or any


other actions affecting significantly the security of any other party or parties to the treaty; fifth, a


clear mechanism is established to address issues related to the substance of this treaty, and to


settle differences or disputes that might arise between the parties in connection with its


interpretation or application. Finally, the treaty is be open for signature by all states of the Euro-


Atlantic and Eurasian space from Vancouver to Vladivostok as well as by the following


international organizations: the European Union, the Organization for Security and Cooperation


in Europe, the Collective Security Treaty Organization, the North Atlantic Treaty Organization



58 Woodrow Wilson believed that the new world order must be based not on ‘covenants of
selfishness and compromise’ between governments, but on ‘the thought of the plain people who
enjoy no privilege and have very simple and unsophisticated standards of right and wrong|…
[and] might be sustained by the organized opinion of mankind’. – (Quoted in Carr, 1945, p. 34)




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and the Community of Independent States and is subject to ratification by the signatory states


and to approval or adoption by the signatory international organizations.


Herein will be the obvious ‘added value’ of a new treaty compared to the provisions


previously adopted in the highest-level documents within the CSCE/OSCE and the NATO-


Russia Council. Russia sees the treaty as a reaffirmation of the principles guiding security


relations among states -- first of all, respect for the sovereignty, territorial integrity and


independence of states and the inadmissibility of the use of force or the threat of its use in


international affairs. (Grushko, 2009) The entire Medvedev program might be summed up as


very idealistic: one state’s aspiration for greater security must stop at exactly the point where the


next state might feel insecure. The Russians have invoked one of the basic Christian principles:


do unto others as you would have others do unto you.


Although the simplest explanation for Medvedev’s initiative might be found in pure


bureacratic games by the Russia’s Security Council and MFA both of which had to produce


foreign policy and security papers for the new president, the initiative under consideration


appears to be a more than just routine paper work. First of all, the security architecture in Europe


had become an issue of central importance for Russia long before Medvedev moved to the


Kremlin. During the whole post-Soviet history, Russia has felt itself quite uncomfortable as an


outsider in the process of building a new security order where the U.S.-led NATO was a central


element.59 As early as the spring of 1996, Russia’s minister of foreign affairs Yevgeny Primakov


compared adjusting to the prospect of NATO enlargement to ‘sleeping with a porcupine – the


best we can do is reduce its size and keep its quills from making us too miserable’. As Strobe


Talbott has recalled, at that time Russia suggested three conditions that, if accepted by NATO,


might make enlargement palatable to Russia: a prohibition against stationing nuclear weaponry


on the territory of new members,; a requirement for co-decsionmaking between Russia and


NATO on any issue of European security, particularly where use of military force was involved;


and codification of these and other restrictions on NATO and rights of Russia in a legally


binding treaty.(Talbot, 2002, p. 218) None of the conditions was fulfilled.



59 For a detailed account of the Russian leadership’s perception of security architecture and NATO expansion, see,
for instance, Mankoff (2009, pp. 165-75). It is worth mentioning that many in the West opposed NATO expansion
from the start as well, chief among them the late U.S. statesman George Kennan, creator of the ‘containment’
doctrine. He called expansion ‘the most fateful error of American policy in the entire post-Cold-War era.’ Kennan
predicted that it would ‘inflame the existing nationalistic, anti-Western and militaristic tendencies in Russian
opinion, restore the atmosphere of the cold war to East-West relations. (Kennan, 1997).The historian John Lewis
Gaddis (1998, p. 145; emphasis in the original) was equally critical: ‘Some principles of strategy are so basic that
when stated they sound like platitudes: treat former enemies magnanimously; do not take on unnecessary new ones;
keep the big picture in view; balance ends and means; avoid emotion and isolation in making decisions; be willing
to acknowledge error.... NATO enlargement, I believe, manages to violate every one of the strategic principles just
mentioned.’.For criticism of NATO expansion see also, Reiter (2001) and Russett and Stam (1998).




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More than a decade later the new military doctrine of Russia (2010) clearly states that the


‘existing international security architecture including its legal mechanism does not provide equal


security for all states’. Moreover, NATO’s ambitions to become a global actor and to expand its


military infrastructure eastwards are mentioned at the top of the list of Russia’s main external


military threats. (Military Doctrine of the Russian Federation, 2010)


Second, there is widespread belief, not only in Russia, but also in the West, that the


current European security architecture is far from ideal. The Ministers of Foreign Affairs of the


OSCE Participating States stated in their Athens Ministerial Declaration that only a new ’Greater


Europe‘, with a global vision and shared goals, will be able to ensure enduring stability on the


continent, contribute globally to international peace and security, and be competitive in that


evolving global context. The Declaration continues:



To achieve this goal, much remains to be accomplished. We continue to be
seriously concerned that the principles of the Helsinki Final Act and OSCE
commitments are not fully respected and implemented; that the use of force has
not ceased to be considered as an option in settling disputes; that the danger of
conflicts between states has not been eliminated and armed conflicts have
occurred even in the last decades; that tensions still exist and many conflicts
remain unresolved; that stalemates in conventional arms control, resolution of
disagreements in this field, resumption of the full implementation of the CFE
Treaty regime and restoration of its viability requires urgent concerted action by
its State Parties….

The OSCE Chairman-in-Office, Greek Prime Minister and Foreign Minister George


Papandreou, concluded that the OSCE's work was not complete, and that ‘Dividing lines also


remain in our minds. Distrust, prejudices and misperceptions can only but divide. We have to


eliminate them. And the best way to do so is to engage in an open, frank and bona fide dialogue.


We have to understand each other; to understand the perspectives, concerns and specificities, but


also understand how much we have in common.’ (‘Conclusions of the OSCE Ministerial Council


in Athens’, 2009)


The NATO Secretary-General also acknowledged that in an age of globalised insecurity


existing security mechanisms need serious adjustments because ‘static , heavy metal armies are


not going to impress terrorists, pirates or computer hackers… Security today is about active


engagement…’ (Rasmussen, 2010) Following the same logic, leading security experts advocate


the creation of a global security web in order to meet new security challenges. For instance,


Zbigniew Brzezinski argues that ‘the paradox of our time is that the world, increasingly


connected and economically interdependent for the first time in its entire history, is experiencing


intensifying popular unrest made all the more menacing by the growing accessibility of weapons


of mass destruction -- not just to states but also, potentially, to extremist religious and political




  112
movements. Yet there is no effective global security mechanism for coping with the growing


threat of violent political chaos stemming from humanity's recent political awakening.’


(Brzezinski, 2009) The economic recession that has dominated both national politics and


international relations for almost two years makes a pan-Eurasian security settlement more


important than at any point since the end of the Cold War. The whole range of old and new


security challenges calls for a strong and growing mutual interest in security cooperation


between the leading countries in Eurasia. A new framework is all the more necessary since the


prevailing security and defense organizations in East and West, such as NATO or the Shanghai


Cooperation Organization (SCO), cannot cope with the emerging global constellation of


overlapping spheres of influence where the rival, transnational interests of ‘great powers’ collide


and their client states clash. This constellation portends more insecurity and conflict across the


Eurasian space, especially in parts of Eastern Europe, the Balkans, the Caucasus and the


Caspian, as well as Central Asia. Even skeptics believe that the basic idea of building a security


system that embraces Russia more comprehensively than existing institutions such as the NATO-


Russia Council is one to which the U.S. and Europe should pay more attention. ((Brzezinski,


2009, p. 308) Third, the moment of suggesting a new initiative by the Kremlin was quite


appropriate, given the relative decline of hard and soft power of Western states as a result of the


war in Iraq and the global economic meltdown. As Adrian Pabst recently stated:


Since the disaster of Iraq, Guantánamo and Abu Ghraib – the U.S.A. (and her
allies) have lost credibility and the moral authority to claim global leadership.
Support for Mikheil Saakashvili’s reckless aggression and his corrupt regime
revealed once more Western double standards and the Atlanticist disregard for
genuine democracy and justice. Similarly, the economic crisis spelled the end of
the neo-liberal ‘Washington consensus’ and confirmed the failure of the Western-
dominated international architecture to regulate global finance or to reduce
worldwide poverty and inequality… Thus, the ’Atlantic unipole‘... has already
ceased to shape and direct global geo-politics and geo-economics. (Pabst, 2009)

Moreover, it seems that the prime concerns of governments in the NATO states in these


post-crisis years will be with domestic economic instability and (in the case of the United States)


with meeting challenges in the Middle East -- Iran, Afghanistan, and Iraq-- where resources of


other powers (first of all, China and Russia) and regional organizations (SCO and Collective


Security Treaty Organization ) will be in demand.


On the one hand, relative revival of Russia provides chance that Russia and Russian-led


regional institutionsto be heard. Indeed, certain developments in post-Soviet space, such as the


sthrengthening of Collective Security Treaty Organization and its recognition by the UN General




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Assembly60, emergence of a customs union among Russia, Belarus and Kazakhstan, and general


growth of Russia’s soft power in the region embodied inter alia in an influx to Russia’s main


cities of dozens of thousands of migrants from Central Asia – all this simpblolized a revival of


Russia as the core within the CIS.


Fourth, the willingness of Russia’s president to advocate a legally binding treaty stems


not only from the bitter experience of his predecessors,61 but also from his background as a


lawyer who prefers formal agreements to mere verbal agreements. According to Russia’s


Minister of Foreign Affairs Sergei Lavrov, ‘Dmitry Medvedev’s proposal for a new security pact


sets a litmus test for the honesty of the West versus Moscow… The treaty was necessary to


implement declarations made in the 1990s that “we are all friends, security is indivisible and


nobody’s security can be enhanced at the cost of others.’ (Lavrov, 2010)


Fifth, a survey of world opinion on general principles of world order conducted by the


Council on Foreign Relation in November 2009 revealed some signs of potential support for


Medvedev’s Security program. (‘World Opinion on General Principles’, 2009) In particular,


international polling indicates a strong consensus that world order should be based on a


multilateral system led by the United Nations or a group of regional powers, rather than a system


based on hegemony or bipolarity. Large majorities in countries around the world reject a


hegemonic role for the United States, but do want the United States to participate in multilateral


efforts to address international issues. Also, large majorities around the world have endorsed


having a stronger United Nations. Support for working through the United Nations is somewhat


tempered, especially among smaller countries, when poll questions highlight the prospect of


subordinating national policies to collective decision-making processes.





60 Although CSTO received the status of an observer at the UN General Assembly in 2004, it signed a special treaty
on cooperation with the United Nations only in March of 2010. The Treaty was supported by the General Assembly
by consensus. the Russian text of the Declaration between the UN and OSCTO signed in Moscow on March 18,
2010, see ‘Sovmestnaia deklaratsiia, 2010).
61 There is a widely-held belief in Russia based upon accounts by Mikhail Gorbachev, Evgenii Primakov and other
Russian key politicians that the U.S. leadership has broken its commitment not to expand NATO as a precondition
for Germany reunification. Contrary to this, former Secretary of State James Baker rejected Russian suggestions that
the West had broken a promise made in 1990 not to expand NATO into eastern Europe. Baker, who oversaw U.S.
foreign policy as communism collapsed in the Soviet Union and its satellite states, said he had ‘only floated the
idea’ during talks with Soviet leader Mikhail Gorbachev. ‘This was a negotiating position briefly considered by the
U.S. in regard to East Germany only in talks about German unification and then promptly discarded’. (See Kim,
2009)




  114



Source: ‘World Opinion on General Principles of World Order’, November 19, 2009. Council


on Foreign Relations. http://www.cfr.org/publication/20017 (accessed 7 April 2010).


In international polling large majorities around the world favor the United Nations having


the right to authorize the use of military force for a wide range of contingencies. The approval of


the UN Security Council plays a powerful—and in many cases a necessary—role in conferring


legitimacy on the use of military force. Among Europeans and Americans, the North Atlantic


Treaty Organization (NATO) does provide some legitimacy, but by much smaller margins than


does the United Nations. Moreover, eventually there will the challenge of Russia’s willingness to


take into account its rising Eastern neighbor China into a new system of Euro-Atlantic security.


Indeed, the ‘Chinese factor’ as Moscow’s security concern has not been raised publicly by the


Russians, although it cannot be further ignored for the mere fact that, as a result of global


economic crises, there has been a further shift of power in favor of Beijing which sooner or later


might try to project its power not only to Africa and Latin America, but also to its neighbours.


Therefore, Russia’s plan to engage a growing China into a Euro-Atlantic security architecture


can become the second the most important effect of Medvedev’s initiative. In means that ‘all


affected parties’, including the Shanghai Cooperation Organization where China plays one of the


key roles, will participate.



Implementation Phase




The Russian draft security European treaty was posted on the president's website on


November 29, 2009. The biggest diplomatic initiative involves not only Russia’s top diplomats


who work very actively in all international forums in order to promote Medvedev’s plan, but also


Russia’s closest allies from the Security Cooperation Treaty Organisation (SCTO). Kazakhstan,


which now holds the chairmanship in the OSCE, has made Russia’s plan one of its main




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priorities. The O.S.C.E is the world’s largest regional security organization. Its 56 members


include the United States and Russia.62


The Security Cooperation Treaty Organisation firmly supported Kazakhstan’s activities


as the leader of the OSCE On March 25, 2010 ministers of foreign affairs of the SCTO countries


issued a special statement about the urgent need to strengthen the OSCE as a platform for


holding equal political dialogue among all OSCE member states and increasing the contribution


of the Organization in the strengthening of European security. The SCTO foreign ministers also


supported the idea of a OSCE summit later this year. (Statement by Ministers of Foreign Affairs


of the CSTO member States, 2010)


After meeting with European Union officials in late January 2010, the Kazakh foreign


minister Kanat Saudabayev asserted that European leaders may be ready to discuss Russia’s new


security plan for the continent at an international summit meeting, perhaps this year. The last


OSCE summit took place in 1999. The agenda for a new meeting has not been identified, but


Russian proposals for a security treaty, which Western critics see as an attempt to undermine


NATO, ’could potentially be one of the subjects’, Mr. Saundabayev said. (Cited in Castle, 2010)


With no clear position among the European Union’s 27 nations, the bloc responded


cautiously to Russia’s proposal. Lutz Güllner, spokesman for the Union’s foreign policy chief,


Catherine Ashton, said the Kazakhs have suggested discussing security at a summit meeting.


Asked why another summit was necessary, Mr. Saundabayev highlighted Afghanistan, the global


economic crises and the fact that “important changes took place in the architecture of European


security”. Top Kazakh diplomat met in the end of January with Ms. Ashton; the European Union


president, Herman van Rompuy; the President of the European Commission José Manuel


Barroso; and Miguel Ángel Moratinos, foreign minister of Spain, which holds the rotating


presidency of the union. According to Kazakh sources, “Mrs. Ashton has promised to look into


that matter but underlined that the final decision lies with the OSCE”. (Cited in Castle, 2010)


German Chancellor Angela Merkel believes that Russian President Dmitry Medvedev's


European security initiative should be discussed in the OSCE framework. She said the discussion


of the Russian proposal "will be invigorated" in the near future. (Merkel, 2010) In practical


terms, Merkel suggested the possibility of trilateral discussions about European security among


Germany, France and Russia. This idea found full support in Moscow. (Nesterenko, 2010) In


general, in the European Union ’there is a genuine understanding of the urgency for having a


summit’. (Castle, 2010)



62 Believing that the OSCE has become a human right agency, Russia suggested that in this area, where Council of
Europea, OSCE and the EU are very often operating on parallel tracks, better division of labour is needed in order to
achieve the most efficient use of comparative advantages of the abovementioned organizations.




  116
In this regard European perceptions of security might vary from the American one. While


Europe and North America share a number of societal beliefs, and while they are still


cooperating militarily within the NATO alliance, their societies are drifting apart. Social


democracy is not taking root in the United States. Moreover, within Europe there is already


widespread unease or clear opposition against NATO military actions outside Europe, or its


expansion into areas, which were never in Europe’s sphere of influence. ’This is particularly so


in the countries of Western, Northern and Southern Europe. These are already more advanced


into new thinking about European and international relations, having experienced the benefits of


peace based on reconciliation and economic growth far longer than those have who joined the


EU only recently and who often look more in the rear-mirror of history than to future


opportunities. But the reluctant support among Europeans will be waning rapidly as soon as they


understand that the new Russia is no threat for them as the Soviet Union was’ (Schepers, 2009).


However, Medvedev’s initiative has received a lukewarm reaction from Washington and


NATO headquarters. In late February 2010, U.S. Secretary of State Hillary Clinton rejected


Russia's call for a new European security treaty, saying Europe's security would be strengthened


by a closer cooperation between Russia and NATO. (Clinton, 2010) NATO Secretary General


Anders Fogh Rasmussen said in December 2009 that NATO was ready to discuss Medvedev's


ideas, but there was no need for a new security treaty. The NATO chief added there are enough


documents ensuring Euro-Atlantic security, and that conflicts happen because some countries do


not comply with the principles enshrined in these documents. (Merkel, 2010) It is clear that


President Medvedev’s intention is to change the terms of the debate on the future of security in


Europe away from NATO towards a new body that includes Russia as a founding member. As


such, his proposal is unacceptable to many EU countries and also to the United States.


The most difficult step in the rapprochement between the two competing positions is the


recognition by Europe of Russia’s security fears. They have historic roots and, while Europeans


may perceive them as unfounded, given their belief in their own new worldviews, they are real


enough for Russians. There is a proven method from the Cold War days to reduce these fears.


Between the NATO and Russia, there should be as many ‘Finlands’ as possible, starting with


Belarus and Ukraine. These countries are free to determine their own political and economic


models, but they should remain neutral and not join any military alliance.63



63 The term ‘Finlandization’ derives its name from Finland's 1948 agreement with the Soviet Union under which
Helsinki agreed not to join alliances challenging Moscow or serve as a base for any country challenging Soviet
interests. In return, the Kremlin agreed to uphold Finnish autonomy and respect Finland's democratic system. In
1988 the Danish political scientist Hans Mouritzen proposed a general theory of Finlandization known as 'adaptive
politics.’ Mouritzen stressed the fundamental difference between a Finlandized regime and a client, or ‘puppet,’
state, explaining that the former makes some concessions to a larger neighbor in order to guarantee important
elements of its independence -- voluntary choices that the latter could never make. ( See, Gilley, Bruce, 2010).




  117
Of course, Medvedev’s proposal for a treaty alone will not shape new security


architecture. Much must be done to underpin a new pan-European security regime with a new


pattern of cooperation, common, or at least harmonized, security agendas and better interaction


among all security organizations and factors acting in the area from Vancouver to Vladivostok.


The Russian Ministry of Foreign Affairs has outlined five areas crucial for progress in building a


new security architecture.


The first requirement is a relaunching serious goal-oriented, discussions on the role of


arms control and confidence-building measures, especially in the domain of conventional forces


in Europe. The Conventional Armed Forces in Europe (CFE) Treaty, signed in November 1990,


set equal limits on the numbers of tanks, armored combat vehicles (ACVs), heavy artillery,


combat aircraft, and attack helicopters that NATO and the former Warsaw Pact could deploy


between the Atlantic Ocean and the Ural Mountains. With the breakup of the Warsaw Pact and


the dissolution of the Soviet Union after the cold war, the CFE Treaty states overhauled the


treaty after three years of negotiations. The Adapted CFE Treaty was concluded and signed at


the Organization for Security and Co-operation in Europe (OSCE) summit in Istanbul in


November 1999. Under the agreements, several NATO members pledged not to increase their


territorial ceilings of treaty-limited equipment (TLE), and Russia agreed to reduce its TLE in


Georgia and withdraw its military presence from Moldova. Only Belarus, Kazakhstan, Russia,


and Ukraine have ratified the adapted treaty. The United States and NATO allies have


conditioned their ratification of the Adapted CFE Treaty on Russia’s fulfilling its Final Act


pledges. In July 2007 Russia suspended implementation of the Adopted CFE Treaty until the the


others to ratify it.


Russia believes that arms control dialogue is the best way ’to get more security with less


means, and... to overcome remaining suspicions in relation to military intentions, planning and


force generation.’ As Russia’s deputy minister of foreign affairs suggested, ’The beauty of arms


control is in its ability to translate political intensions into understandable language of numbers,


limits, locations, information and verification regimes. And we should not be talking only about


technicalities how to bring in motion Adapted-CFE regime, but should think creatively about the


very relevance of arms control instruments in evolving security environment and necessary steps


to increase their viability. NATO declares to be transparent about its military activity. We


welcome this intention. But we are also looking forward to get from our NRC partners their


vision of concrete parameters of “substantial combat forces” – one of the key provisions of the


Founding Act, signed in Paris in 1997.’ (Grushko, 2009)






  118
Second, better cooperation among all security organizations and actors in the Euro-


Atlantic area is also needed. An important contribution here could become the implementation in


good faith of the NATO-Russia Council (NRC) Work Program for 2010 and of the document


“Taking the NRC forward”. Another important contribution – with the EU – would be to start


negotiations on an agreement on co-operation in crisis management. The positive experience of


Russian participation in the EU mission in Chad / Central African Republic provided political


impetus to the process of establishing a legal and operational framework for joint actions of the


EU and Russia in crisis situations. And we should not forget about the need to create a joint EU-


Russia institutional body that will allow the taking of joint decisions in the security sphere, to


implement them jointly and to share responsibility.


Third, the elaboration of common approaches to global threats to security of our citizens,


societies and states is required. Within the NRC Russia is willing to launch a process of common


threat assessment in the security spheres relevant to the NRC. A similar process is ready to start


in the framework of “Corfu”.


Fourth, this is a need to have a clear common set of guiding rules to be uniformly applied


to settle all crisis situations, including the frozen conflicts. Russia has circulated in the OSCE its


proposals aimed at establishing uniform approaches to the prevention and peaceful resolution of


conflicts that should be based on the inadmissibility of the use of force, negotiations, voluntary


agreements between the parties to the conflicts without outside imposition of unilateral solutions.


Russia is ready to work on these issues within context of the ’Corfu Process‘, as well as in the


framework of the OSCE documents, such as Vienna Document 1999 Chapter on Risk Reduction.


And, fifth, the possibility of establishing a common security agenda is becoming more


and more realistic. NATO readiness to engage Russia in the process of defining a new strategic


concept is a very positive sign. It is the common interest of Russia and NATO to avoid mutually


competing and interfering security agendas, especially in the areas, where Russia and NATO


face common challenges, be it drug trafficking or organized crime, money laundering, energy


and cyber security, climate change, etc. Russian Foreign Minister Sergei Lavrov made it clear


that all Russia’s initiatives, whether in the sphere of politico-military security or in the sphere of


creating a new legal framework for energy cooperation, are ’united by a desire to forge


teamwork in dealing with specific problems. They do not presuppose unilateral action but imply


a uniting of efforts and the use of multilateral forms of addressing contemporary issues in any


area. Of course, our goals in promoting these initiatives are very clear. We have no hidden


agendas. We want stability around our borders, and strive to provide the most favorable external


conditions in order to tackle the vital tasks of modernizing our economy and transferring it on to


an innovative track.’ (Lavrov, 2010a)




  119
Comprehensive security remains Russia’s main objective. But the commitment to


comprehensive security should not be used as a pretext not to advance on hard security. Since the


adoption of the Helsinki Final Act in 1975 many things have changed in Europe. All European


states – with the exception only of Belarus – became full-fledged members of the Council of


Europe, which through its legally binding instruments, the Court, monitoring mechanisms, is


bringing us together in the broader range of issues that we describe as soft security. (Grushko,


2009)


Meanwhile, the current uncertain situation in the security area makes Russia behave


actively because, as Lavrov believes, one ’who does not care about national interests, is doomed


to lose. That is why Russia supports building of Collective rapid reaction forces within CSTO.


We have to admit that nobody will take care about our security… though the doors for honest


and equal relationship and joint projects should be open.’ (Lavrov, 2010b)



Conclusion


It appears that the key issue is not about keeping the staus quo in terms of the security


arcitecture in Eurasia, but rather on what a new security mechanism should look like – should it


be a NATO-centric structure which means turning the North Atlantic Treaty Organization into a


forum for consultation on worldwide security issues,64 including all rising powers such as China,


India and Pakistan, or should it be a new instututional framework based upon a legally binding


treaty guaranteing equality and indivisibility of security of all states.


Medvedev’s “Fourteen Point” program certainly represents continuity of Russia’s


security policy advanced about fifteen years ago. It represents one of the first ‘positive’ Russian


foreign policy initiatives after the collapse of the USSR. The initiative has both real substance


and all the symbolic features to be expected of the major foreign policy imitative of Medvdev’s


presidency so far. The program’s main added value is twofold: it aims at the contruction of a


new security regime in Europe on new principles of the indivisibility of international security


and the inclusiveness of all interested actors; one of the main objectives of Medvedev’s security


plan is not only to upgrade the already existing (and ineffective) system but also to expand it into


the Asia-Pacific region, in order to have a common security space from Vancouver to


Vladivostok. Obviously, building such an architecture would preserve Russia’s security interests


both in the West and in the East. It would also pave the way for integrating a rising China and


other countries of Asia into a dense network of European security institutions. (Borodavkin,


2010)




64 According to the NATO Secretary General, ‘the Alliance should become the hub of security partnerships’.




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References

Borodavkin, A.N. (2010) ‘Asia-Pacific Region and National Security of the Russian Federation,’


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Juliana Peixoto Batista65



Flexibilities for Developing Countries in the Doha Round as “À La Carte”


Special and Differential Treatment66





ABSTRACT

The current tensions within the WTO have many external and internal causes, such as the global crisis,
changes in the global power balance, and the revival of North-South conflict, mostly after the Cancun
Ministerial and the creation of the G-20. The WTO, to a large extent, reflects those changes, mainly given
that it is the most transparent of all multilateral organizations, and it is also the most accountable to its
members. However, the WTO is only the canary in the coal mine that announces the lack of oxygen: it
shows how multilateral organizations are obsolete in this current transition phase towards a new global
scenario. In fact, developing countries have blocked many developed countries' initiatives in the WTO, by
considering them unlike to response to their development interests. Countries such as Brazil and India
have been increasingly expanding their roles as process drivers in the international level, while the
differentiation within the group of developing countries increases. In this context, discussions around
flexibilities for developing countries in the WTO are still valid, whether we call them Special and
Differential Treatment (S&DT), less than full reciprocity, whether they are discussed in specialized
committees or in the Committee of Trade and Development. The goal of this paper is twofold: on one
hand, to look for answers in how the S&DT has been approached in the Doha Development Agenda; on
the other hand, to identify how middle income developing countries actively participating in coalitions
have positioned themselves in order to search for new flexibilities they see as necessary in the
multilateral trading system from their development perspective.



65 Coordinator at Latin American Trade Network (LATN), Researcher at FLACSO-Argentina. Lawyer and Master
of International Relations.
66 This paper is the result of the fellowship program taken at UNCTAD in Geneva. The author would like to thank
Vlasta Macku and her team for the opportunity awarded and contacts for interviews; Diana Tussie, Pablo Heidrich,
Manuela Tórtora, and Marcel Vaillant, for their comments and guidance; in addition to all the persons interviewed,
without whom it would have been impossible to learn about the informal negotiations taking place during the Doha
Round. Any errors are the author’s sole responsibility.




  123
INTRODUCTION



The current tensions in the search for flexibilities for developing countries in


organizations such as the WTO is part of the historical North-South conflict, how this conflict


has been fluctuating through time due to the changes in the world power balance, as well as the


increasing heterogeneity within developing countries group.


Developing countries have blocked some of the initiatives of developed countries,


believing that they fail to consider their interests.67 Additionally, although emerging countries —


such as Brazil or India— still lag behind the so-called “developed” countries, they are


increasingly participating in the decisions of important international organizations such as the


IMF, OECD, and the financial G-20. In other words, they are starting to move away from the


position of rule takers or rule breakers within the international scenario, to play an increasingly


important role as rule makers68 —at a regional level, and process drivers at the global level.69


In these times of change in the configuration of the international community, the


development agenda and its search for flexibilities is more relevant than ever before and adopts


various forms in different environments. In fact, if the WTO’s agenda on Special and


Differential Treatment (S&D) is held up, countries then search for other ways to move on under


different names but with the same substantial objective: obtaining the flexibilities they seem


necessary in the international environment.


In that context, this paper has two closely intertwined objectives. On one hand, to identify


how S&D has been dealt with in the multilateral system, from its inception under GATT to the


present negotiations in Doha. On the other, to identify how middle income70 developing


countries actively participating in coalitions have positioned themselves, as is the case of Brazil,


Argentina, India, South Africa. What we see is that the S&D is being restricted to be turned into


flexibility room for LDCs, while other developing countries continue searching —under other


names— for new flexibilities they see as necessary in the multilateral trading system from their


development perspective.


The first section will offer a brief historical overview on Special and Differential


Treatment, from its beginnings under GATT to the present day, analyzing it in the light of the


WTO’s North-South conflict. The second section will analyze the S&D evolution on specific

67 See K. Shadlen, Resources, Rules and International Political Economy: The Politics of Development in the WTO,
working paper no.09-01 (GDAE, 2009).
68 About these categories, see S. Krasner, US Commercial and Monetary Policy: Unreaveling the Paradox of
External Strenght and Internal Weakness, International Organization no. 31, autumm (New York: Cambridge
University Press, autumm 1977). p. 635-671, p.636-.
69 See D. Tussie, Process Drivers in Trade Negotiations: The Role of Research in the Path to Grounding and
Contextualizing, Global Governance no. 15 (3) (Boulder: Lynne Rienner Publishers, 2009).
70 We consider middle income countries those comprised within the World Bank range of lower and upper middle
income countries.




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issues, i.e. subsidies (Agreement on Subsidies and Countervailing Measures), investment


(Agreement on Trade-Related Investment Measures), and intellectual property (Agreement on


Trade-Related Aspects of Intellectual Property Rights). The third section will provide a summary


of the main roads followed by several developing countries to move forward in the search for


flexibilities in the Doha negotiations. At the end, some conclusions will be provided.





I. SPECIAL AND DIFFERENTIAL TREATMENT AT THE HEART OF THE NORTH-SOUTH
CONFLICT




In the study of international organizations, structuralist approaches hold that these


organizations reflect the underlying power in the relationships among States. They focus on the


distribution of resources as the key determinant accounting for the results in the international


scheme.71 Furthermore, structuralist theories comprising neorealist and neo-Marxist versions of


the hegemonic stability theory share the common vision that multilateral trade regimes are


instruments of state power or class power. Thus, according to structuralist views, the


GATT/WTO is seen as a multilateral trading system created to support and respond to the


interests of most industrialized countries, such as the USA, European Union, Japan, Canada, to


the detriment of developing countries.72


According to the neoliberal approach of political economy, the system includes rules that


enable cooperation through information sharing, monitoring mechanisms, and low transaction


costs, although for some, it also tends to preserve the interests of the leading countries


establishing the system.73


Along the same lines, according to institutionalist approaches, the GATT/WTO


represents an opportunity for developing countries to obtain more positive results in the


international arena, thanks to the fact that this organization is strongly rule-oriented. Otherwise,


in the absence of any rules, the results would be much more harmful to the interests of the least


developed countries (LDCs).74 Furthermore, some views state that in asymmetrical relations, the


weak are not always doomed to fail in their demands or, more specifically, that the outcome of


international negotiations can be influenced by developing countries.75



71 Shadlen (2009), supra note 1, p. 1.
72 M. Tanzimuddin Khan, China, WTO and the Developing Countries: A Constructivist Analysis, working paper
(Center for Strategic Research, Ministry of Foreign Affairs of the Republic of Turkey, 2004), p. 13.
<http://www.sam.gov.tr/volume9a.php> available at:
73 Ibid, p. 16.
74 “Bad rules are better than no rules... but they are still bad rules”. Shadlen (2009), supra note 1, p. 6.
75 I.W. Zartman; J.Z. Rubin, The Study of Power and the Practice of Negotiation, in Zartman, I. W. and J.Z. Rubin
(eds.), Power and Negotiations, (Ann Arbor, University of Michigan Press, 2002), p.1.




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Some more heterodox approaches refer to the pressure exercised by developed countries


on developing ones. In the case of the WTO, this dynamics would involve a mix of rules and


power, where power outweighs rules in critical times, such as at the closing of multilateral


negotiation rounds.76


From a more juridical standpoint, in classical theory, when analyzing the relationship


between law and power, it is stated that international law favors the status quo and, when that is


not so, it becomes unrealistic and the threat of its violation arises.77 However, others believe that


the law plays a less relevant role in international relations, albeit not less important to the


organization of international life.78


At the heart of this debate —regardless of the discipline involved— is the power


relationship among states in international organizations, the North-South division of the world,


developed countries vs. developing countries and, consequently, the discussion around the


flexibilities that LDCs must enjoy to make up for the asymmetry in international economic


relations and to trigger their development strategies.


While there is no intention for this WTO-driven agenda —including S&D—, to replace


the countries’ domestic development strategies,79 the truth is that, on one hand, there is no level


playing field at the WTO, and developing countries need flexibilities to at least negotiate under


more equitable terms. On the other hand, it is worth noting that international trade is not an end


in itself, but a means to improve the standards of living, as declared in the recitals to the


agreement establishing the WTO.


Development is thus still present in the multilateral trading system and the task of


analyzing issues that are the basis of the North-South conflict is equally current, as well as


complex. For some authors, this discussion will prevail during part of the 21rst century,80 after


the end of the Cold War and the world’s East-West division: the First World became North and


the Third World, South, while the Second World vanished (a few countries from the late Second


World became part of the North and others, of the South). According to others, the increasing



76 R. H. Steinberg, In the Shadow of Law or Power? Consensus-Based Bargaining and Outcomes in the
GATT/WTO, Internactional Organization no. 56, (New York: Cambridge University Press, 2002).
77 H. Morghentau, La Notion du Politique, (Paris, 1933), pp. 79-85, quoted by M. Koskenniemi,
Carl Shmitt, Hans Morghentau, and the Image of Law in International Relations, in M. Byers.
(ed.), The Role of Law in International Politics: Essays in International Relations and
International Law (Oxford: Oxford University Press, 2000).
78 M. Koskenniemi, Carl Shmitt, Hans Morghentau, and the Image of Law in International Relations, in M. Byers
(ed.), The Role of Law in International Politics: Essays in International Relations and International Law (Oxford:
Oxford University Press, 2000), p. 28.
79 As rightly mentioned by Kleen & Page in a comprehensive work on S&D (Kleen, P.; S. Page, Special and
Differential Treatment of Developing Countries in the World Trade Organization, Serie Global Development
Studies no. 2 ( EGDI Secretariat- Ministry for Foreign Affairs, Sweden-Overseas Development Institute, 2004)
80 See R. Reuveny; W. R. Thompson (eds.), The North-South Divide in the World Political Economy (Oxford:
Blackwell Publishing, 2008).




  126
tensions on this issue are also a challenge to more classical views on international relations that


are developed on the premise that cooperation leads to an increase in the overall well-being of


the international community: in the North-South tension, interests are usually incompatible and


cooperation rules are not applied.81


In this debate, the multilateral trading system still manifests very clear indications of the


North-South conflict82 and this is directly reflected on the hard struggle in relation to the Special


and Differential Treatment (S&D) and the constant re-negotiation of its rules, as described


below.





A. Special and Differential Treatment under GATT


At the beginning, developing countries on the basis of sovereign determination were


considered equal partners in the multilateral trading system, at least under the 1948-1955


GATT.83 The only provision available to developing countries was Article XVII, which enabled


developing countries to derogate from their scheduled tariff commitments or implement non-


tariff measures, such as quotas, in order to promote the setting up of certain industries in their


territories, that is, the protection of infant industries.84 From then on, the number of developing


countries participating in the GATT increased, also increasing the pressure for more flexible


rules accounting for the asymmetries of the system. Thus, the S&D is born as a result of the


coordination of political efforts by developing countries in order to correct what they felt were


inequalities in the post-Second World War system, understood as preferential treatment in favor


of developing countries, in every aspect of their international economic relations.85


This development paradigm, pioneered by Latin America, India , Egypt and later


supported by a wide array of countries from Asia and Africa, was based on the need to improve


trading terms, reduce dependence on exportation of primary products, correct the volatility and


imbalances in the balance of payments and industrialization by offering protection to infant


industries and export subsidies, among other objectives.86



81 Shadlen (2009), supra note 1.
82 D. Tussie, Latin America in the World Trade System, in Oxford Handbook of Latin American Economics, 2010,
to be published.
83 E. Kessie, Enforceability of the Legal Provisions Relating to Special and Differential Treatment under the WTO
Agreements, paper given at the WTO Seminar on Special and Differential Treatment for Developing Countries
(Geneva, 7 March 2000).
84 A. Singh, Special and differential treatment: The multilateral trading system and economic development in the
twenty-first century, in Gallagher K. P. (ed.) Putting development first: The importance of policy space in the WTO
and IFIs (London and New York: Zed Books, 2005).
85 UNCTAD, Training tools for Multilateral Trade Negotiations: Special & Diferential Treatment, Commercial
Diplomacy Programme, document UNCTAD/DITC/Misc.35 (Geneva: UNCTAD, 2000)
86 Ibid.




  127
In the following years, several S&D provisions were introduced in the GATT. Firstly,


through the amendment to Article XVIII in the GATT Review Session of 1954-55. The new item


(Article XVIII:B) offered flexibilities to developing countries so as to cope with difficulties in


their balance of payments. Later on, in 1965, the S&D was also present in the inclusion of Part


IV to GATT, exempting developing countries from the prohibition of applying subsidies to


exports of manufactured goods and allowing for greater flexibility in the use of tariff protections.


Additionally, many developing countries entered the GATT under Article XXVI, which enabled


them to evade negotiation of consolidated tariffs as part of their accession agreements.


Flexibilities in relation to market access were deepened through the incorporation of the


non-reciprocity provision (Art. XXXVI:8) in Part IV of GATT in 1964. Furthermore, between


1966 and 1971, the Generalized System of Preferences (GSP) and the protocol on trade-related


negotiations among 16 developing countries were introduced in GATT, as waivers to Article I


(MFN).


In the Tokyo Round, which began in 1973, the efforts of developing countries to


consolidate the special treatment in their favor resulted in the “Decision on Differential and


More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries”,


known as the “Enabling Clause”. The Enabling Clause comprises: a) the Generalized System of


Preferences; b) Non-tariff measures in GATT instruments; c) Global or regional arrangements


among developing countries, and (d) Special treatment to LDC. The concept of special and


differential treatment thus reached the core of the multilateral trading system.


However, at that time, developing countries started to perceive that the positive


discrimination they received under S&D was being overshadowed by the increasing negative


discrimination against their trade, so they took a tougher position.87 The end of the Tokyo Round


was thus marked by great tension among the so-called “transatlantic powers” (USA and


European Community-EC) and developing countries, members of the so-called “Informal Group


of Developing Countries”. With the aid of UNCTAD, this group summarized its position on the


Tokyo Round codes and set out to the battle, led by Argentina, Brazil, Egypt, India, and


Yugoslavia.


Although the US and the EC were in full disagreement with the position of developing


countries and with what they called the “UNCTADization” of the GATT —having even planned



87 Negative discrimination against developing countries was particularly apparent in relation to: voluntary restraint
arrangements adopted directly against their most competitive exports; extension of free-trade agreements and
custom unions among developed countries; increasing restrictions on textiles under the Multifiber Agreement;
higher tariffs on products of exporting interest to developing countries in comparison with those of interest to
developed countries; increasing application of anti-dumping and countervailing measures; and the use of the GSP as
a pressure tool by developed countries, which —in the absence of more specific provisions— unilaterally “graded”
the countries that would no longer receive GSP benefits (UNCTAD, 2000:27; Kessie, E., 2000:9).




  128
to bring back to life the conditional MFN clause or to leave the GATT and negotiate an


agreement with the OECD— they decided to accept the position of developing countries to close


the Round in the middle of security and defense considerations brought about by the Cold War88.


Thus, the Tokyo Round closed in 1979 with voluntary codes, a compromise that reflected these


tensions. Developing countries were thus able to defend their right not accept all rules,


considered by industrialized countries as the clearest evidence of free riding.89





B. The Turn Towards the WTO and the Current Doha Round


The Uruguay Round (UR) began in a context where many developing countries were


somewhat empowered by S&D flexibilities and, at the same time, they were watching for any


discrimination against their trade. That is, they sought increased market access, taking a more


cooperative stand in view of the promise of including agriculture in the negotiations, while they


also intended to continue using S&D provisions. In the beginning, they did not intend to sign


such agreements as TRIPs, TRIMs, or GATS. However, the course of the Round led to a very


different outcome from that of the Tokyo Round.


To begin with, the UR was open to participation only for countries that were contracting


parties under GATT or those that undertook to negotiate their accession during the Round.90


Additionally, as the Round progressed, the Cold War was coming to an end and US negotiators


no longer had to weigh security considerations in exercising their power to exert pressure on


more reluctant countries. Furthermore, the crisis and adjustment many developing countries were


undergoing caused them to see the UR as an opportunity to also obtain some benefit from the


unilateral liberalization performed as a consequence of the structural adjustment programs


required by international credit institutions as a condition for bailout. All too late, developing


countries realized that agreement to adopt hard liberalization measures did not automatically


imply the ability to exercise a decisive influence on the agenda and outcome of negotiations.91


In this context, the US and the EC deployed their coercive and bargaining power to close


the round, resorting to the old scheme of threatening with draining the GATT. This time, the


threat was made effective by means of a legal device in the text of the WTO Agreement. Article


II of the Agreement establishes that all annexes (GATT of 1994, GATS, TRIPs, TRIMs, subsidy



88 Steinberg (2002), supra note 10, pp.:359; Krasner (1976), supra note 2.
89 Even Argentina in the midst of an early neoliberal experiment that had drastically reduced tariffs neither bound
these reductions nor signed the codes. For Brazil, enjoying then the so-called Brazilian miracle, signing the codes on
export subsides or government procurement , would have entailed great costs.
90 UNCTAD (2000), supra note 19, p. 28.
91 Tussie (2010), supra note 16.




  129
and anti-dumping arrangements, i.e. all of the so-called “multilateral trade agreements”) are part


of the Agreement establishing the WTO and binding upon all members. This was the birth of the


single undertaking. Additionally, the agreement establishes that the 1994 GATT is legally


different from the 1947 GATT.


These devices were created to avoid free-riding or a “GATT à la carte” and draining the


GATT 47, causing developing countries to accept the whole package because, once the WTO


Agreement was signed and all other agreements were consequently accepted, the US and EC


would deem their obligations extinguished in relation to the 1947 GATT.92


The impact of the Marrakech package on the development strategies was not adequately


weighed. The outcome of the Uruguay Round was markedly uneven in favor of developed


countries and dealt a hard blow to the S&D. There was no consensus among developing


countries for the adoption of a general “umbrella” framework for S&D provisions, although


there were not many chances of fighting for that either. Developing countries were at a


crossroads —would they accept all the rules and obligations resulting from the negotiation or


would they remain outside the organization?93 As a matter of fact, the single undertaking resulted


in causing developing countries and developed countries to assume very similar undertakings94,


based on rules commonly biased in favor of developed countries.


The concept of S&D was changed,95 its scope was restricted; it was a reflection of the


poor willingness on the part of developed countries to continue granting special treatment,


particularly to middle-income countries. This is evidenced by the express implementation of


grading mechanisms, similar to what was already being unilaterally done with GSP beneficiaries.


The focus was then shifted towards LDCs, as already contemplated in the general framework of


the multilateral system, Article XI:2 of the WTO Agreement.


Clearly, the WTO’s evolution towards the inclusion of beyond-the-borders issues was not


accompanied by a similar evolution of the instruments implementing the S&D concept. In this


case, one had to make do with texts containing vague and ambiguous general S&D provisions,


while only some specific provisions in certain agreements have binding effect, mostly those


related to extended implementation terms. Thus, in the agreements currently in effect, the S&D


provisions clearly establishing rights and obligations enforceable against the dispute resolution


system are those related to longer transition periods for implementation of obligations; and



92 Steinberg (2002), supra note 10.
93 E. Tempone, Los dilemas institucionales de la OMC: comentarios sobre el Informe Sutherland, Agenda
Internacional, Año XIV no. 25. (Buenos Aires, 2007).
94 K. Fukasaku, Special and Differential Treatment for Developing Countries. Does It Help Those Who Help
Themseleves?, working paper n. 197 (Brugge: World Institute for Development Economic Research, The United
Nations University, 2000).
95 About the difference between S&D before and after the Uruguay Round, see Whalley, J., 1999.




  130
flexibility with some obligations and procedures, in addition to certain provisions on technical


assistance.96


This is not enough if we consider the strong implications of multilateral trade rules on a


developing economy, as there are no S&D provisions capable of overcoming the anti-


development impact of several provisions in multilateral agreements, such as TRIPs, TRIMs, and


the Agreement on Subsidies, which at times seem to invert the reasoning and grant special


treatment to developed countries.97


In short, the main idea behind the new S&D seems to involve merely affording room for


adjustment and implementation of the new, controversial rules; a far cry from a genuine concern


for the development of LDCs.


However, the discussion on S&D, which seemed to be living on borrowed time, was


growing in importance once again, in the years of implementation of the Marrakech agreements,


when many developing countries became fully aware of how biased UR agreements were in


favor of developed countries. On their part, the US and the European Union wanted to continue


moving forward in the advancement of the Marrakech agreements, and with that in mind they


proposed a new Round. Developing countries, on the other hand, unhappy with the outcome of


the UR that did little for their development needs, accepted the offer, subject to prior exclusion


of such issues as the environment and employment, and under the condition that the mandate of


the new round should be as comprehensive as possible to include their interests and development


needs.98


Thus, the Doha Development Round was launched in 2001 at the Doha Ministerial


Conference. The Doha Declaration, paragraph 44, provided that S&D provisions are part of


WTO Agreements and that particular attention will be paid to them, in an effort to reinforce them


and make them more accurate, effective, and operational.


From then on, the S&D continued moving forward along two related paths. The first one


involved the commitments already undertaken at the UR and their development, which in


practice meant an important restriction in the S&D universe of application and their



96 For considerations on the binding effect of S&DT provisions, see Kessie (2000), supra note 17, among others.
Additionally, other authors have classified the S&DT provisions contained in the Marrakech agreements. See
Fukusaku (2000), supra note 28; Hoekman, B., Operationalizing the Concept of Policy Space in the WTO: Beyond
Special and Differential Treatment, Journal of International Economic Law. Vol 8, No. 2, pp. 405-424 (Oxford
University Press, 2005); Kessie (2000), supra note 17; Kleen; Page (2004), supra note 13; Stevens, C., Special and
Differential Treatment, briefing paper no. 2, spring, Trade and Development Brief Serie (IISD, 2003). In turn, the
WTO has also established a classification that will be described below.
97 Some examples of the referred bias in the special treatment afforded to developed countries include quotas on
textiles, agricultural subsidies, the agreement on subsidies (where the subsidies allowed are adequate for
industrialized countries), or the restrictions on the competition policy allowed under the TRIPs Agreement. See
Singh (2005), supra note 18.
98 Steinberg (2002), supra note 10.




  131
beneficiaries. The other path moved around the speeches and negotiations under way at the Doha


Round. The following section will map those two paths.





II. IMPLEMENTATION OF THE SPECIAL AND DIFFERENTIAL TREATMENT PROVISIONS
IN THE SPECIFIC AGREEMENTS OF THE URUGUAY ROUND: INCREASING RESTRICTION



On one hand, this section will identify the situation of middle-income developing


countries and LDCs,99 in relation to the S&D provisions believed to have greater binding effect,


that is to say, extended terms for agreement implementation and flexibility in their application.


On the other hand, its purpose is to identify the S&D provisions under negotiation at the Doha


Round.


To this end, a mapping will be conducted on the actual scope of the S&D in three of the


Uruguay Round agreements: the Agreement on Subsidies and Countervailing Measures (SCM),


the Agreement on Trade-Related Investment Measures (TRIMs), and the TRIPs Agreement. In


addition, the agenda of the special session of the Committee on Trade and Development will be


studied; this Committee is responsible for conducting the S&D negotiations in the round


currently under way.






A. The Agreement on Subsidies and Countervailing Measures - SCM




Let us see a summary of the S&D situation in the Agreement on Subsidies from the


effective date of the WTO Agreement to the present day100.





99 According to the list of the United Nations (UN) Economic and Social Council (ECOSOC)
100 September 2009




  132
Box I: Differentiated terms and extensions for developing countries and LDCs under the


SCM Agreement


SCM Developing countries LDC






Art. 27,
paragraphs 1
and 2; Annex
VII


Subsidies
subject to use
of national
products



Adaptation period: 5 years, non-
renewable.



Adaptation period: 8
years, non-
renewable.




Subsidies
subject to
exportation


- Adaptation period: 8 years,
renewable.
- Some developing countries are not
subject to this 8-year term until their
GDP per capita reaches 1,000 dollars
per annum101: Bolivia, Cameroon,
Congo, Ivory Coast, Egypt,
Philippines, Ghana, Guatemala,
Guyana, India, Indonesia, Kenya,
Morocco, Nicaragua, Nigeria, Pakistan,
Dominican Republic, Senegal, Sri
Lanka, and Zimbabwe. The 8-year term
will then start to run in relation to
them.


Prohibition of use of
those subsidies shall
not apply to LDCs,
as so designated by
the United Nations.



Art. 27,
paragraph 4


Term for
application for
extension



December 31, 2001



Not applicable






Applications for extension or
reservation of rights


- Extension: Antigua and Barbuda,
Barbados, Belize, Colombia, Costa
Rica, Dominica, El Salvador, Fiji,
Granada, Guatemala, Jamaica, Jordan,
Mauritius, Panama, Papua New
Guinea, Dominican Republic, Saint
Kitts and Nevis, Saint Vincent and the
Grenadines, Saint Lucia, Surinam,
Thailand, and Uruguay.
- Reservation of rights: Bolivia,
Honduras, Kenya, and Sri Lanka.



Not applicable




Countries that were granted
an extension for years 2003-
2007 and benefited from the
extension procedure, 2008-
2012 period [General Council
Decision (WT/L/691)]


- Antigua and Barbuda; Barbados;
Belize; Costa Rica; Dominica; El
Salvador; Fiji; Granada; Guatemala;
Jamaica; Jordan; Mauritius; Panama;
Papua New Guinea; Dominican
Republic; Saint Kitts and Nevis; Saint
Lucia; Saint Vincent and the
Grenadines; and Uruguay.
- Reservation of rights: Bolivia,
Honduras, Kenya, and Sri Lanka.


Not applicable


Source: own elaboration based on official WTO documents (http://docsonline.wto.org)



101 The countries listed under b) above are included on the basis of the most recent data on GNP per inhabitant.




  133
The following observations may be made from the above mapping.




1. Extension of transition periods


First, according to Article 27 of the SCM Agreement, the transition period and its


potential extension applied to all developing countries. Additionally, it established no conditions


other than the deadline for submission of applications for extension (December 2001) and the


review by the SCM Committee. Nevertheless, a very reduced group of countries requested an


extension. Even fewer were those who obtained the requested extension and none of them is


among those considered competitive developing countries. This is due to the fact that, during the


Doha Ministerial Conference and supported by the Ministerial Declaration itself, the SCM


Committee approved a document establishing the country profile and subsidy programs entitled


to an extension (G/SCM/39), thus restricting the scope of Article 27. In fact, conditions are so


strict that they virtually exclude all middle-income developing countries. These conditions


include: share of world merchandise export trade not greater than 0.10 per cent; Gross National


Income of no more than US $20 billion. Moreover, those which obtained an extension were


almost all the countries having free zone activity as their fundamental tool for the insertion in


international trade. In brief, these are countries that would have no other alternative for


positioning themselves in the international trade if it were not for certain programs aiding their


exportations. Even in relation to that restricted group of countries, the General Council adopted a


decision in 2007 (WT/L/691) establishing the maximum period —December 2015— to continue


adopting those subsidies.




2. Reservation of rights


On the other hand, although it has established restricted conditions in comparison to


Article 27 of the SCM, the procedure approved by the Committee (G/SCM/39) declares, in


paragraph 7, that its provisions shall not affect the rights set forth in the SCM Agreement, nor do


they serve as precedent for any purposes. This paragraph might serve as a window enabling a


request for extension by the developing countries that failed to meet the conditions required


under that procedure. However, none of those countries, except Thailand, has submitted any


request. In addition, in the subsequent procedure (WT/L/691), there is no reference to the


undermining of the SCM Agreement and it only states that it makes no judgment about the rights


of members making a reservation of rights, that is, Bolivia, Honduras, Kenya, and Sri Lanka.


It seems that these provisions worked more as a reservation of rights with a view to


conducting future negotiations rather than as an exercisable right, while the current scenario does




  134
not seem to have changed for exercise of those rights, particularly by middle-income developing


countries.






B. The Agreement on Trade-Related Investment Measures - TRIMs




The map of TRIMs looks as follows:




Box II: Differentiated terms and extensions for developing countries and LCDs under the


TRIMs Agreement




General Rule



Notification obligation: Article 5, paragraph 1 and Decision
WT/L/64: A term of 90 days from the effective date of the WTO
Agreement is granted to notify all TRIMs in effect that are not in
conformity with the Agreement. For new members, there is a term
of 90 days as from the date of acceptance of the WTO Agreement.
(Decision WT/L/64)





Rules for
developing
countries and
LDCs


Transitio
n period


Article 5,
paragraph 2:


Developing countries LDC
They shall eliminate the notified
TRIMs in a term of 5 years from
the effective date of the WTO
Agreement.


They shall eliminate the
notified TRIMs in a term
of 7 years from the
effective date of the
WTO Agreement.


Transitio
n period
extension


Article 5,
paragraph 3:


The transition period for
developing countries may be
extended, subject to the Goods
Council’s approval and
fulfillment of certain
requirements.


The transition period for
LDCs may be extended,
subject to the Goods
Council’s approval and
fulfillment of certain
requirements.





Grant of extension


- Until May 2003: Romania


- Until June 2003: The


Philippines


- Until December 2003:
Argentina; Colombia;
Malaysia; Mexico;
Pakistan; Thailand.





None


Measures in favor of LDCs in
Hong Kong (Annex F of
General Council Decision,
WT/MIN(05/DEC, of
12/22/2005)


Not applicable Ability to adopt
measures not compatible
with the Agreement,
subject to prior notice,
for a term of 6 years for
already existing
measures; 5 years for
new measures.


Source: own elaboration based on official WTO documents (http://docsonline.wto.org)




  135


1. The Doha mandate for TRIMs


This issue was the object of discussions in Doha in 2001 and the Decision on the matters


and concerns regarding application (WT/MIN(01)/17) ratified the possibility to extend the


transition period, particularly for LDCs. However, as may be seen in box II, no LDC requested


an extension and, although some middle-income developing countries did so, the extension was


granted only by the end of 2003. In 2004, Argentina, for example, submitted an application


which was rejected.


Even in Doha, according to paragraph 12 of the Ministerial Declaration, pending matters


—including proposals related to the TRIMs Agreement— would be made part of the work


program. The main proposal on the matter is included in the working paper Job(01)152/Rev.1


and its content may be summarized as follows: 1. it is proposed that developing countries have


another opportunity to notify existing trade-related investment measures (TRIMs) and make use


of a new transition period; 2. it is stated that extension rules should be properly amended and


should be mandatory; 3. it is proposed that developing countries be exempted from obligations


related to domestic content; and 4. it is stated that the TRIMs Agreement should be flexible


enough for developing countries to be able to apply development policies.


In 2002, a report by the Committee Chairman to the General Council (G/L/588) opposed


this proposal. According to the Chairman, the TRIMs Agreement already offered enough


flexibility to respond to the concerns of developing countries.


Part of those issues is still on the agenda, due to the insistence of Brazil and India


(G/C/W/428 G/TRIMS/W/25), which submitted proposals on development policies. To this date,


these proposals are still being discussed, but they have not been submitted for formal


consideration yet (G/TRIMS/M/20). According to subsequent reports, since 2005 it has been


recommended that the issue be the object of political debate, given the disagreements among


members, which prevent finding common ground at the technical level.


The African group also submitted a proposal in relation to TRIMs (TN/CTD/W/3/Rev.2),


which considers such issues as balance of payments and transition periods. According to the


reports by the Committee Chairman to the General Council, except for certain aspects


concerning balance of payment issues, most of the proposal is not achieving consensus. It is


recommended that discussions should continue.


The perspective for LDCs improved in Hong Kong. There, 5 provisions in favor of that


country group were approved, thus enabling the adoption of measures incompatible with the


agreement, renewable on prior request.




  136
Regarding the other issues, and although there has been renewed enthusiasm —due to the


drafting of revised proposals that were discussed—, after Hong Kong, the agenda soon came to a


standstill again, as evidenced by the 2006, 2007, and 2008 reports.


Thus, while the S&D issues that in practice favored developing countries continue to lack


consensus for approval, the decisions that are in fact approved have been increasingly restrictive,


including only LDCs. But, why is it that in a matter that is so important for development, as is


the case with investment measures, the great majority of developing countries has not even


attempted to obtain an extension? And why is it that no LDC attempted to do so either before the


Hong Kong Ministerial?


First of all, LDCs requested no extension for two reasons. On one hand, some were not


significantly affected by the limitations imposed by the TRIMs102. As a matter of fact, in their


current development stage, investment is welcome regardless of its origin or purpose. Besides, in


practice, it is very difficult for those countries to impose limitations on such flows. That is, in


general LDCs have not made use of any investment measures incompatible with the TRIMs


(domestic content requirement, limitations on imports, etc.) due to the absence of effective


enforcement mechanisms, but particularly because of a lack of interest, as they do not have a


domestic industrial capacity that would benefit from such measures. On the other hand, the


countries that were in fact affected promoted the approval of measures in their favor, such as the


Hong Kong decision.


Secondly, middle-income developing countries continue to insist on the debate, but they


have not appeared in large numbers to apply for extensions either. Brazil and India’s proposals


are more of an attempt to maintain the issue of development policies on the agenda, rather than a


reaction by countries actually affected by the Agreement limitations.


To a great extent, this is due to the fact that virtually all of those countries are part of


regional integration agreements, at least at the Free Trade Zone level, and that the domestic


content requirement, considered as an incompatible measure under TRIMs rules, is present in


those integration processes as a regionally-established rule. Thus, the old domestic content


requirement, now forbidden under TRIMs, has been turned into a powerful tool by the name of


“regional content rules”.103 The rules of origin are, in addition, compatible with WTO


agreements, as they are necessary to certify the origin of products in transit in the “intrazone”.



102 A. Di Caprio; A. Amsden, Does the new international trade regime leave room for industrialization policies in
the middle-income countries?, working paper n. 22, (Geneva: World Comission on the Social Dimensions of
Globalization, International Labour Office, 2004).
103 M.T. Gutierrez-Haces, Normas de origen: Un mecanismo de exclusión comercial en el libre comercio, Tercer
Mundo Económico no. 116, (Montevideo, 1998).




  137
From this standpoint, the TRIMs prohibition was to a great extent neutralized by regional


commercial integration agreements, while LDCs benefited from provisional exemptions.






C. The Agreement on Trade-Related Aspects of Intellectual Property Rights -


TRIPs




In relation to intellectual property, let us analyze the following chart:




Box III: Differentiated terms for developing countries and the LCDs under the TRIPs


Agreement



General Rule


Transition period: Article 65, paragraph 1: No Member shall be
under an obligation to apply the Agreement for a general term of 1
year from the effective date of the WTO Agreement.






Specific
rules





Developin
g
countries



Transition period: Article
65, paragraph 1: 4
additional years.



Transition period for
non-protected
technology sectors:
Article 65, paragraph 4:
additional period of 5
years.



LCDs:


Transition period: Article 66, paragraph 1: 10
additional years.


Application
for/Grant of
extension


Maldives Islands:
- Application for extension: August 2004.


- Grant of extension: until December 2007.
Doha
Mandate on
extensions
under TRIPs


Paragraph 7 of the Declaration on the TRIPS
Agreements and Public Health and Decision of the TRIPs
Council (IP/C/25): Member LCDs shall have no
obligation in relation to pharmaceutical products for
Patents of Invention and Protection of Information not
disclosed until January 1, 2016.


General
Council
Decision
WT/l/478
(12/07/2002)


Extension of the transition period set forth in Article 70(9) in
relation to pharmaceutical products: Application of the obligations
of Member LDCs under paragraph 9 of Article 70 of the
Agreement will be suspended in relation to pharmaceutical
products until January 1, 2016.


Source: own elaboration based on official WTO documents (http://docsonline.wto.org)


1. Transition periods


As may be seen, the S&D provisions contained in the TRIPs —except for the Doha


initiative on the TRIPs Agreement and Public Health—, were in practice the least effective ones.


That is an indication of the extent of pressure exercised on developing countries to prevent them




  138
from extending their transition periods.104 In fact, although both Argentina and Brazil -for


example- could have exercised the right to use the additional four-year transition period [Article


65(4)] for some sectors, they waived this right. As a matter of fact, Maldives Islands were the


only country applying for an extension.




2. Compulsory licenses and amendment to TRIPs


In addition to transition periods, the Doha Declaration on the TRIPs Agreement and


Public Health introduced a subject that raised intense discussions among developing countries,


LDCs, and developed countries. It is paragraph 6 of the Declaration, which is about the


difficulties faced by the countries that are unable to make effective use of compulsory licenses


because they lack manufacturing capacities in the pharmaceutical sector.


In September 2003, the TRIPs Committee issued a decision (WT/L/5402), that partially


resolved the matter, granting exemptions for certain obligations under the Agreement for some


countries to be able to export pharmaceutical products to those countries in want of capacity —or


with insufficient capacity— to satisfy their domestic demand. This same decision provides for


the drafting of an amendment to the TRIPs including that possibility, which was achieved in


2005 under Decision WT/L/641 amending the TRIPs Agreement and leaving its acceptance at


members’ discretion.105 By early 2009, the protocol had been accepted by 21 countries, including


Brazil and India.


As regards other S&D provisions, news is not that good. From all proposals submitted, it


was only possible to move on with the drafting of one paragraph, similar to the African Group


proposal on the difference between exclusive trade rights and patent rights.





D. The WTO Debate on S&D



At the WTO, absent a framework agreement on S&D, progress and deliberations on the


subject are fragmented into countless provisions under specific agreements, as well as into


several negotiation proposals in special sessions of the Committee on Trade and Development


(CTD or Committee). This section will go over the issues under negotiation in the special session


of the Committee.


Since February 2002, the CTD has been working hard on such issues as the review of


S&D provisions in the specific agreements to construe them in a way that reinforces them and


makes them more efficient; the review of proposals for a framework agreement on S&D, in



104 Shadlen (2009), supra note 1.
105 This alternative favors developing countries that have the capacity to export drugs, such as Brazil or India.




  139
addition to identifying those provisions that are mandatory and the consequences from


conversion of the measures that are currently not binding into mandatory provisions, all of which


should be in conformity with the mandate of paragraph 44 of the Doha Declaration and


paragraph 12.1 of the Declaration on issues and concerns regarding the application of Doha..106


Since then, the task involves submitting a report with recommendations to the General Council


for a decision to be adopted on the matter, initially, no later than on March 31, 2003, pursuant to


the mandate of paragraph 14 in the Doha Declaration.


On the basis of the review of the Committee’s reports, we can observe that the


Committee worked continuously up until 2008, but the terms were postponed as negotiations


progressed in the round and the issue suffered several modifications that will be described below.


Before starting to work, upon the request of certain countries, the WTO Secretariat was


instructed to disclose the information on the application of S&D provisions by the members, in


order to facilitate the Committee’s work.107 Additionally, S&D provisions were divided into five


groups, namely: provisions to increase trade opportunities through market access; those requiring


that members safeguard the interests of developing countries; those allowing for certain


flexibilities to developing countries in the application or rules and disciplines; those authorizing


longer transition periods for developing countries and technical assistance provisions.


After this, discussions continued to deal with proposals for specific agreements and


transversal and systemic proposals. The goal was to arrive at the Cancun Ministerial with


recommendations to the General Council to be included in the text of the Declaration. In the


sessions that followed until Cancun, the surveillance mechanism that would be responsible for


monitoring compliance with S&D provisions in WTO agreements was included in the debate as


a proposal of the African Group. In the last stage of sessions until December 2003, the


Committee worked intensively under the chair of South African Faizel Ismail, who replaced


Jamaican Ransford Smith. By the time of the Cancun Ministerial, there was a proposal to add


Annex C to the Ministerial draft containing the proposals agreed upon. However, neither the


Annex nor the text was adopted in the Ministerial. At that time, the attention focused on


agriculture, market access in NAMA, cotton and the Singapore issues, thus leaving the


discussion on S&D temporarily on hold, also expecting to find more common ground among


countries.


The main disagreements until Cancun involved cross-cutting issues, such as S&D


principles and objectives, the mandatory or non-mandatory nature of technical assistance, the


enabling clause and graduation, differentiation among developing countries to allow for a one-,



106 www.wto.org. Last accessed on 09/05/2009
107 Document WT/COMTD/36




  140
two-, or three-tier structure of rights and obligations, as well as the structure and scope of the


surveillance mechanism.


After Cancun, upon the Chairman’s initiative, works were resumed through specific


questions to members on how to move forward with the S&D. There was disagreement, but not


on the requirement that the July 2004 package should have a clear-cut development component.


According to the July package (WT/L/579), concerns on development and S&D


provisions are part of the Doha Ministerial Declaration and WTO agreements, respectively.


Furthermore, it recommended that progress should be made on pending proposals for provisions


in specific agreements and should comprise all other pending works, including those in relation


to transversal issues, the surveillance mechanism, and incorporation of the special and


differential treatment to the WTO rules structure, also submitting the pertaining reports. It further


recommends to all WTO bodies before which proposals on S&D have been submitted that they


forthwith complete their review and also submit a report to that body, with clear


recommendations for adoption of a decision, with a view to the Hong Kong Ministerial.


From then on, given the short term remaining until the Ministerial, the priority in search


for consensus on pending issues turned to those involving LDCs, in addition to concluding the


proposals in specific agreements to then arrive at the Hong Kong General Council with


proposals. During that time, however, negotiations once again stumbled upon the following


dilemma: transversal issues vs. specific issues. The priority afforded to LDCs also failed to


remove conflict from the debate on these questions. Many developed countries were concerned


about the automatic nature of concessions, also proposing that flexibilities should be temporary


and be granted based on a jointly examined need. Furthermore, they believed the general


exemptions and the mandatory nature of technical assistance were unacceptable.


On the eve of the Hong Kong Ministerial, there was no consensus except for some


proposals on specific agreements. The proposals on S&D forwarded to other WTO bodies were


not progressing either. A political decision was needed and the technical work seemed to have


been exhausted, as diagnosed by some members. A decision was made to forward the draft text


consented to by the majority, in addition to all minority proposals. A political decision was


requested on the adoption of issues already agreed upon, the priority question of LDCs, and a


clear directive on pending works.


In reply, ministers renewed the commitment to S&D at the Round, adopted five decisions


in favor of LDCs, and instructed the CTD to complete works by the end of 2006. Undoubtedly,


the most important element in the Declaration was the decision in favor of LDCs, as they moved


beyond wishful thinking and the setting of to-be-extended terms.




  141
Moreover, the Ministerial Declaration of Hong Kong indicated specific points on S&D


with respect to developing countries, such as paragraph 24 of the document, or the principle of


less than full reciprocity, as will be seen in the following section.


Afterward, the Committee’s works, under the chair of Singapore ambassadors and then


Thailand ambassadors, were initially focused on operationalizing decisions in favor of LDCs. In


this sense, LDCs were particularly interested in moving on with the provisions on duty-free and


quota-free market access and greater transparency in rules of origin. Progress was made on the


first issue and, by mid 2007, the CTD declared that several developed countries were already


complying with the duty exemption in at least 97% of LDCs’ exports. Pending work involved


including the remaining 3%, which according to LDCs representatives is the most relevant


portion of their exports, and also causing developing countries that are able to do so to grant that


benefit to least-developed ones. Regarding rules of origin, however, no such progress is


observed. According to many members, that is an issue where at present progress on common


standards and transparency criteria is unlikely, which leads to the conclusion that the same will


happen at the CTD, where the matter is in fact deadlocked.


In the work on specific agreement provisions, by 2008 consensus had been achieved in


only 6 out the 28 proposals on which there was preliminary agreement, from a total of 88


proposals submitted.


Finally, in relation to transversal issues, the only proposal that has survived along the


years was that concerning the surveillance mechanism, although there is no comfortable margin


of consensus on whether this mechanism should only deal with any provisions potentially


approved after the start of Doha or whether it should consider all provisions, including the


Marrakech agreements.


To offer a clearer idea on the restriction of the S&D agenda in CTD negotiations after


Doha, below is a breakdown of the Committee’s agenda by year, up until December 2008.





  142
Box IV – Agenda of the Committee on Trade and Development in special session, from


February 2002 to December 2008


2002-2003 (Cancun) Initial Doha Mandate: review of S&D provisions in specific
agreements to reinforce them and make them more effective; review
of proposals for a framework agreement on S&D; identification of
mandatory provisions and the consequences from conversion of the
measures that are not currently binding into mandatory ones. To
adopt decisions on the matter no later than March 31, 2003
(paragraphs 44 and 14 of the Doha Ministerial Declaration and
paragraph 12.1 of the Declaration on issues and concerns related to
the application of Doha)
Issues discussed:


- Proposals for provisions in specific agreements (28)
- mandatory or non-mandatory nature of provisions and their
consequences
- principles and objectives of S&D
- difference among developing countries
- surveillance mechanism
- priority to LDCs
- technical and financial assistance and building of capabilities
- incorporation of the S&D into the WTO's structure of rules


2003-2005 (Hong Kong) Hong Kong Mandate:108 initial Doha mandate with extended terms,
July 2004 package, and Ministerial Declaration of Hong Kong



Issues discussed:


- proposals for provisions in specific agreements (16)
- measures for duty-free and quota-free market access and rules
of origin
- proposals forwarded to other WTO bodies
- surveillance mechanism
- incorporation of the S&D into the WTO's structure of rules


2005-2008 Current Mandate: Hong Kong mandate, with extended terms

Issues discussed:


- proposals for provisions in specific agreements (6)
- surveillance mechanism
- measures for duty-free and quota-free market access


Source: own elaboration based on CTD reports from 2002 to 2008, available at
http://docsonline.wto.org and the WTO website: www.wto.org



Unsurprisingly, as an example of what has been going on with term renegotiation, the


S&D is being restricted in the negotiations currently under way at the Committee on Trade and


Development, in Doha. The only consensus achieved involved few proposals on specific


agreement provisions, measures in favor of LDCs, and the general basis for a surveillance



108 This mandate includes the S&D decisions discussed at the CTD. This does not include the flexibilities in NAMA,
Agriculture or Services, to name only a few.




  143
mechanism, while all other aspects that were being discussed at the beginning of the Round at


the CTD seem to have been lost along the way.


There were some achievements, as is the case of specific measures for LDCs or the


Protocol on TRIPs and public health. Additionally, there are certain relevant areas where the


S&D is being negotiated for LDCs. In NAMA, for example, LDCs are exempt from making


concessions, together with other groups of countries such as small and vulnerable economies and


recently acceded members.


Nonetheless, that would seem little if compared to the negotiation agenda and the


mandate at the start of the Round. Moreover, that type of particular measure does not contribute


to the S&D cause because, firstly, the laissez faire policy for LDCs will not help them find a


course for development unless it is coupled with technical assistance, technology transfer, and


other substantial measures. Secondly, because it manages to divide the developing world into


those already enjoying guaranteed preferences and other benefits —and which, consequently,


reduce their demands— and the other countries that have been excluded from those benefits.


One final issue worth mentioning is that, at present, there is virtually no participation by


some middle-income countries at the Committee on Trade and Development. And given that in


the multilateral trading system nothing is lost, nothing is created, everything is transformed, the


fact is that the search for flexibilities by those countries should be at a different level, under other


names, as mentioned in the rules of regional origin and their relationship to TRIMs, for example.


Along these lines, the next section will identify the most relevant areas where middle-


income countries are moving forward in the search for flexibilities in the Doha negotiations,


especially those most involved in the G-20 and NAMA 11, two coalitions reflecting two


particularly interesting areas for these countries: Agriculture and NAMA (Non-Agricultural


Market Access).





III. FLEXIBILITIES FOR DEVELOPING COUNTRIES: À LA CARTE SPECIAL AND
DIFFERENTIAL TREATMENT



Much has been said about the participation of developing countries in the multilateral


trading system. The first prevailing view asserts that developing countries participated in the


GATT only to negotiate an exemption from their obligations, whether it be because they pursued


import substitution industrialization and/or because they sought free-riding. In contrast, the


second view believes that developing countries were some passive players under GATT, due to


their lack of expertise or political representation to participate more fully.




  144
Others claim that during the GATT, the participation of developing countries in the


multilateral system was relatively reduced, whether because GATT was a system aimed at the


interests of developed countries and developing countries did not believe it could serve their


interests, or because they had a reduced presence in world tradei —such reduced presence results


in their exclusion from the system and vice versa— as indicated by the WTO itself.109


According to Wilkinson & Scott,110 the problem is that those prevailing views do not


fully account for the participation of developing countries in the GATT. As opposed to what is


usually held, developing countries had an active involvement —as described in the first section


of this paper; they made efforts to make rules appropriate to their situation and they did make


concessions. Although it is true that their efforts were generally aimed at seeking more favorable


treatment, this is due to the biased nature of GATT and of their underdeveloped status, rather


than the mere search for free-riding.


Thus, as a starting point for this section, it is considered that there has been an increasing


participation of developing countries in the multilateral trading system and that this participation


intended to modify certain unfair rules of the multilateral trading system, in addition to help


those countries move forward in their development strategies. In this context, developing


countries adopted different strategies throughout the multilateral negotiations of GATT and,


subsequently, of the WTO, which is clearly related to the fate of the Special and Differential


Treatment in the course of multilateral system negotiations.


In an initial stage, when the first S&D provisions were introduced until their peak in the


‘70s, it could be said that developing countries showed a mostly confrontational strategy,


promoting the creation of the UNCTAD and pushing for the creation of a new international


economic order. In 1979, at the close of the Tokyo Round, the push to adopt the Enabling Clause


showed a growing understanding of rules and a more consensus –concerned strategy.


While certain progress was attained in making the GATT comprise more flexibilities to


cater to their needs, even before the beginning of the Uruguay Round, developing countries


started to realize the limitations of those achievements. As already described in the first section,


developing countries started to perceive that the positive discrimination they were receiving


under S&D was being outdone by an increasing negative discrimination against their trade, and


they set out to seek market access, with the promise that agriculture would be included in the


negotiations. Simultaneously, the UNCTAD was decreasing in relevance, as a consequence of


the constant reluctance of developed countries to confer it any decision power in the



109 WTO, Participation of Developing Countries in World Trade: Recent Developments and Trade of Least-
Developed Countries, document WT/COMTD/W/65 (Geneva: WTO, 2000).
110 R. Wilkinson; J. Scott, Developing country participation in the GATT: a resassessment, World Trade Review no.
7:3 (Cambridge University Press, 2008).




  145
international scenario,111 while developing countries were searching for assistance to leave


behind the ‘80s crisis in a context of marked change of paradigm towards neoliberalism.


With all these variables at stake, those countries adopted a more cooperative approach,


participated in coalitions together with developed countries (Cairns Group) and accepted the


undertakings and concessions package, also suffering a considerable amount of pressure by


developed countries to close the Uruguay Round, as already noted in the first section.


The Marrakech agreements were gradually implemented, the debt on agriculture


remained outstanding on the part of developed countries, and developing countries started to


verify the high cost they were paying for the Uruguay Round. By the late ‘90s, a change of


strategy was becoming increasingly necessary: on one hand, the strategies aimed at a change in


the international order —through the rejection of the status quo and the creation of a


counterhegemonic reality through UNCTAD — did not yield the expected results; on the other,


the collaboration strategies did not yield the expected results either in the middle of the


difficulties of the late ‘80s, the search for market access, and an attempt to obtain some benefit


from unilateral opening.


Then, a new offensive by developing countries is observed intended to open a new


negotiation round. Not a “Millennium Round”, with a deepening of undertakings —as developed


countries desired—, but a “Development Round”, with the leveling of the playing field and


fulfillment of pending agriculture-related undertakings by developed countries. The Doha


Development Round was launched in 2001, but the most remarkable change became apparent in


2003, in the Cancun Ministerial, with the creation of the G-20.112


The G-20 was born in 2003 out of a combination of factors. The feeling that the WTO


was not satisfactorily assisting the interests of developing countries, particularly in agricultural


issues; the visible gap existing between the Doha undertaking in agriculture and the draft under


negotiation; the US and EU position to continue trying to get greater levels of undertaking by


developing countries, while they submitted a framework proposal in agriculture that was not


only restricted in relation to their own undertakings but also totally contrary to round


objectives.113


It should be noted that the present coalitions (after the Doha Round) are rather different


from the more confrontational coalitions of the ‘60s-‘70s, like the G-77 for instance. While they



111 One of the devices used to that end involved having all of UNCTAD’s initiatives be implemented through other
already existing forums.
112 The G-20 consists of: Argentina; Bolivia; Brazil; Chile; China; Cuba; Ecuador; Egypt; Philippines; Guatemala;
India; Indonesia; Mexico; Nigeria; Pakistan; Paraguay; Peru; South Africa; Thailand; Tanzania; Uruguay;
Venezuela; Zimbabwe.
113 Uzquiza, L. G., Crisis y estancamiento negociador: cuando el todo es más que la suma de las partes, working
Paper no. 107 (Latin American Trade Network-LATN, 2009), p. 12. <www.latn.org.ar> available at:.




  146
maintain the substantial idea that developing countries share problems and needs that must be


collectively addressed, coalitions such as the G-20 are not asking for the substitution of the WTO


with another institution, they are not advancing on an alternative idea to the export-oriented


insertion model, but what they promote is a change from within the WTO and not the


construction of another regime.114


In general terms, the WTO suffered the distrust of developing countries, an institutional


crisis leading to various studies on its reformation,115 which represented an additional obstacle in


the task of providing a proper response to the change in their members’ balance of power. Brazil,


India, Argentina, South Africa, among others, appeared as strong leaders in that coalition. As one


of their major achievements, they imposed limitations on the US-EU bloc, which had dominated


the multilateral trading system since the times of the GATT.


From the beginning, it was clear that the G-20 —as well as some other coalitions


subsequently formed, such as NAMA 11116— was ready for the great battle: that of attaining a


negotiation favoring their interests, or else they would not accept an agreement and would


prevent the progress of negotiations and close the Round.


In this context, the S&D —in its more ample conception as a framework agreement—


seems gradually less apt for those “graduated” countries (see second section)117 and, though it


would be a mistake to assume that the S&D will disappear from the agenda, it is clear that this


issue is the WTO’s great “moving target”.118


Thus, it is worth analyzing how those countries are being able to establish their demands


in search for flexibility margins in future agreements, so as to understand the new S&D


flexibility layout in relation to those countries.


To this end, it is necessary to understand the dynamics of the two main negotiations


under way: agriculture and non-agricultural products. This is where the “great battle” of the


WTO lies: finding a balance that is acceptable to everyone between agriculture (domestic


support and market access) and the NAMA (Non-Agricultural Market Access). All other


negotiations in this round are in the waiting line, advancing in minor issues, making no


decisions, executing no agreements, waiting for these negotiations to come to an end.



114 Tussie (2010), supra note 16, p. 18.
115 See the Sutherland Report requested by the WTO and the comments in relation to, quoted by Tempone (2007),
supra note 27.
116 NAMA 11 members are: Argentina; Brazil; Egypt; Philippines; India; Indonesia; Namibia; Bolivarian Republic
of Venezuela; South Africa; Tunisia.
117 In fact, at the Committee on Trade and Development, those countries are required to grant special treatment to
LDCs.
118 Tórtora, M., Development Mandates and Development Goals: Moving Targets, paper given at the Latin
American Trade Network Plenary Meeting (Mexico, 13-14 November, 2003), p. 7.




  147
Negotiation of the flexibilities of these modalities responds to a liberalization criterion


for "less than full reciprocity", to respond to the more general requirements of the Development


Round, and the balance between agriculture and NAMA, set forth in paragraph 24 of Hong


Kong, as a general rule. As a specific rule, each country or group of countries is negotiating its


particular flexibilities.


In NAMA, there are not many countries that will be applying the general tariff reduction


(the so-called “Swiss formula” with coefficients) Most member countries, especially developing


countries, are part of some exception, whether it be because they are LDCs, small and vulnerable


economies, recently acceded members (RAMs), transition economies, highly indebted countries,


small islands, landlocked countries, etc.


Among the countries that will be applying the formula, many are negotiating flexibilities


in addition to the general ones deriving from the general rule on less that full reciprocity and


balance with agriculture. MERCOSUR, for instance, negotiated an additional flexibility


consisting of a list of exceptions that will not be included in the tariff reduction.


While the current draft for NAMA has been accepted by Brazil (with inclusion of the


additional flexibility for MERCOSUR) and India (that requested no additional flexibility),


Argentina and South Africa are carrying on with negotiations.


Argentina believes that the current draft does not satisfy the general requirements of less


than full reciprocity and balance between agriculture and NAMA, and is negotiating a clause for


its exceptional position.


In turn, South Africa points out that in the Uruguay Round it made concessions in


NAMA equivalent to those of a developed country and, therefore, it should be allowed to offer a


lesser deepening of its undertakings under this modality, and that is why its particular case is still


subject to negotiation.


Some other groups of developing countries are also trying to adapt to this scenario, like


Peru, Colombia, Ecuador, or Costa Rica; these are small economies, although they do not fall


into the “small and vulnerable” category and fear that preferences might be undermined by the


special flexibilities to this type of countries. Additionally, countries like Paraguay are actively


demanding special flexibilities to landlocked countries.


In agriculture, the situation is somewhat different. In the G-20 there are at least two


groups: offensive net exporting countries —led by Brazil— and defensive net importing


countries — led by India and China.


Countries like Brazil and Argentina want to deepen the undertakings on domestic support


(the greatest obstacle being the United States) as well as on market access measures (the greatest




  148
obstacle being the European Union), while India is more interested in eliminating domestic


support measures because there are many obstacles for access to its market.


In order to keep the common denominator in the G-20 and reconcile all interests


involved,119 these countries have focused their efforts against domestic support measures, letting


the US be the country focusing on attempting to reduce the obstacles to market access,


particularly for European markets.


In this context, it appears that negotiations are bound to conclude, and there will be


certain flexibilities tailored to the needs of developing countries, while there are still doubts


about whether the package would be approved by the United States and the European Union. Is it


possible for the USA to obtain negotiating mandate in the middle of such a deep crisis? Could


this round, in the short term, reach consensus between USA and EU with regard to agricultural


subsidies —the main problem for USA— and barriers to market access —the main problem for


EU?





CONCLUSIONS


This paper was intended to accomplish two closely related objectives. On one hand, to


identify how S&D has been dealt with in the multilateral system, from its inception under GATT


to the present negotiations in Doha. On the other, to identify how middle-income developing


countries like Brazil, Argentina, India, and South Africa have positioned themselves in this


context, where S&D is being increasingly considered an issue for LDCs.


At the heart of this debate is the power relationship among states at international


organizations, the world’s division into North-South, into developed countries vs. developing


countries, as well as the increasing fragmentation of developing countries. These issues are


reflected on the debate around the flexibilities that LDCs must have to make up for the


asymmetry in international economic relations and to have room to promote development


strategies.


The theoretical views on this matter range from structuralist approaches —according to


which the GATT/WTO is seen as a multilateral trading system created to support and respond to


the interests of most industrialized countries, such as the USA, the European Union, Japan,


Canada, to the detriment of developing countries120—, to institutionalist views, according to


which the GATT/WTO represents an opportunity for developing countries to obtain more



119 As a matter of fact, Brazil and India conducted a thorough review on their agricultural profiles and proposals to
analyze the compatibility of their positions, prior to G-20 formation. See Uzquiza (2009), supra note 47, p. 15.
120 Tanzimuddin Khan (2004), supra note 6, p. 13.




  149
favorable results in the international scenario, thanks to the fact that the WTO is strongly rule-


oriented.121


Between those two views, there is a series or more heterodox approaches claiming that in


asymmetrical relationships, the weak are not always doomed to fail in their demands and that the


outcome of international negotiations can be influenced by developing countries.122


Additionally, others state that the WTO uses a mixed dynamics of rules and power, where power


outweighs rules in critical times, such as at the closing of multilateral negotiation rounds.123


Mixed views are quite appropriate to understand the situation of the Special and


Differential Treatment at the WTO. It can be observed that, on one hand, the S&D is being


restricted to the so-called middle-income countries, while on the other, those countries continue


seeking and obtaining flexibilities they deem necessary in the multilateral trading system


according to their development perspective, with some amount of help from the WTO’s own


rules.


On one hand, the S&D provisions of the Uruguay Round have had an increasingly


restrictive interpretation and did not have the expected impact on the development agenda. In the


agreements analyzed, it is possible to see a tendency to restrict, in practice, those provisions to


LDCs and, to a lesser extent, to other developing countries in a less advantageous situation,


excluding the more developed developing countries of middle-level income. Moreover, in the


negotiations currently under way, the initial S&D agenda at the Committee on Trade and


Development (in special session) when the Doha Round was launched was ample and


comprehensive —mandatory or non-mandatory nature of provisions and their consequences;


S&D principles and objectives; technical and financial assistance and training of capacities;


S&D incorporation into WTO rule structure. Today, this agenda is limited to implementation of


measures in favor of LDCs, a surveillance mechanism, and some S&D proposals for specific


agreements.


Many of the developing countries that were being excluded from S&D benefits during


the implementation of the Marrakech agreements started fighting for specific flexibilities on each


of the issues of critical importance to them, such as agriculture and NAMA, and thus obtain


certain flexibilities matching their respective developing country profiles.


While attempting to attain those results, certain substantial issues in the present


negotiations of the Doha Round were unveiled. The negotiations are a reflection of the change in


the world’s balance of power and the increasing fragmentation of the developing world. The



121 Shadlen (2009), supra note 1, p. 6.
122 I.W. Zartman; J.Z. Rubin (2002), supra note 9; Page, S., Developing Countries in GATT/WTO Negotiations,
working paper (London: Overseas Development Institute, 2002), p. 1.
123 Steinberg (2002), supra note 10.




  150
WTO, to a large extent, reflects these changes. In fact, it is the first one in doing it, mostly given


that it is the most transparent of all multilateral organizations, and it is also the most accountable


to its members.


However, the WTO is only the canary in the coal mine that announces the lack of


oxygen: it shows how multilateral organizations are obsolete in this transition phase to a new


global scenario. The times when transatlantic powers bilaterally set the agenda in multilateral


trading system are gone, and the limit comes from the coalitions of developing countries or their


use of the Dispute Settlement Mechanism. Middle-income and emerging countries already have


the ability to block negotiations and impose certain limitations on the US-EU bloc, which had


dominated the main decisions of the multilateral trading system since the times of the GATT.


Nevertheless, that power is not enough yet to achieve a substantial reformation of


multilateral system rules, even though that does not seem to be the priority objective of those


countries either, at least for the time being. Among them, a more pragmatic view prevails —


confrontation from within the system, an attempt to obtain specific flexibilities, in view of the


increasing restriction to the provisions identified as “S&D” and a strong offensive to also


achieve more undertakings by developed countries.


At times, this round seems biased to large and medium players. That is also reflected on


the way in which the S&D was managed in relation to LDCs and all the other subsets of


countries, such as small and vulnerable economies, small islands, landlocked countries, and the


like. The "laissez-faire" approach is unanimously considered as a measure intended to cause


those countries to give their consent to the round and be silenced in their demands, while interest


is focused somewhere else —on large markets.


In the middle of these considerations, there does not seem to be any more room for a


grand or over-arching framework agreement on S&D, including more binding provisions,


particularly for those developing countries that are do not fall into the least developed. The most


likely outcome from all of the above will be certain tailor-made flexibilities, some sort of


variable-geometry S&D approach, on a case-by-case basis. To a certain extent, that would mean


undoing the road for a single undertaking at the WTO, agreed upon at the Uruguay Round,


adapting the system to the various needs and capacities of its members. Perhaps that unravelling


may ease the negotiations but may not be enough in the realm of trade rules for development.






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  153
Zoya S. Podoba



Seniour Lecturer


Department of World Economy
St. Petersburg Sttate University




West versus East


Energy security has become one of the leading issues in the world today. Energy security


is a term for an association between national security and the availability of natural resources for


energy consumption. For a long time it was defined as “security of energy supply”. And it was


believed that this term was vital only for huge energy importers. Nevertheless energy security is


rather essential for energy exporters either, since it is important to ensure both energy supply and


demand.


In Russia the definition of energy security is found in the Energy Strategy of Russian


Federation adopted by the Government Decision in 2003. It is defined as the “state of protection


of the country, its citizens, society, state, economy from the treats to the secure fuel and energy


supply”. There is also another definition contained in the document: “the full and secure


provision of energy resources to the population and the economy on affordable prices that at the


same time stimulate energy saving, the minimization of risks and the elimination of threats to the


energy supplies of the country”. In accordance with the Strategy the basic elements of the energy


security in Russia are:


the ability of the energy sector to meet internal and external demand with affordable


energy resources of the necessary quality;


the ability of consumers to use the energy resources efficiently, preventing unnecessary


expenditure by society on energy supply creating a deficit in the energy balance;


the stability of the energy sector in the face of internal and external economic,


technical and natural threats and its ability to minimize the damage caused by different


destabilizing factors.


Russian Federation is rich in energy resources, especially in natural gas. With the


collapse of the Soviet Union, Russia has reemerged as a global power on the basis of its energy


resources.124 The country holds the world's largest natural gas reserves, taking the lead over Iran,


Qatar and Saudi Arabia (Appendix 1 - “World Natural Gas Reserves by Country”), the second


largest coal reserves (behind USA) (Appendix 2 - “Coal State”, Figure 1), and the eighth largest


oil reserves (Appendix 3 - “World Oil Reserves by Country”). Russia is also the world's largest



124 Liudmila V.Popova, Russia and the Northeast Asian energy market in the context of energy security, 2010




  154
exporter of natural gas, the second largest oil exporter (behind Saudi Arabia) and the third largest


energy consumer.125 Russia’s economic growth over the past years has been driven primarily by


energy exports, given the increase in Russian oil production and relatively high world oil prices


during the period (except for the 2008 crisis).


Russia is the world’s third largest energy consumer (Appendix 4 – “Energy consumption


by source for major countries”). The structure of Russia’s energy consumption during the last 25


years is characterized by decreased share of three main energy resources – natural gas, oil and


coal – from 93 % to 88% due to slight increase in nuclear and hydro energy consumption. At the


same time the weight of natural gas in the overall energy consumption has increased by 11 %,


and the weights of oil and coal dropped by 49% and 58% respectively126 (Appendix 5 – “The


Structure of Russia’s Primary Energy Consumption by energy source, 1985-2009”).


Russia holds the world’s largest natural gas reserves, with 1,680 trillion cubic feet, and


Russia’s reserves account for about a quarter of the world’s total proven reserves. Appendix 6


lists the 13 largest gas fields in the world. Russia owns two-thirds of them. More than half of all


Russian reserves are concentrated in Siberia (Appendix 7 – “Major Russian Gas Basins”), with


the Yamburg, Urengoy, and Medvezh’ye fields alone (all of them are licensed to Gazprom,


Russia’s state-run natural gas exploration and production company) accounting for about 45 %


of Russia’s total reserves. However, these three fields have faced declines in recent years.


Russian gas sector is dominated by Gazprom, with 90% of the total natural gas output.


Gazprom also controls most of the Russian gas reserves: more than 65 % of proven reserves are


directly controlled by the company, and additional reserves are controlled by Gazprom in joint


ventures with other companies.127 While independent producers have gained some importance


recently, with producers such as Novatek and LUKoil contributing increasing volumes to


Russia’s production, the upstream remains fairly closed to independent producers. Gazprom’s


position is strengthened further by its legal monopoly on Russian gas exports. It also owns the


entire gas pipeline infrastructure in Russia along with the compressor stations (Russia’s unified


gas supply system (UGSS)128. In addition, Gazprom controls the sole means of getting gas to


domestic and export markets. The professed reason that Russia has given Gazprom monopoly


control over its natural gas industry is the so-called “social obligation”. Through Gazprom, the


Russian government subsidizes its inefficient domestic industries with low-priced natural gas.

125 US Energy Information Administration, Independent Statistics and Analysis, Country Energy Profiles, URL:
http://www.eia.doe.gov/country/index.cfm
126 Dolgikh.com, Natural Gas Research, Natural Gas in Russia’s Fuel and Energy Complex, URL:
http://dolgikh.com/index/0-63
127 The same source
128 UGS is the world’s largest gas transportation system, a unique technological chain of facilities in charge of gas
extraction, processing, transportation, storage, and dispatch. UGS is supposed to ensure a steady supply of gas from
the field to the end-consumer.




  155
Gazprom sells most of its gas to domestic customers at a considerable discount. Obviously,


Gazprom is losing large amounts of money on domestic sales that make it to rely on export


revenues for “compensation”.


In spite of its world leading position in gas production Russia has rather weak status in


LNG business. The Soviet Union did not have LNG technology, and the Russian Federation, in


order to develop its LNG potential, was forced to enter into consortiums with Western energy


firms.




Russia has more gas reserves than any other country, and one of the largest reserves-to-


production ratios. In addition, the gas industry plays a significant role in the Russian economy,


contributing significantly to total GDP. But despite the country’s huge reserves and industry


importance, natural gas production has remained essentially flat over the past several years, with


a mild production increase for 2008. In 2009 the production of natural gas decreased due to


reductions of industrial production followed by decline of gas demand (Appendix 8 – “Russia’s


Natural Gas Production, 1998-2009”).


The immediate future of natural gas production in Russia is not so optimistic. Gazprom’s


major challenge is the aging of all its major producing gas fields. Production from these fields is


declining. The reason for the gas shortfall is simple. Over the past several years Gazprom has not


invested sufficiently, and lacks the technology to develop new gas fields to replace its depleting


ones.


Russia exports significant amounts of natural gas. Gazprom has shifted much of its


natural gas exports to serve the rising demand in countries of the Western direction (Appendix


32 – “Major Recipients of Russian Natural Gas Exports”).


There are currently nine major pipelines in Russia, seven of which are export pipelines.


The Yamal-Europe I, Northern Lights, Soyuz, and Bratrstvo pipelines all carry Russian gas to


Eastern and Western European markets via Ukraine and/or Belarus. Three other pipelines, Blue


Stream, North Caucasus, and Mozdok-Gazi-Magomed connect Russia’s production areas to


consumers in Turkey and former Soviet Union republics in the east.


Russia launched several megaprojects in recent years and is going to run some more ones


soon. Many projects target European and domestic markets:


- North European Gas Pipeline, or Nord Stream Pipeline (from Russia to Finland and the


United Kingdom via the Baltic Sea),


The Nord Stream gas pipeline is a fundamentally new route for Russian gas exports


to Europe. The target markets for gas supplies via Nord Stream are Germany, the UK, the


Netherlands, France, Denmark and others. The new gas pipeline is extremely significant for




  156
meeting the increasing natural gas demand in the European market. Gas imports to the EU are


anticipated to grow in the coming decade by nearly 200 billion cubic meters or more than 50 per


cent. Due to a direct connection between the world’s largest gas reserves located in Russia and


the European gas transmission system, Nord Stream will be able to satisfy about 25 per cent


of this extra demand for imported gas. In this regard, back in December 2000 the European


Commission had assigned the Nord Stream project the Trans-European Network (TEN) status


which was confirmed once again in 2006. This means Nord Stream is a key project aimed


at creating crucial cross-border transport capacities with a view to ensuring sustainability and


energy security in Europe.


Nord Stream is a joint project of five major companies: OAO Gazprom, BASF


SE/Wintershall Holding GmbH, E.ON Ruhrgas AG, N.V. Nederlandse Gasunie and GDF SUEZ


S.A. The combined experience of these energy companies ensures the best technology, safety


and corporate governance for this project. To be completed in 2011, construction of the first


pipeline string will be immediately followed by the second string that will increase the pipeline


throughput capacity from 27.5 to 55 billion cubic meters. In 2012 the second string will reach the


German coast near the town of Greifswald.


- South Stream (the first component of the South Stream project plans to send natural gas


from the same starting point as the Blue Stream pipeline at Beregovaya for 560 miles under the


Black Sea; the second, onshore component will cross Bulgaria with two alternatives: one


directed towards the northwest, crossing Serbia and Hungary and linking with existing gas


pipelines from Russia; and the other directed to the southwest through Greece and Albania,


linking directly to the Italian network),


The project provides for the offshore South Stream pipeline to run under the Black Sea


from the Russkaya compressor station on the Russian coast to the Bulgarian coast. The total


length of the offshore section will be around 900 kilometers, the maximum depth – over two


kilometers and the design capacity – 63 billion cubic meters. There are two optional routes for


the onshore South Stream pipeline: either northwestwards or southwestwards from Bulgaria.


Construction of South Stream will commence in 2013. First gas supplies are scheduled for late


2015.


- Yamal megaproject. Yamal's onshore fields are subject to integrated development


by means of creating three production zones – Bovanenkovo, Tambey and Southern:


1) The Bovanenkovo production zone includes three basic fields: Bovanenkovskoye,


Kharasaveyskoye and Kruzenshternskoye (the licenses are held by Gazprom Group). The total


production is projected to reach up to 220 bcm of gas and up to 4 mln t of condensate per annum.




  157
2) The Tambey production zone involves six fields: Severo-Tambeyskoye, Zapadno-


Tambeyskoye, Tasiyskoye, Malyginskoye (the licenses are held by Gazprom Group), Yuzhno-


Tambeyskoye and Syadorskoye. The total production is projected to reach up to 65 bcm of gas


and up to 2.8 mln t of condensate per annum.


3) The Southern production zone involves nine fields: Novoportovskoye (the license


is held by Gazprom Group), Nurminskoye, Malo-Yamalskoye, Rostovtsevskoye, Arkticheskoye,


Sredne-Yamalskoye, Khambateyskoye, Neytinskoye, Kamennomysskoye (located onshore). The


total production is projected to reach up to 30 bcm of gas and up to 7 mln t of oil per annum.


The Company is exploring the possibility of constructing an LNG plant on Yamal.


- The Shtokman gas and condensate field development project. The project


implementation will become a pivotal point to form a new gas producing region on the Russian


Arctic shelf. The Shtokman field will become a resource base for building up Russian pipeline


gas and liquefied natural gas (LNG) supplies to the domestic and foreign markets.




Russia also launched new projects aimed to explore gas resources of Eastern part of


Russia and to supply gas to Asia-Pacific Region. Eastern Siberia and the Far East cover nearly


60 per cent of the Russian Federation. The initial aggregate gas resources of Eastern Russia


account for 52.4 trillion cubic meters onshore and 14.9 trillion cubic meters offshore. At the


same time, the regional gas potential has been poorly explored standing at 7.3 per cent for the


onshore area and 6 per cent for the continental shelf.


In Eastern Russia owns an abundant resource base, which makes it possible to implement


large infrastructure projects. Today Gazprom, its subsidiary and affiliated companies hold more


than forty licenses for the right to use subsurface resources in Eastern Siberia and the Far East.


They include the licenses for the Chayanda field in Yakutia, the Chikanskoye field in the Irkutsk


Oblast, the Sobinskoye field in the Krasnoyarsk Krai and the Kirinskoye field offshore the


Sakhalin Island.


In the aim of expanding its resource base Gazprom performs geological exploration in the


Krasnoyarsk and Kamchatka Krais, the Irkutsk Oblast, the Republic of Sakha (Yakutia) and


offshore the Sakhalin Island. By 2030 Gazprom is going to add up to 7 trillion cubic meters


of natural gas to the existing resource base in the Siberian and Far Eastern Federal Districts. The


prioritized meeting of Russian consumers’ gas demand is Gazprom’s primary objective


in Eastern Russia. The same principle underlies the Eastern Gas Program.


Chikanskoye field (Irkutsk Oblast). In 2008 the field was brought into pilot


commercial operation. At present, engineering of a gas pipeline from the Chikanskoye field


is going on in order to supply natural gas to Sayansk, Angarsk and Irkutsk.




  158
Sobinskoye field (Krasnoyarsk Krai). The work is underway to pre-develop the oil


rims. Gazprom is looking at the ways to establish gas processing and gas chemical facilities


based on the Sobinskoye field reserves.


Chayanda field (Republic of Sakha (Yakutia)). Being located in Yakutia, the field


is unique in terms of natural gas reserves. It also contains considerable amounts of helium. The


geological exploration is in progress. It is projected to construct the Yakutia – Khabarovsk –


Vladivostok gas pipeline; the issues are being addressed relevant to building Chayanda-based


gas processing capacities, as well as constructing LNG production capacities in the Primorsky


Krai.


Gas supply to Kamchatka. Gazprom is pre-developing the Kshukskoye and Nizhne-


Kvakchikskoye fields on the western coast of the Kamchatka Peninsula. The Company is also


constructing the Sobolevo – Petropavlovsk-Kamchatsky gas trunkline planned for


commissioning in 2010. In addition, the project stipulates construction of gas distribution


networks in Petropavlovsk-Kamchatsky. The Russian Federation Government took a decision


to grant Gazprom the subsurface license for the Zapadno-Kamchatsky block. Between 2009 and


2011 natural gas reserves are projected to increase by some 200 billion cubic meters here.


Sakhalin shelf is best prepared for starting up natural gas production and supplying


it to the consumers in Russia’s Far East


Sakhalin II. It is a large integrated PSA project being carried out by an international


consortium. Gazprom is the majority shareholder in the project. As part of the project Russia’s


first LNG plant was built. Russian LNG exports began in 2009. The royalties and the Russian


Federation’s share of produced gas will be delivered to the Far East to promote regional


gasification.


In case of this project Gazprom relied on Shell's technical expertise. With the opening of


the Russian LNG terminal on Sakhalin Island, Russia joined the global LNG market. The LNG


plant is the heart of the Sakhalin II Project, one of the largest integrated oil and gas projects in


the world. New facility implies a significant shift in Russian energy exports towards East Asian


market. This project will be discussed in detail in the next chapter.




Sakhalin III. In 2009 the Russian Federation Government adopted the decision to award


Gazprom the subsurface licenses for the Kirinsky, Vostochno-Odoptinsky and Ayashsky blocks


of the project. Geological exploration is underway at the Kirinskoye field (subsurface license


acquired in 2008). Natural gas production is scheduled for 2014. The field will become one


of the natural gas sources for the Sakhalin – Khabarovsk – Vladivostok gas transmission system.




  159
Sakhalin – Khabarovsk – Vladivostok gas transmission system (GTS). The system


is a paramount target of the Eastern Gas Program. According to the Russian Federation


Government’s assignment and the Gazprom Board of Directors’ decision, Gazprom is currently


constructing the GTS in order to develop gas supply to the Khabarovsk Krai and the Sakhalin


Oblast, as well as to arrange gas supply to the Primorsky Krai starting from the third quarter


of 2011. The first GTS start-up complex will have the length of 1,350 kilometers and the


capacity of 6 billion cubic meters per annum. In future the system will deliver circa 30 billion


cubic meters of Sakhalin gas. This will make it possible to meet the prioritized gas demand


of Russia’s Far Eastern regions and to create additional potential for gas exports to Asia-Pacific


countries. This project is important for expansion of Russia’s gas export as well. 129


-The Kovykta gas condensate field is one of the largest undeveloped natural gas fields in


Eastern Siberia, Russia. The field is located in the northern part of the Irkutsk Oblast, in the


Zhigalovo and Kazachinsko-Lensk districts. The Kovykta field is considered to supply natural


gas to China and Korea.


Tasks and questions:


1. Why energy security is vital both for energy importers and energy exporters?
2. Name the basic elements of the energy security in Russia. Offer your ones.
3. How new gas projects may affect energy security in Russia?
4. Range new gas projects in Russia in descending order of importance in your opinion.
5. Why Eastern gas program is important for Russia?



129 Dalnevostochnaya Zvezda, “Gazprom discusses the financing of gas pipeline to Vladivostok with Japan”, 10.02.2010, URL:
http://dv-zvezda.ru/11234-gazprom-obsuzhdaet-s-yaponiej-finansirovanie.html




  160


6. Appendix 1. World Natural Gas Reserves by Country





The source: Oil and Gas Journal, 1 January 2010




  161



Appendix 2. World Coal Reserves by Country



The source: World Energy Council Interim Update 2009




  162

Appendix 3. World Oil Reserves by Country



The source: Oil and Gas Journal, 1 January 2010




  163

Appendix 4. Energy consumption by source for major countries




The source: BP Statistical Review of World Energy, 2009




  164



Appendix 5. The Structure of Russia’s Primary Energy Consumption by


energy source (1985-2009), tons of oil equivalent






oil
natural gas
coal
nuclear energy
hydro energy

The source: Rosstat data (Dolgikh.com, Natural Gas Research), 2010





  165

Appendix 6. Largest Gas Fields in the World





The source: Energy Tribune, E.O. Ndefo, P. Geng, S. Laskar, L. Tawofaing, and Michael J. Economides, Russia: A Critical
Evaluation of its Natural Gas Resources, URL: http://www.energytribune.com/articles.cfm/379/Russia-A-Critical-Evaluation-of-
its-Natural-Gas-Resources, February 2007




  166

Appendix 7.Major Russian Gas Basins



The source: US Energy Information Administration




  167

Appendix 8. Russia’s Natural Gas Production (1998-2009)








Natural gas production (million of cubic metres)
Growth rate

The source: ABARUS Market Research, 2010




  168

Appendix 32. Major Recipients of Russian Natural Gas Exports




The source: Energy International Agency, 2008





  169


M. Sait Akman*


Turkey in the World Trading System and the WTO: Activism Under Global


Challenges and the EU Process




I. INTRODUCTION


Turkey’s increasing engagement in the global economy changed its trade regime and


thereupon its trading position within the world trading system in the last couple of decades.


Turkey does not play a major role in the WTO and Doha Development Round (Doha Round),


mainly because it represents only a margin of world exports and imports in world merchandise


trade, and in trade in services130. More importantly, Turkey’s trade position is largely shaped by


its obligations under its Customs Union with the European Union (the EU), and other bilateral


trade agreements in enters thereof. However, Turkey can be regarded as a middle power that can


be described as an emerging market destined to join the EU, and representing a political gravity


centre in its own neighbourhood. The changing parameters helped Turkey to develop an


assertive trade policy in multilateral and bilateral spheres. Three important motives induced


Turkey to initiate a more self-confident and offensive approach in its trading relations within the


WTO.


First, the Turkish economy experienced a major transformation after 1980 adopting the


principles of the market economy. In this context, export-oriented industrialisation in


conjunction with policies such as flexible exchange rates; liberal import regime, new foreign


investment policy; measures for a liberal money market and for the modernisation of capital


market; new export promotion policies; and institutional restructuring brought a spectacular


change in the structure of Turkish imports and exports. The dominant role of agricultural


products in exports was over in favor of industrial products. Also the product range was


diversified and the volume of foreign trade increased significantly. Apart from the implications


of several unilateral economic measures, the economic sectors had to reorient themselves to the


changing multilateral discipline within the framework of GATT/Uruguay Round and the WTO.


Therefore, as an open and market-oriented economy Turkey could not be negligent to the



* Asst. Prof. Dr., Marmara University European Union Institute, (saitakman@marmara.edu.tr), and
Visiting Senior Fellow at TEPAV (Turkish Economic Policy Research Foundation, Ankara).
130 WTO International Trade Statistics reveal for 2009 that Turkey is twenty-second leading exporter of
manufactures in the world with a share of 1.1 percent and a value of 102 billion dollars in 2009, and
fifteenth largest importer with a share of 1.5 percent and a value of 141billion dollars, counting the EU-27
as one. In services trade Turkey amounts to a share of 1.3 percent (33 billion dollars), and 0.7 percent (16
billion dollars) in exports and imports in the ranks as fourteen and twenty-four. respectively.




  170
developments in international trading regime gathered around the WTO and had to define its


interests accordingly. Secondly, Turkey’s close relations with the EU, a leading actor in


GATT/WTO system since early 1990s, forced Turkey to reposition its stakes in line with those


of the EU as long as its accession process and the Customs Union (CU) link necessitate. In this


context, the EU position and assertiveness can stimulate Turkey to take initiatives in many areas


of trade negotiations as long as they converge with the EU. Third, the domestic actors started to


define their interests in response to global developments such as new production networks,


supplier-oriented industrial upgrading, technological and communication improvements, and


advancing in financial markets. Gradually, export-oriented sectors become larger to strongly


pressure the policy-makers for enhanced market access, while domestic import-competing


sectors had to react more firmly to preserve their existing market share. Both actors started to


play a more influential role on the governments. Therefore the governments had to be more


involved in international trade regime and multilateral negotiations to balance domestic interests


(hence putting themselves under WTO commitments) with a view to obtaining a political support


to pursue market-oriented policies in favour of liberalising groups on the one hand, and to


defensing the position of protectionist groups via available WTO mechanisms on the other.


The multilateral aspect of Turkish trade policy encompasses WTO commitments with


regard to trade in goods and services, trade-related intellectual property rights, trade-related


investment measures, and several trade policy rules in areas within the WTO domain. Following


the establishment of the WTO Turkey started to take an active part in the negotiations (especially


after the launch of the Doha Round) especially in issues pertinent to its evolving production and


trade patterns. However, Turkey’s position within the WTO system is largely shaped by


behavioural pattern reflecting its dual face: to keep its developing country status as much as


possible to preserve the rights already bestowed to such countries, and to benefit special and


differential treatment in areas of negotiations if its interests requires so. On the other hand,


Turkey has to be in close cooperation with industrialised nations, mainly the EU because of the


fact that, Turkey has already lowered its industrial tariffs, and liberalised its customs regime


deeper than many other developing countries in line with its CU engagement. Its unique position


that requires a balancing makes Turkey an interesting actor to analyse.


This article focus on the issues of central importance to Turkey’s case within the WTO


system and the Doha Round, in particular. However, before an investigation of Turkey’s


interests and position in several negotiation areas, the study provides a review of the Turkish


trade structure focusing on its trade patterns, and the priorities in evolving trade strategy, and its


special relationship with the EU that is embedded in Turkey’s transformation process. The study


finally sets for the conclusive remarks about Turkey’s position in the WTO.




  171
II. A SYNOPSIS OF TURKISH TRADE REGIME AND PROSPECTS FOR A


CHANGING TRADE STRATEGY


Turkey’s trade structure has radically changed following 1980 reforms about the foreign


trade regime. This change induced by several unilateral trade liberalisation measures had


significant reflections on Turkey’s trade position in the international trading system, particularly


in GATT/WTO arena. This part summarises the main shifts in Turkey’s trade patterns to provide


an overall understanding about Turkey’s position within the global trade relations.



II.1 Turkish Trade Regime in Post-1980


Turkey has followed an inward-oriented trade policy largely based on import substitution,


and exportation of primary agricultural and labour-intensive manufactured products mainly to


European markets until 1980. A more liberal trade policy was adopted in 1980 with a view to


integrating Turkish economy into the world economy. This turn has largely been a consequence


of the need for transformation in Turkey following the developments in domestic politics and the


world economy. However, this evolution has not been an exceptional case for Turkey alone in


this era. This was a phenomenon observed in many other developing countries in early 1980s,


too. According to Rodrik (1992: 31) the most important reason relates to ‘economic


circumstances in which most developing countries found themselves as a consequence of the


prolonged macroeconomic crisis’ experienced by higher inflation, and negative or slower


growth. This eventually induced these countries, including Turkey to prevent deterioration in


economic conditions beyond mere concerns about distributional considerations, including the


import-competing interests or rent-seeking. Economic stability measures in January 1980 were


adopted to restore the downward economic trends including the resurrected current account


deficits. In what follows, Turkey abondened its ‘import substitution’ policy and started an


‘export oriented industrialisation strategy’ with subsequent opening of import markets in 1980s.


In the export side, Turkish Lira was devalued by almost 50 percent against the US dolar to limit


domestic demand, while the fixed exchange rate policy was replaced by a more flexible one with


the aim of boosting exports. An export encouraging package based on tax rebates, export credits,


and subsidies helped manufacturing industry to reach ever larger export values. In imports strict


licensing mechanism was liberalised, quantitative restrictions were progressively phased out,


tariff rates were eliminated especially on imports of intermediate and capital goods, and nominal


tariffs were lowered progressively from 77 percent in early 1980s, down to 40 percent in 1990,


and to 20 percent in 1994 (İzmen and Yılmaz, 2009: 175).
However, external conditions like economic stagnation in the world economy in late


1980s and during the 1990s, the Gulf War, economic embargo against Iraq, and domestic chronic




  172
problems suc as high inflation rates, budget deficits, rising debt stock, produced a severe


economic crisis in 1994 in Turkish economy. Devaluation of Turkish Lira and economic


measures to combat the crisis had positive impact on the competitiveness of Turkish exports in


the short run. In the subsquent peirod exports rose by 18 percent after a modest 4 to 8 percent


increases over the preceeding three years, while imports dropped by 21 percent in that year.


II.2 Turkey’s Relations with the EU based on a Customs Union


Turkey’s ambition to become a part of the European Union (then the EC) and its volatile


economic structure induced policy-makers to take the radical step to finalise the CU with the EC


despite domestic reactions from import-competing sectors. However, export-oriented industries


forcibly supported this process in order to capture much bigger and sustainable share in the


European market. The CU that entered into force in 1996 had a significant effect on Turkish


economy ultimately increasing the competitiveness of Turkish manufacturing industry and the


shares in domestic production and export of relatively more technology-intensive products. In


this framework, Turkey has adopted a large body of EU trade legislation131. The CU brought four


main substantive requirements on Turkish trade policy. First, Turkey has removed all tariffs and


quantiative restrictions on industrial products imported from the EU member states, and opened


Turkish domestic market into European competition. Apart from textiles and clothing the EU


had eliminated most tariffs and quotas on industrial imports from Turkey, Therefore the most


notable effect of the CU for Turkish exports was the abolition of existing European quantitative


restrictions applied in these sectors. This was welcomed by Turkish textile and apparel industry


which considered Europe as the most sustainable and stable markets for their products, then. The


free movement of goods within the customs union applies to all products, including those


imported from third countries into either the EU or Turkey. It was to abide by EU textile policy,


as well132. Secondly, Turkey had to align with the Common Customs Tariff (CCT) of the EC


towards imports of industrial products from third countries133. The average weighted industrial


tariffs under the CCT is as low as 3.6 percent, and this incurs Turkey to implement a strategy in


line with the EU, and other OECD countries in NAMA (non-agricultural market access)


negotiations to pressure other developing and emerging powers to reciprocate by lowering their


tariffs. Turkey has adopted the Community Customs Code and has started to implement the new


import and export legislation since the beginning January 1996. Third, Turkey was expected to



131 For a detailed analysis of the CU Decision see, Kabaalioğlu (1998).
132 This caused an important dispute settlement case in textiles in the WTO, after a complaint by India,
and others against Turkey. This matter be analysed subsequently.
133 Turkey was allowed to maintain higher rates of protection in specified ‘sensitive’ products until 2001,
as an exception to its alignment of the CCT.




  173
adopt the preferential trading arrangements, including Free Trade Agreements (FTAs) of the EU.


Therefore, Turkey started to negotiate such arrangements with European Free Trade Association


countries, Israel, Macedonia, Croatia, Bosnia-Herzegovina, Palestinian Authority, Tunissia,


Morocco, Syria, Egypt, Albania, and Georgia as a result of its obligation under the CU. These


agreements represented a first wave of such bilateral trade schemes ever held by Turkey, with


the exception of its CU link itself and provided an easier access for Turkish exports into these


territories. Turkey has also based its Generalised System of Preferences (GDP) on the EC’s.


However, their significance for Turkish exports was secondary as Turkish industry was more


concerned with the EU market in this period. Subsequently, Turkey had to follow suit several


other EU preferential arrangements in the form of FTAs with major trading partners, when the


EU trade policy switched into regional trade schemes right after the failure in Cancun Ministerial


in 2003. Finally, according to CU decision Turkey started to implement trade policy measures


similar to those of the EU in imports, exports, and customs matters. Turkey also adopted


measures in areas directly relevant to the functioning of the CU. In intellectual property matters,


Turkey brought copyright and patent laws into line with the EU, and had to implement the


Uruguay Round rules on patents for pharmaceutical processes and products by the beginning of


January 1999, and established a Patent Intitute. Competition was another vital issue. Turkey has


aligned its laws fully with the EU. The law on competition was adopted and enforced in 1994,


and set up an independent Competition Authority, in 1997. Standards and technical barriers to


trade were important areas to achieve free trade between the EU and Turkey. Accordingly,


Turkey had to harmonise its technical legislation with that of the EU.


The CU can be regarded as a unilateral trade liberalisation by Turkey because the EC had


previously eliminated a substantial part of its tariffs and non-tariff barriers facing Turkish


exports. However, it should be considered that the CU also brought a much easier market access


for Turkish products expecially in textiles and clothing following EU’s elimination of


quantitative restrictions. Additionally, the CU strenghtened Turkey’s privildged position in EU


market against third countries.


CU was the most important step in Turkish trade regime in the 1990s and changed


Turkey’s foreign trade structure by increasing the capacity of Turkish industry to cope with the


competitive pressures and global imbalances134. In addition to its implications for the


competitiveness of Turkish industry, the CU also provided a new outlook for Turkish trade and



134 Izmen and Yilmaz (2009) goes further to claim that besides its effect on Turkey to be more in line with
the market forces, the CU also helped Turkey to resist East Asian and Russian crisis of the 1990s, and the
global recession in 2008, without which it would be very difficult for Turkey to overcome (p.176). Of
course, the CU does not eliminate the effects of these crisis but transformed Turkish industries to become
more resistant to such shocks.




  174
customs policy which became more EU-oriented in multilateral trade negotiations within the


ambit of the WTO. The new trade pattrens in post-CU period led Turkey to formulate its


priorities by taking into consideration of its CU and the EU accession process. Despite several


inconsistencies and mismatching priorities, the EU effect should not be underestimated in


shaping Turkey’s negotiating position in several areas of the negoatiations in WTO and Doha


Round, particularly in industrial products (NAMA), and trade facilitation matters.


II.3 The Changing Patterns of Turkish Trade Policy


Strategies and policy choices focusing on export-oriented growth have become main


elements to shape the structure of Turkish trade in post-liberalisation era. Nonetheless, both


international developments and domestic policies to confront these globally-induced challenges


were important determinants to understand the shifts in specific periods. For instance, the


expected implications of the CU were not realised in exports until early 2000s for two main


reasons. First, it was too early to feel the stimulating effect of the CU on Turkish economy


before Turkey adopted harmonisation measures. Second, sseveral exogenous factors such as


economic crisis in Asia in 1997 and Russia in 1998; and the 1999 earthquake that hit several


Turkish industrial premises as well as domestic structural problems led Turkish economy into


crisis in 2001. The post-crisis adjutment measures helped to increase the exports and the


exports/production ratio for almost all manufacturing sectors only after 2002. Furthermore, the


crisis-driven shrinking domestic demand forced many Turkish producers to search for new


export markets, in addition to the EU. In this context, it is unsurprising that the Undersecretariat


of Foreign Trade (UFT) initiated the Strategy of Neighbouring and Surrounding Countries135 in


2000, and the Strategy of African Countries in 2003, in order to reduce regional dependency in


export markets. In this period, the start of Doha Round negotiations was also welcomed by


Turkey as liberalisation schemes to be adopted by 2005 (the original deadline fort he Round)


were expected to provide better market access opportunities for Turkish exports.


Indeed, this benefitted Turkish exports to find alternative destinations in the following


period. Several motives can explain the rising levels of exports, i.e. dropping real labour costs,


improving financing facilities, a better regulated banking sector in the post-crisis period, higher



135 Neighbouring countries can be defined as the countries that have common borders with Turkey or that
may be reached from Turkey directly without having to cross a third country. These are namely,
Azerbaijan, Georgia, Iran, Iraq, Syria, the Turkish Republic of Northern Cyprus (KKTC), Greece,
Bulgaria, Ukraine, the Russian Federation and Armenia. The surrounding countries are those which do
not share a common frontier with Turkey but have cultural ties or geographical proximity and are feasible
markets in terms of population and/or economic potential. These countries are cited as Turkmenistan,
Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan, Israel, Saudi Arabia, Jordan, Lebanon, Egypt, Moldova
and Macedonia.




  175
prices for export products in international markets, and a positive development in euro/dolar


parity in favour of Turkish exporters136. But, more convincingly it can be argued that, the long-


run effects of te CU were better realised in Turkish manufacturing industry regarding the


increase in productivity, technological development, reduced x-inefficiencies thanks to stiff


competition, and better explotation of the economies of scale by Turkish undertakings (Figure 1).


Figure 1. Turkish exports and imports after the CU (1996-2010), billion $




Source: Turkish Statistical Institute (TÜİK) and Undersecretariat of Foreign Trade (UFT).
The imports also increased reflecting the change production patterns in Turkish


manufacturing industry by a notable increase after 2003, with an exceptional decline in 2009 as a


result of global economic and financial crisis.


The shares of the trading partners also changed considerably as a result of both global and


domestic structural changes in the economy during the last and a half decade. The EU-15 share


in total Turkish trade declined from over 50 percent to 46 percent in 2010, while the share of


Middle East and North Africa (MENA), Russia, Central Asian Republics, and Asian countries


increased substantially. In imports a similar trend takes place where the EU products were


significantly replaced (the total share of the EU-27 was only 38.9 percent in 2010 compared to


52 percent in 1996) by imports from Asian countries and Russia. Between 1996-2010 the share


of imports from the Far East, and South Asia doubled while its share is almost tripled from



136 For export increase in Turkey see, DTM (2009), The develeopment of exports in Turkey, available at:
http://www.dtm.gov.tr/dtmadmin/upload/IHR/genel.doc (retrieved on 12 April 2011).




  176
Russia and Central Asian countries (see, Table 1). The EU’s share in total trade deficit fell


significantly from 57 percent to 14 percent while trade with Asian countries started to represent


the substantial part of Turkey’s trade defict (78 percent). The rise in imports from Asia is


predominantly a result of diverted Turkish demand for intermediates from Asia (i.e. Far East


Asia, mainly China) because these countries are competitive and price their goods in dollars.


Turkey also sourced most of its energy products such as oil and natural gas from Russia and


Central Asia in order to diversify its energy supply markets. The political atmosphere between


Russia and Turkey also helped this process to make the former as the second major import


destination in Turkey following the EU-27, in 2009. As Yükseler and Türkan (2008: 15) notes


that the trend reflects an ‘Asia’isation of trade in Turkey. The share of MENA and African


countries in Turkey’s exports increased slightly over time with a constant share in imports from


the region. The region represented an exceptional case where Turkey experienced occasional


trade surpluses especially due to its enlarged market access to Iraq (Turkey’s second-rank export


market in 2009 after the EU-27).




  177


Table 1


Change in Turkey’s exports and imports by country groups (%) in post-CU era


1996 1999 2000 2001 2002 2003 2004 2005 2006 2007
Total share in exports (%)


EU-15 49.7 54.0 52.2 51.4 51.2 51.8 51.6 48.8 47.9 46.7
EU-10 2.3 2.1 2.1 2.3 2.8 3.0 2.9 3.4 3.6 4.3
Other
Europe


5.1 5.2 5.3 4.7 5.3 6.0 6.1 7.2 8.0 8.9


Americas 7.8 10.2 12.4 11.1 10.4 8.7 8.7 7.7 6.8 4.8
Asia I 5.7 3.3 3.2 3.0 3.7 3.4 2.5 2.5 2.7 2.8
Asia II 11.2 5.6 5.7 6.1 6.1 6.0 5.9 6.5 7.7 8.9
Africa &
M. East


13.3 13.6 12.2 13.4 12.5 14.3 15.5 16.7 16.0 16.5


Free
zones


1.9 2.9 3.2 3.0 4.0 4.1 4.1 4.0 3.5 2.7


Other 2.8 3.1 3.7 5.0 4.1 2.8 2.7 3.1 3.7 4.3
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0


Total share in imports (%)
EU-15 53.0 52.6 48.8 44.2 45.2 45.7 43.4 38.9 36.4 34.1
EU-10 0.9 1.1 1.4 1.6 2.3 2.6 3.2 3.2 3.1 3.3
Other
Europe


4.6 4.1 4.3 5.8 7.2 7.4 6.9 7.0 6.5 6.5


Americas 10.2 9.0 8.6 9.1 7.6 6.8 6.5 6.5 6.5 6.9
Asia I 9.9 11.4 11.6 11.2 11.7 13.0 14.9 16.6 17.0 18.1
Asia II 6.9 9.1 10.4 11.1 10.6 11.1 13.1 14.7 16.6 18.2
Africa &
M. East


11.6 8.6 10.4 13.2 10.7 10.3 9.8 11.2 12.1 10.7


Free
zones


0.7 1.2 0.9 0.7 1.1 0.8 0.8 0.7 0.7 0.7


Other 2.1 2.8 3.5 3.1 3.6 2.2 1.4 1.3 1.3 1.5
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0


Trade balance share (%) - deficit / + surplus
EU-15 -56.8 -50.1 -43.3 -21.5 -31.4 -32.7 -28.4 -22.2 -18.1 -12.6
EU-10 0.8 1.0 -0.8 0.7 -1.2 -1.7 -3.6 -2.8 -2.3 -1.5
Other
Europe


-4.0 -2.2 -3.4 -9.0 -11.7 -10.5 -8.4 -6.6 -4.0 -2.4


Americas -13.0 -6.9 -4.7 -2.8 -1.0 -2.9 -2.4 -4.5 -6.0 -10.4
Asia I -14.7 -26.6 -20.4 -36.6 -30.4 -33.4 -37.6 -40.6 -39.5 -44.2
Asia II -2.1 -15.7 -15.2 -26.8 -21.2 -21.9 -26.3 -28.5 -30.6 -34.0
Africa &
M. East


-9.6 0.9 -8.5 -12.8 -6.4 -1.7 0.6 -1.6 -5.7 -0.8


Free
zones


0.7 1.9 1.5 6.3 5.6 6.1 5.1 5.1 3.7 2.7


Other -1.3 -2.4 -3.3 2.7 -2.3 -1.2 1.0 1.6 2.5 3.1
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0


Source: Yükseler and Türkan (2008: 84).




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Turkey experienced a structural change in its exports shifting from conventional and


unskilled labor-intensive sectors to more technology intensive-sectors requiring more skilled


labor. Export increase was visible in sectors which can be classified as medium-low and


medium-high-technologies, substantially between 1996 and 2010. The enhancement was


especially the case in basic metals (by 50 percent), machinery and equipment n.e.c. (100


percent), and motor vehicles, trailers and semi-trailers (3 times), while traditional share of low-


technology products such as textiles and clothing industries declined four times from over 40


percent to 20 percent from 1996 to 2010. Other declining sectors as a share in total exports were


low-technology food products and beverages (from 12 to 6 percent) and chemicals (medium-


high) in this period. Accordingly, the total share of medium- tech sectors accounted for 65.8


percent in 2009, while it was only 40. 3 percent in 1996 (Figure 2). The share of low-tech


exports mainly in textiles and clothing dropped sharply from 57.8 percent in 1996 to 31.7 percent


in 2009.


Figure 2. Change in technology-intensiveness of sectors in Turkish manufacturing exports
(1990-2009) (%)




Source: Turkish Statistical Institute (TÜİK).


This trend is also reflected in Turkey’s trade policies under WTO when Turkey proposed


its trading partners to lower their tariffs in export-oriented sectors, while it instituted safeguard


measures in declining industries in which reduced competitiveness provoked domestic producers


to search for protection against rising imports. In 2006, for example Turkey was in favour of a




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scheme for emergency measures in textiles and clothing sectors to prevent the implications of


quota phase-out process after Uruguay Round137.


II.4 Challenging Factors for Turkish Trade Policy


Following export-oriented strategy and implementation of unilateral trade liberalisation


policies, Turkey became an offensive exporting country with the share of industrial products


rising progressively to almost 92 percent in its total exports138 in 2010, while they only


constituted a mere 36.6 percent in 1980. However, several factors challenge the rising trend of


success in Turkey’s trade in the last three decades.


The first challenge is the persistent trade imbalances which has repercussions on the


country’s current account deficits. Actually, the trade deficit is not a new phenomenon, but it has


been a characteristic in Turkey’s trade since the end of the second World War. It amounts to over


70 billion dollars, in 2010. After the CU, while the deficit continued (indicated in Figure 3), the


export/import ratio has been on average of only 65 percent. Substantial increase in exports did


not increase this ratio at all. The ratio of trade deficit to the GDP rose from 15.9 percent in 1980,


to 19.4 percent in 1995, finally reaching to 45 percent in 2008, with a peak of 56.3 percent in


2006. Energy import has been an important factor to contribute to Turkish trade deficits (in fact


export/import ratio raises from 65 to a more satisfactory level of 81 percent between 2002-2010


if energy imports are excluded).



137 Several countries including Turkey urged the WTO under the so-called ‘Istanbul Declaration’
to extend the deadline for implementation of the final integration stage to December 31, 2007 in
WTO Textiles and Clothing Agreement. The idea behind the initiative was to prevent job losses
and business bankruptcies due to massive trade associated with the ending of current textile trade
regime in 2005. For the petition ‘Istanbul Declaration Ragarding Fair Trade in Textiles and
Clothing’ presented to the WTO Director General see, www.ncto.org/quota/Idec.pdf (retrieved
on 16 April 2011).



138 This ratio is over the world’s average of manufactured products to total exports, according to World
Bank figures.




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Figure 3. Turkish trade deficit in dollars (1996-2010)




Source: Undersecretariat of Foreign Trade (UFT).


The second challenge relates to the sectoral composition of exports. There has also been a


steady growth in technology-intensiveness of the manufactures, with a trend of decrease in low-


technology products, and an increase in middle-technology products. However, the share of


high-technology goods was constant. Overall, medium-low technology manufacturing industry


products have dominated the export performance in Turkey. The success in vehicles (especially


automobile industry), electrical machinery and equipment, consumer electronics, and, iron and


steel products was remarkable. However, increasing competitive pressures put Turkey under the


‘middle-income country trap’ in international trade where low-technology manufacturing is


facing challenges from the low-wage countries as a result of further liberalisation of world trade


under multilateral and regional liberalisation. On the other hand, spreading intovalue-added and


high-tech sectors requires a more sophisticated strategy. The export-composition of Turkish


manufacturing industry reveals that the share of high-tech product exports is comparatively


lower than many other developed and principal developing countries (e.g. the G-20 members).


The total share of these products (such as office machinery and computers, radio-tv and


communication equipment, medical and optical instruments) only represent a tiny 2.5 percent in


2009, while its was almost 2 percent in 1996. Hence, the CU and other relevant measures did not


boost exports in these segments. Furthermore, Turkey’s world market share in high-tech goods is


only confined to 0.15 percent despite its corresponding share of 0.8 percent in total merchandise




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exports. The positive change in market share also reveals a marginal 0.05 percent, a much lower


rate of increase compared to many leading trading nations from 1990s to 2000s.


A third challenge is about the trends in sectoral concentration of Turkey’s exports. Trade


performance and sustainability are based on country and product concentration of exports and


imports. It is observed that country concentration of exports experienced a positive downward


shift after 1980 when Turkey has managed to geographically diversify its exports. The trend was


more promising especially after 2001. Geographical diversification of exports was assuring as


Turkey started to find alternative markets replacing the EU.


Figure 4. Turkey’s export concentration by country and sector (Herfindhal-Index, 1990-
2007)




Source: Türkiye Kalkınma Bankası (2010), p. 10.


Market diversification has another dimension. Several of Turkey’s important trading


partners that constitute a significant share in its exports are not yet members of the WTO.


Russian Federation, Azerbaijan, Kazakhstan, Turkmenistan, Uzbekistan, Iraq, Syria, Iran,


Algeria, Libya are among these where the WTO regime is not existing to provide sufficient


predictability and transparency. Therefore, it is essential that the accession process of these


countries are completed successfully and Turkey provides maximum support for theri eventual


integration into multilateral system.


Furthermore, Turkey does not reveal a corresponding performance in sectoral


diversification. In other words, Turkey experienced gradually a concentration of its exports in


less and less diversity of products, while it must be admitted that a sustainable increase in




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exports can be achieved through multiplicity of its products. Undoubtedly, diversification of


export markets is favourable as Turkey becomes less dependent on limited number of country


markets, mainly the EU. But, the upward shift in product concentration ratios after 2001 needs


further elaboration in every sector seperately depending on whether it is a result of industry-


specific structural shifts, or developments outside the industry itself (Erlat and Akyüz, 2001).


Nevertheless, the timidity largely reflects the limited resources such as raw materials, physical


capital, qualified labour force, technological investments, research and development


expenditures, and innovation initiatives as well as industrialisation strategies adopted in response


to global developments. However, a better explanation for narrower range of export products can


be the lack of sufficient policy initiatives to boost domestic production in higher steps of value-


added chain under Turkey’s current domestic political economy considerations. Turkey, in this


respect has served as an assembly centre in manufacturing mainly dependent on imports of


intermediates from Asian or European countries.


Fourth challenge comes from the exchange rate parity. Many policies including export


incentives were not possible for Turkey to be implemented independently as a result of its CU


obligations. Therefore, Turkey started to direct its foreign trade by means of exchange rate


realignments in the post-CU period. Devaluations during crisis periods were usually followed by


policies leading to appreciated Turkish Lira. These policies, as observed after 2002, made


intermediate imports needed for the industrial production relatively cheaper (Tonus, 2007).


However, this process generated a significant increase in imports of processed and primary


industrial supplies; primary fuels and lubricants; parts and accessories of capital goods and


transport equipments, and rendered the manufacturing industry to be more dependent on imports.


Yükseler and Türkan (2008: 53-59) claims that this ‘importisation’ process accelerated trade


imbalances. Appreciated currency also helped Turkish exporters who source intermediates from


Asian countries in dollar terms, and process them to be exported to European markets in euro


terms. The euro/dollar parity in favour of the former helped exporters to stay competitive and


keep their share in European market (İzmen and Yılmaz, 2009: 183). Indeed, in Turkey the share
of imports in dollar terms increased from 55 percent in 2003 to 61 percent in 2010 in total


imports. The volume of exports in euro terms over the same period passed those in dollar terms


shaping the trade patterns. How sustainable is this configuration of trade is open to dispute when


challenges in European economy after the crisis started to induce euro to shrink its value, to


reduce EU demand for importables, and to boost new trade protection measures after the global


financial crisis.


Another compelling factor as a challenge to Turkish exports relates to the competitiveness


in world markets. Global developments (change in global production networks and new




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outsourcing facilities, technological developments, diversified communication, transportation


and marketing methods etc.) lead all countries to adopt new strategies to conform to changing


conditions and competitive situation. The adaptation capability of Turkish exports industry has


been relatively good when exporters had the capacity to follow trends in the world economy and


managed to forward their exports into emerging markets. According to International Trade


Centre (ITC) estimates, Turkey has successfully advanced its rank from sixth (in 2000-2005) to


second in 2005-2009 period among the upper-middle income group of countries139. However, a


similar success is not assured in its competitiveness (i.e. increase in market share in export


products and in export destinations) while Turkey’s ranking descended from second to fifth for


the corresponding periods (seventh for 2007-2009). As figures in Table 2 reveal, in the last


decade Turkey became less competitive while its adaptation capacity increased in exportation140.


Table 2
Comparison of Turkey’s Trade Performance Index-TPI (2000-2009) with various middle-
high income countries
2000-2005 2005-2009
Competitiveness Rank Adaptation Rank Competitiveness Rank Adaptation Rank



Argentina 0.0000 16 0.0001 5 -0.0004 20 -0.0003 19
Azerbaijan 0.0000 15 0.0000 15 0.0009 4 -0.0002 18
Belarus -0.0001 18 -0.0004 21 0.0000 13 0.0000 12
Brazil 0.0032 1 -0.0001 18 -0.0005 21 0.0003 1
Chile 0.0009 4 0.0001 4 0.0000 14 0.0001 3
Kazakhstan 0.0004 7 0.0004 2 0.0011 3 -0.0001 13
Malasia -0.0007 20 -0.0003 20 -0.0001 16 -0.0005 20
Mexico -0.0012 22 0.0003 3 0.0037 2 -0.0008 21
Romania 0.0009 5 -0.0001 17 0.0008 6 0.0000 11
Russia 0.0018 3 0.0011 1 0.0044 1 -0.0029 22
S. Africa 0.0009 6 -0.0004 22 -0.0003 19 0.0000 4
Turkey 0.0022 2 0.0001 6 0.0009 5 0.0003 2


Source: TEPAV (2011a) based on UN Comtrade Database, ITC Trade Performance Index.


At sectoral level, among leading Turkish export products, the reduction in


competitiveness is notable in fruits and vegetables, and the clothing industry although modest in


iron and steel industries and in vehicles. However, the only significant sector that managed to


increase its competitiveness was electrical machinary. It can be argued that, a reduction in the



139 Actually when revision is made for the period of 2007-2009 to eliminate the effects of global
economic and financial crisis, Turkey ranks the first in its group. The ‘upper-middle income’
group comprise several emerging markets (i.e. Russia).
140 TEPAV (2011a: 2).




  184
competititveness, with a continuation in the export of standardised labour-intensive products


with lower and middle-technologies, may cause lasting reductions in export markets141.


As Table 3 indicates, Turkey’s relative competitive position deteriorates especially after 2003
compared to many developing countries including BRIC (i.e. Brazil, Russia, India, China)
countries, S. Korea, Mexico, Indonesia as prominent rivals of Turkish export products in
international markets. Turkey’s rising imports from Asian countries can also be attributable to its
waning competitiveness against Far East Asia, ASEAN countries and South Asia especially in
several low-technology and labour-intensive sectors (Yükseler and Türkan, 2008: ).
Table 3. Turkey’s relative position vs. selected countries (Competitiveness Index,
2000=100)


2000 2001 2002 2003 2004 2005 2006 2007
Japan 100 89.5 109.7 124.3 132.6 155.5 168.7 203.6
Korea 100 86.3 96.1 107.9 114.4 114.3 107.4 121.6


Sweden 100 86.7 94.3 93.8 97.1 112.8 113.3 121.1
US 100 76.6 88.8 106.1 118.1 131.1 131.0 151.8


Brazil 100 94.7 127.8 143.5 146.2 130.7 115.6 119.0
China 100 78.1 92.8 112.1 123.2 137.6 136.1 147.7
India 100 79.6 92.8 104.5 112.1 120.1 120.2 123.0


Mexico 100 73.1 84.9 110.7 126.4 134.7 134.1 154.2
Indonesia 100 86.0 82.2 86.7 97.3 109.9 94.5 105.6
Turkey 100 100 100 100 100 100 100 100



Source: Adopted from Türkiye Kalkınma Bankası (2010), p. 34.


Hence, the transformation in the structure of exports do not necessarily provide a positive


prospect for a couple of reasons. First, Turkish export strategy did not specifically remark ways


for increasing the industries competitiveness under the challenge of dynamic comparative


advantages. Recall for switching into technology-intensive sectors do not go beyond a rhetoric


unless coupled with a comprehensive agenda linking several related policy areas. An active


industrial policy aiming at long-term restructuring based on skill upgrading, science and


technology planning, technological support and R&D incentives to enterprises, attracting


technology-based FDI has become essential determinants for export upgrading. Turkish Industry


Strategy Document adopted in 2010142 had an intention to provide a clear road map by


pinpointing the strong and weak points of Turkish industry. However, the Document does not


put forward under its Action Plans a comprehensive set of instruments necessary to switch into


high-tech sectors and to boost competitiveness143.



In imports, Turkey has one of the most liberal trade regimes with regard to MFN Tariff


Trade Restrictiveness Index (TTRI). This makes it the fifth least restrictive trade regime with an



141 TEPAV (2011b: 5).
142 See, http://www.sanayi.gov.tr/Files/Documents/sanayi_stratejisi_belgesi_2011_2014.pdf for the
Document. (18 April 2011).
143 For more on Turkey’s competitive position see, Seymen (2009).




  185
average of 1.5 percent, much lower than the averages of Europe and Central Asia (4.4 percent)


and the upper-middle income countries (6.9 percent). Because the TTRI for non-agricultural


products are based on the EU’s CCT, it is only 1.3 percent putting Turkey at a lower protection


level than most of its trading partners. For agricultural products, however, the TTRI is 21.8


percent in 2009, placing Turkey in a higher protectionist group of countries144. However,


Turkey’s import protection measures are, on the other hand, challenge its trade position in WTO


negotiations. Only 46.3 percent of tarif lines in Turkey were bound after the Uruguay Round,


while applied tariff schedule has a complex structure. Despite lower average bound MFN tariffs,


the mean MFN tariffs are higher in sectors like textiles, footwear, chemicals, transport


equipment, base metals etc. in which the volume of imports are considerable. Imports in several


categories of products are subject to licensing, permission of authorities, and strict health and


sanitary controls (Togan, 2010: 1349-1357; and WTO,2008). Increasing resort by Turkish


industries to anti-dumping and safeguard measures places Turkey among a high-rank user of


such trade policy instruments in the last decade (this point will be raised further in the next part).



Another major challenge in the import side is as mentioned earlier relates to rising


dependency in Turkish manufacturing industry to imported intermediates, hence leading to trade


deficits and waning of local suppliers. The ‘import’ dependence is mainly rooted in some sectors


like consumer electronics with inputs imported mainly from East Asian and European suppliers


(Taymaz and Voyvoda, 2009: 165) put Turkey under a choice for a newer ‘input supply strategy’


as was developed recently by Undersecretariat of Foreign Trade. Its consequences are not yet


certain and potentially blurred under given global production networks, limited domestic


resources and energy supply insufficiencies in Turkey.



Finally, the EU’s regional trade agreements such as Free Trade Agreements (FTAs) has a


challenging impact on Turkey’s market share in the EU and in its relations with third countries.


Accordingly, various motives induce the EU to increasing resort to arrangements (allegedly not


as alternatives to the WTO multilateralism) leading to bilateral links with its several trading


partners. These initiatives, whatever their impact on the WTO itself, has repercussions on



144 MFN TTRI denotes the tarif that when uniformly applied accross the entire (MFN only) tarif Schedule
would keep total imports at the observed level., capturing the protectionist aspect of a country’s non-
discriminatory trade policy. See, World Trade Indicators 2009/10database (country-level Trade Briefs and
Trade-at-a-Glance Tables) available at: http://info.worldbank.org/etools/wti/docs/Briefstaags.htm
(retrieved on 18 April 2011)




  186
Turkey’s on-going privilidged status in EU markets under its secular CU link. Accordingly,


Turkey has several concerns about the EU FTAs145.



First, they cause an erosion of preferences for Turkish exports in EU markets. Such FTAs


can be seen as ‘trade re-orientation’ rather than ‘trade diversion’ as these agreements provide


equal conditions of duty and quota free access to products coming from previously sidelined


third countries. However, Turkey’s concerns rise as the EU enter into negotiations and conclude


agreements with countries like Mexico, India, South Korea, ASEAN, MERCOSUR, Ukraine etc.


which are in competition with Turkey in the EU market. The similarity of composition of


exportables shall also cause a deterioration in terms of trade in Turkey vis-a-vis the EU as


Turkey has to further reduce its export prices to be able to keep its market share constant. The


second concern is about the likely impact of such agreements in Turkish domestic market. Under


the CU regime, third country products that enter into free circulation in the EU can be re-


exported to Turkish market (recall that same is true for imports into Turkey from third countries


if they are to be re-exported to the EU market) with no tariffs, quotas or similar mesures to be


imposed as if they have the EU origin. Thus, Turkey will in practice liberalises its imports while


these countries can continue applying measures against Turkish exports. Third, the EU is free to


choose its trading partners for concluding free trade deals and negotiate in its own terms without


taking into account the needs and priorities of Turkish domestic actors. Thus, Turkeye’s position


is disregarded. Negotiations are not held in parallel and Turkey claims it is not very well


informed of the negotiation process despite its CU linkage. The EU proposes better market


access conditions for European firms in industrial, agricultural and services areas and bring


further requirements on its FTA partners to comply with EU norms in standards and domestic


regulations in return for its own concessions towards these partners. However, Turkey also


assumes indirectly liabilities arising from such bilateral deals without reciprocal achievements


unless it can negotiate similar FTAs with these partners. What if these countries refrain from


negotiating with Turkey is another concern even though the EU asks its partners to start


negotiations with Turkey for similar FTAs. Therefore, a ‘Turkey clause’ is instituted by the EU


to encourage these countries to approach Turkish initiatives positively, but this clause is not


binding with its limited political effect. Only commercial considerations of these countries can


motivate them to have a corresponding FTA with Turkey146. Finally, FTA deals are proliferating


under a ‘domino effect’ where all countries take themselves under these schemes for not loosing



145 For a more detailed analysis of the debate implications of the EU’s FTA regime on Turkey-EU
relations and Turkish trade regime, see Akman (2010).
146 Nevertheless, it must be admitted that most of these countries with few exceptions like Mexico have
already initiated negotiations, and Turkey have successfully used its CU link to persuade these countries.




  187
their market shares against its rivals. This trend, however shifts attention from the multilateral


negotiations and keeps the Doha Round to fall behind. Countries like Turkey have further gains


in WTO regime and sidelining the Doha Round will bring further complications for its trade


regime.


III. TURKEY’S POSITION IN THE WTO AND THE DOHA ROUND


Turkey has been a Contracting Party to the GATT since 1994, and became a founding


member of the WTO on March 26, 1995147. Turkey had so far four policy reviews (1994, 1998,


2003 and 2007) under TPR mechanism. The WTO’s Trade Policy Review: Turkey 2007 (WTO,


2008) formulates Turkey’s main interests in the Doha Round as:


‘fair, competitive, and predictable trading environment where trade (including export)
distorting support measures are eliminated. For Turkey, agriculture is the key issue of the
DDA; and Turkey attaches utmost importance to non-agriculture market access (NAMA)
negotiations and trade facilitation’ (p.13).


In this context, it can be argued that main factors shaping Turkey’s position in the world


trading system are the current relations based on the CU with the EU, the WTO Agreements


(WTO, 2008: vii), and the on-going picture of rising preferential trade arrangements accelerated


by the EU. In Doha Round, on the other hand Turkey is squeezed in a position between


developed and developing countries largely as a result of its special relationship with the EU, and


its developmental concerns ‘commensurate to its economic and social conditions’ (Pulat, 2003:


5). In main pillars of the negotiations, Turkey’s position swings between two sides reflecting its


‘ambitious’ market access requests with ‘balanced’ outcome for developing states, but


sometimes differing even within the same area of negotiations. Being in the CU Turkey stands to


gain from reductions in industrial tariffs by other developing countries with comparable levels of


income as their average bound tariffs are usually higher and eventually create an unfair


competition. In agriculture, Turkey prioritises the elimination of trade distorting subsidies,


including export subsidies while it simultaneously insists on keeping special products and special


safeguard mechanisms for developing countries considering the fact that its agrarian population


is high (almost 30 percent). Its engagement in trade in services negotiations has been active and


constructive as proposed by Ambassador Aran (2011), but this area like many other developing


countries have been considered by Turkey as mostly favouring developed country interests.



147 Turkey has not signed yet any of the plurilateral agreements that resulted from the Uruguay Round but
it is an observer state in the Committees on Government Procurement and Trade in Civil Aircraft, and
party to the Information Technology Agreement (ITA).




  188
Besides these main features, Turkey overall has been involved in different bargaining


coalitions with several participating countries during the negotiations. Understandably, this is a


typical behavioural pattern to support a country’s position. Turkey worked in coordination with


the EU and other industrialised nations (as in NAMA); or with developing countries (G-33,


India, China, S. Korea and Indonesia to make special products and SSM a part of final text in


agriculture), and a mixed group in Friends of the Anti-dumping. Its role was constructive in the


‘Friends of the System’ group together with Norway, S. Korea, Canada, New Zealand,


Singapore, Chile and Colombia, to support the continuation of the negotiations (Aran, 2011).


This part aims to provide a short analysis of Turkey’s general outlook and its position in


major areas of negotiations in Doha Round and the WTO.


III.1 Non-Agricultural Market Access (NAMA)


Turkey paid great attention ton non-agricultural market access negoatiations in Doha


Round, mainly because most of its exports are such products covered under NAMA. More


importantly, Turkey has applied EU’s common cutoms tariff (CCT) since the establishment of


the CU. The weighted average applied tariff rates under the CCT after Uruguay Round was set at


3.7 percent, a relatively low level providing easier market access conditions for third countries,


including many large developing countries which are rivals for Turkish products. In return these


countries had higher tariff rates to Turkish products. Therefore Turkey had to take a position in


line with the EU and other industrialised nations to enforce developing countries make further


reductions. Hence, the CU has to a large extent been a determinant of its general approach in


NAMA negotitions. By supporting the Doha mandate set in 2001, Turkey showed its tendency to


actively involve in the negotiations. Turkey, in its national communication briefly proposed its


views in 2003148. In terms of ‘tariff bindings’, Turkey proposed that all members should


commmit themselves to bind all non-agricultural tariffs, and in this regard its own lower level of


coverage (36.3 percent) could be raised to 100 percent as well. Modalities for tariff reductions


were the cardinal element in negotiations. Turkey suggested that a ‘non-linear formula’ would be


the best for steeper cuts in higher tariffs (especially when it is considered that simple average


bound tariffs were much higher in several developing countries such as India, S. Korea, Brazil,


Argentina, South Africa, many ASEAN members than Turkey). Turkey’s proposal was for


adopting a formula with a constant coefficient where 15 percent to be set as a ceiling base rate,


instead of using differrent variables or coefficients for different country groups and with limited


flexibilities to be conferred to the developing countries. (Figure 5).



148 The WTO Document TN/MA/W/41, 12 August 2003, Communication from Turkey on Market Access
for Non-Agricultural Products.




  189
Hence, Turkey from its point of view had an optimal approach to prevent developing


countries to continue applying higher rates to the detriment of Turkey’s exports. Accordingly,


the formula offered by Turkey initially proposed that any tariff rate above 15 percent, after the


negotiations shall amount to around 11.5 percent at most. Additionally, the formula offered a


more progressive elimination of tariffs under 15 percent to provide Turkey with keeping its tariff


margins within the context of the CU. The formula was:


For t0 ˂ 15%, and, For t0 ≥ 15%, t1


Concerning non-tariff barriers, Turkey’s choice was to consider the issue as an integral


part of the negotiations and to undertake them together with the reduction of tariffs. Furthermore,


Turkey took the position that no sectoral exception to general negotiations should not be


conducted. This was because for Turkey exports a variety of products that can be classified


under different sectors and most of its exports were composed of low-tech and middle-tech


products that were then actually or potentially subject to trade protection in many countries.


Figure 5. Turkish initial proposal in NAMA negotiations (TN/MA/W/41), in 2003.




Following the failure to achieve final modalities in Cancun in 2003, a ‘general


framework’ was instituted in Annex B of the General Council’s Decision in July 2004. However,


many developing countries which claimed that it repeated the views of developed countries, and


resembled largely to Derbez Text that has been rejected in Cancun because it had reflected the


Canada-US-EU proposal., opposed to ‘the Framework’. The main idea of the developing




  190
countries was that the Framework provided an extreme form of harmonisation with far-reaching


tariff reductions to provide an opening for exporters from industrialised nations in developing


country markets, and it proposed no sufficient emphasis on the ‘les-than-full-reciprocity’


principle for the developing countries149. The negotiations started to generate a modality based


on non-linear Swiss formula, with a possibility that more than one coefficient would be


applicable, and ‘special and differential treatment’ and ‘less-than-full-reciprocity’ principle


could be used for the developing countries. After hard negotiations the text which brought


different coefficients with flexibilities for the developing countries, has taken its shape in July


2008 with subsequent revisions of the draft text150.


For Turkey, the fierce opposition by several developing countries, and NAMA-11 in


particular has prevented what it proposed initially (single coefficient). Despite its developing


contry status Turkey cannot parctically benefit special and differential treatment as it has to


follow developed countries under its CU obligations. On the other hand, even a limited final text


based on a non-linear formula is better than ‘no text’ for an offensive Turkish policy.


Additionally, some side steps were important for Turkey such as the acceptance of ‘mark-up’


approach that could provide higher cuts for some developing countries151.


In practice, Turkey adopted an approach which pressures developing country partners so


that they sharply cut their tariffs, tariff peaks and tariff escalations. This approach intends: to


keep reductions in CCT at the minimum; to provide Turkish exporters with a possibility to


possess their preferences in the EU market; and to achieve lower tariffs vital for Turkish


exporting sectors such as automobiles, textiles, clothing, machinery, consumer electronics, and


iron and steel, at the end of negotiations 152. Nevertheless, Turkey’s sui generis position is well


observed in NAMA. It can neither benefit its developing country status in practice (such as


flexibilities and different coefficients secured for the latter- or protect its sensitive products- nor


can it have an ‘overall trade-off’ that many developed countries do- between NAMA and other


negotiation topics (agriculture, services etc.) owing to its special concerns in these areas. Overall,


it can be argued that an incomplete Doha Round does not serve to Turkey’s interests in trade in


manufactures while uncertainties in the multilateral system motivates a wider set regional trade


arrangements with further complex repercussions on Turkey’s trade relations.



149 Hilary, J. (2005: 12), The Doha Deindustrialisation Agenda: Non-Agricultural Market Access
Negotiations at the WTO, available at: http://www.wto.org/english/forums_e/ngo_e/posp47_nama_e.pdf
(retrieved on 10 May 2011). For a recent review of NAMA negotiations see, Low and Santana (2009).
150 The fourth revision draft text is TN/MA/W/103/Rev.3, on 6 December 2008. For current state
of NAMA negotiations, see TN/MA/W/103/Rev.3/Add.1, on 21 April 2011.
151 Yaman (2008: 177).
152 Yaman (2008: 182-184).




  191
III.2 Agriculture


Agriculture is a thorny subject in the WTO and in Doha Roundd negotiations, in


particular. No country has managed to strip off itself from pressures of agriculture -even though


it represents a tiny part of the total world trade- because of its significant role in terms of


employment, vulnerability of incomes for farmers, food security, environment and so on. Turkey


with its vast territories and geographical proximity to Europe, Middle East and North Africa, and


Central Asian Republics connotes a potential gainer of agricultural trade liberalisation. However,


Turkish position in agriculture in Doha has been of defensive in nature (Pulat, 2003: 6). Its


cautious policy has been mostly in line with the developing countries highlighting their typical


sensitivities. It can be claimed that sensitivities also exist members like the EU, the US and


several other developed countries such as Japan, S. Korea, Norway, Switzerland, and Iceland


whose positions have also been defensive. However, the main divergence lies in their generous


subsidies to their domestic farming that the developing countries cannot mostly provide.


Therefore, developing countries prefer to protect their domestic producers by means of high


tariffs and by achieving more flexibilities for their special and differential statutes under WTO


rules. This is also manifest in Turkish case where domestic support is comparably much lower


than the EU. Indeed, in Trade Policy Review: Turkey 2003 (WTO, 2004), prepared just after


Cancun Ministerial revealed Turkish governments’ official view reflecting its developmental and


social concerns:


As a developing country, Turkey gives priority to the ongoing negotiations on


agricultural products. In developing countries, the majority of the population depends on


agriculture for their livelihood. Therefore, the results of the agreement will not only have


economic but also social effects. Since developing countries cannot provide necessary and


sufficient support to their domestic agriculture, tariffs are the only instrument to protect the


agricultural sectors against highly subsidized imports mainly from the developed countries.


Developing countries also need to support their agricultural sector to sustain agricultural


production. However, government support remains at negligible levels in these countries,


including Turkey, because of the budgetary constraints. Therefore, without any substantial


reductions in the other pillars of the Agreement, tariff reductions could not generate fair and


improved market conditions (p.14). italics added.


In Turkey agricultural support reduced substantially as a result of agricultural reform


policies under the World Bank guidance and IMF-led monetary policies, initiated in late 1990s.


This urged Turkey to implement direct income support programme which converted the nature


of domestic support from ‘amber’ into ‘blue box’ measures in the WTO. Therefore, it is not




  192
surprising that Turkey supported Cairns Group and G-20 views of having cuts in domestic


support and eliminating trade distorting subsidies during the negotiations rather than acting in


coordination with the EU as in NAMA. During the negotiations, Turkey’s approach also


overlapped with the G-33 in ‘de minimis’ issue. Turkey like many other developing countries


was subject to de minimis rule which provided the opportunity to give domestic support not


exceeding 10 percent of the production value. Turkey opposed to any proposal to reduce 10


percent which it deemed as minimal.


On the other hand, tariffs are important instruments to protect domestic farming in


Turkey. The average applied MFN tariff is substantially high in agriculture (e.g. 28.3% in 2007),


and according to WTO definition153, average tariff protection was 47.6% on agricultural products


in 2007 (simple average as high as 114.3 rercent in the case of live animals and products thereof,


and 109.4 percent in dairy products), compared with 5% on non-agricultural products.


Furthermore, tariff escalation is positive especially in food, beverages, and tobacco products


(WTO, 2004: 31). In market access Turkey apparently has been in line with the EU to resist


substantial cuts in tariffs, nevertheless the defensive nature differed widely as Turkey demanded


to be placed in a different band than the EU on grounds of its developing country status. Turkey


thus supported a ‘simple linear formula’ imposing on developing countries a maximum of only


two-thirds of tariff cuts made developed countries. Turkey also supported the G-33 position to


achieve the possibility to benefit from reduced and/or zero cut options for ‘special products’ (SP)


and ‘special safeguard mechanisms’ (SGM), the two essential flexibilities154 with regard to live


animals, dairy products, grains, oil seeds, sugar, tea and tobacco (İmir, 2008: 149).
In export subsidies Turkey welcomed the EU position to eliminate them by 2013, the


only main issue over which its interests overlap with the EU position.


Interest coalitions of Turkey with non-EU and developing countries may be regarded as


paradoxical if one considers that Turkey is at the same time in the accession process that requires


harmonisation of its policies with the EU’s Common Agricultural Policy. However, Turkey’s



153 WTO definition of agriculture: HS Chapters 01-24 less fish and fishery products, plus some selected
products.
154 In Hong Kong Ministerial the developing countries were allowed to make lower commitments in
specific number of ‘special products’ they deemed essential on grounds of food security, livelihood
security, and rural development. Turkey sided with G33 group of developing countries on the ground that
these instruments are of vital importance to have progress in market access negotiations and to sustain
agriculture in developing countries. The G-33 raised their concerns over ‘special products’ (SP) and
‘special safeguard mechanisms’ (SSM) that were regarded as controversial issues to deadlock the Doha
negotiations in July 2006. In their press statement, the G33 countries- including Turkey stated in para. 4:
‘Ministers insisted that all aspects of SPs and SSM must be incorporated integrally in any modalities to be
agreed by July 2006. They further stressed that no modalities in agriculture can be acceptable which do
not fully reflect the expectations of the vast bulk of developing countries in the WTO on SPs and SSM’.
See, http://www.tradeobservatory.org/library.cfm?refID=88374 (14 May 2010).




  193
intention has been to benefit all flexibilities reserved for developing countries in the


implementation of the final agreement because its full EU membership seemed to take a long


time (İmir, p. 139)155.


III.3 Services


Sampson argues (2008: 86) ) that the General Agreement on Trade in Services (GATS)


under WTO have a potential to immensely expand trade in services, and change the patterns of


global production and investments. The services sector represents an overwhelming share in


employment and GDP in Turkey as in many countries, and serves as an essential element of


economic development. Turkey’s overall trade balance in trade in services in 2009 was 17 billion


dollars, with a real growth of 7.8 percent (while it was 4.4 percent in goods). However, the


services share of total exports dropped from 37.2 percent in late 1990s to 20 percent in 2009 as


Turkey focused more on manufacturing. The two main aspects of services negotiations have


been market liberalisation and rule-making. The liberalisation made under different modes are


usually based on bilateral ‘request and offer’ formula between the members.


Turkey’s initial conditional offer was submitted in September 2003, and this followed by


a revision in September 2005156. Turkey’s requests were generally concentrated on construction


and engineering services, while its trading partners made comprehensive plurilateral requests in


telecommunication, maritime, logistics, energy, environment, distribution, postal, financial,


education, legal, architecture and engineering, and audio-visual services as well as MFN


exceptions. The requests were made by a wide range of countries starting from the US and the


EU to S. Korea, Mexico, India, Pakistan, Singapore and Taiwan. In services, Turkey adopted a


‘cautious’ approach displaying its concerns over domestic regulatory problems in many services


areas. Therefore, the official position has been ‘to avoid any creating expectations in its trading


partners for further market access’157. Two topics were important for Turkey in services. The


first priority issue as in many developing countries was the movement of natural persons who are


service-providers (mode IV) because this represented a sizable receipt of remittances. Turkey has


extensive investments abroad in construction and engineering business in which the qualified


personel is essential, but visa and immigration related obstacles needed elimination for the


interests of many Turkish undertakings providing services abroad. The second issue was Article



155 For more on Turkey’s position in WTO in agriculture see, Çakmak and Akder (2005).
156 See, WTO Document TN/S/O/TUR/Rev.1 on 29 September 2005 for Turkish Revised Conditional
Offer on Services.
157 The Fifth Meeting of the WTO Coordination Committee in Turkey, held on 12 April 2006, available
at: http://www.dtm.gov.tr/dtmadmin/upload/ANL/CokTarafliAnlasmaDb/KitapcikNisan2006.doc
(retrieved on 16 May 2011).




  194
II exemptions simply because most of Turkey’s partners in trade in services are non-WTO


neighbouring countries such as Russian Federation, Azerbaijan, Central Asian Republics,


Bosnia, Libya, Algeria so on.


There are several factors influencing Turkey’s guarded stand on services. First, the


commitments of other countries including the EU. Although the CU does not extend into


services Turkey followed the EU by not adopting a position that went beyond its commitments


under GATS and services negotiations. Second, its domestic concerns over investment regime


and extensive privatisation programs in areas like infrastructure, electricity, natural gas,


telecommunications reflected tensions concerning social aspects of the issue and security


considerations. Additional pressures by local suppliers not to relinquish their priviledged access


also affected Turkey’s liberalisation scheme in not providing a wider market access to foreigners


(Yılmaz, 2007: 252). The third point to be raised in Turkey’s involvement in trade in services


regards ‘domestic coordination problem’. The Treasury in Turkey has been the main responsible


body to coordinate Turkey’s position in the negotiations differently than in other areas where the


UFT was heading. Structurally the services area requires the involvement of several institutions,


public and regulatory bodies, and private parties which made the formation of a unique approach


difficult to achieve by the Treasury. Fourth, a comprehensive quantitative and qualitative


assessment of the outcomes of liberalisation in services have never been tabled in Turkey as


most attention was diverted to manufacturing which is more easily estimated. Finally, it can be


argued that the developments in trade in services are largely influenced by the deadlock in


industrial and agricultural negotiations. Therefore a lack of progress in these areas shall have a


stumbling affect on services under the ‘single undertaking’.


III.4 Other prominent areas of negotiations


TRIPS is another important area of the Doha Round package although it has never


constituted one of the major tracks in negotiations. However, the protection of intellectual


property rights always obtained sufficient support from developed countries and TRIPS was


symbolised as a mechanism to enforce these rights. Many developing countries claimed that


Uruguay Round was imbalanced partly because the TRIPS Agreement served to interests of


developed countries especially in areas such as pharmaceuticals and chemicals.


Turkey, among the developing countries has made a considerable progress in intellectual


property rights under its CU regime with the EU. Besides the establishment of Turkish Patent


Institute to administer issues pertinent to patents, trademarks, and industrial designs, several


legislative steps have been taken to make Turkey a party to several international conventions and


to enforce the protection of rights thereof (Özdemir, 2010: 34). Despite its past success in




  195
administrative and legal progress, Turkey is not equally promising in the enforcement of laws in


practice and it is currently considered to be one of the most problematic countries in counterfeit


goods, the protection of patents and copyrights. This brings Turkey into direct confrontation with


the EU. In Doha Round two prominent issues were on the agenda: geographical indications


(GI), and biological diversity (BD). In GI, Turkey has not contested the EU approach for a


legally binding WTO registration system for ‘wines and spirits’ and its extension to other


products. Turkey was only concerned with ‘Turkish Raki’ in spirits but supported ‘Friends of the


GI Group’ (led by the EU) approach for an extensive coverage to include other products in the


system (Pulat, 2008: 224-225; Aran, 2011). The BD deals with patentability or non-patentability


of plant and animal inventions, and the protection of plant varieties. In negotiations Turkey


generally supported W52158 group of developing countries which claimed that a ‘disclosure


requirement’ must be obligatory for patent applicants to disclose the origin of genetic resources


and traditional knowledge used in the inventions.


Trade facilitation (TF) has been an important aspect of Doha Round to discipline non-


tariff barriers and to provide smooth processing for exports and imports. In TF, Turkey actively


participated in the negotiations apparently for two reasons. First, Turkey after the CU has largely


aligned its import and customs legislation with the EU, one of the most advanced systems. In


export side, however Turkish exporters face serious problems in developing country customs


mainly because of the lack of technical capacity in these countries. Such problems include but


not limited to the need for accelerated customs procedures, harmonisation in commercial


documents, improving transparency and predictability, and computarisation of administrative


procedures so on. Secondly, its land transportation fleet is strong but heavily subject to such


problems. In this context, Turkey initiated its first communication TN/TF/W/45159 in 2005


proposing that a final agreement must include elements like, improvement in consistency and


predictability; transparency; and acceleration of customs clearance procedures. Turkey further


tabled subsequent communications on issues such as publication and availability of trade-related


legislation on internet; advance ruling; and quota-free transit regime160.


III.5 Trade remedy measures


Turkey is a frequent user of trade remedy measures (i.e. antidumping duties, safeguard


measures) in the last couple of years. The WTO statistics reveal that it became the tenth largest



158 Named after WTO Document TN/C/W/52, a proposal for “modalities” in negotiations on geographical
indications (the multilateral register for wines and spirits, and “disclosure” in biological diversity.
159 WTO Document TN/TF/W/45 The document is accessible via:
http://docsonline.wto.org/gen_search.asp?searchmode=simple
160 For a detailed analysis of Turkey’s approach in TF, see (Oğuz, 2008).




  196
user of antidumping protection in terms of initiation and definitive measures among the WTO


members. Also, the UFT figures reveal that by March 2009, 274 investigations have been opened


and 182 of them were terminated with definitive duties, with a successful imposition of about 66


percent. This means that 2 out of every 3 investigation is followed by a final duty. The trend in


Turkey of the antidumping is augmenting since the CU in 1996161, hence making Turkey a


leading user as Figure 6 indicates.


Antidumping issue was held under the Rules negotiations in Doha Round. Turkey had a


position mostly in line with, if not totally overlapping the so-called ‘Friends of the Antidumping


Group’ of countries162 which proposed in principle to change WTO rules to prevent abuse of


anti-dumping measures, and burdensome or unnecessary investigations. However, the group


members started to have divergencies in their views once the negotiations started to focus on


specific issues and Turkish support to the group waned in time (Tan, 2008: 247). Turkey’s


position is interesting in the sense that it favoured formulation of new rules and regulations to


provide transparency and due process in implementation as it is one of the main targets of such


mesures itself. However, like many others Turkey had practiced such measures in a proliferated


way to protect domestic industries once its tariffs have been further eliminated after the Uruguay


Round and the CU. Therefore, Turkey discovered the antidumping measures as a life-jacket


mostly for declining industries like textiles and clothing, base metal products, plastics and rubber


articles, and other manufactures such as lighters and pencils coming mainly from low-priced


Asian countries (i.e. China, India, Thailand).


Figure 6. Leading antidumping initiators (1995-2008)



161 See, WTO figures available at: http://www.wto.org/english/tratop_e/adp_e/ad_init_rep_member_e.pdf
(retrieved on 19 May 2011).
162 This was a heterogenous group of countries composed of Norway, Chile and Hong Kong which
opposed the use of such measures per se; Japan and S. Korea, Taiwan which started to use them recently
but usually opposed for their export purposes; Switzerland and Israel which considered to take part for
their overall negotiation purposes; Brazil and Mexico which opposed to the US pracitces; and Turkey, a
ferquent user itself, but opposed its abuse by others for its export interests.




  197




Source: http://www.antidumpingpublishing.com/info/free-resources/anti-dumping-statistics.aspx


Cheong and Dikmener (2007) noted that in the conduct of antidumping investigations the


antidumping authority (UFT Directorate for Imports) has a considerable discretion to decide


which countires and products to be included as well as the calculation of dumping margins. The


majority of these duties are specific, but some are ad valorem reaching up to 100 percent.


Therefore, they had a serious pre-emptive effect to reduce the level of imports. In this regard,


Turkey’s position reflects its mercantilist approach in antidumping issue because in the Round its


focus remained on disciplining initiation of investigations process and clarifying rules in order to


curtail discretions available to investigating authorities.


Safegurad measures are not as widely used as antidumping in Turkey, but an increasing


trend in line with the concerns of domestic industries is observed over the recent years (Table 4).


Table 4. Safeguard mesures in Turkey since 2004

Turkey Thermometers 07.17.2004
Turkey Activated Earth and Clays 07.17.2004
Turkey Certain Glasswares 07.17.2004
Turkey Unframed Glass Mirrors 07.17.2004
Turkey Certain Voltmeters and Ammeters 07.17.2004
Turkey Footwear 01.05.2006
Turkey Salt 01.05.2006
Turkey Vacuum Cleaners 01.05.2006
Turkey Steam Smoothing Irons 01.05.2006
Turkey Motorcycles 08.15.2006
Turkey Frames and Mountings for Spectacles 02.11.2007
Turkey Travel Goods/Handbags and Similar Containers 06.05.2007
Turkey Certain Electrical Appliances 12.19.2007
Turkey Cotton Yarn 05.23.2008
Turkey Matches 05.02.2009


Source: The World Bank, Global Safeguards Database at: http://econ.worldbank.org/ttbd/gsgd/




  198
Countervailing duties are occassionally used measures in Turkey like in many other


WTO members for the reasons that most countries are willing to subsidise their domestic


industries anyway, so no one can accuse others of behaving ‘unfairly’. But nore importantly, the


Agreement on Subsidies and Countervailing Duties of the WTO have extensively disciplined


subsidies. Furthermore, it can be claimed that Turkey’s position considers its obligations under


the CU with the EU.


IV. CONCLUSIVE REMARKS


Turkey’s increasing export interests after having adopted outward-oriented policies and


the CU were influential for Turkey to have a proactive approach in international trade relations


under the WTO regime. At the same time, the WTO rules and agreements were important


determinants for Turkey’s domestic reforms (e.g. on governmental support, subsidies, tariff


liberalisation, investment rules). Actually, its unilateral trade liberalisation scheme in 1980s


helped Turkish industry to integrate into global markets long before the WTO’s multilateral


track. However, sustained structural problems in Turkish economy and challenges for Turkish


trade thereof raised a more cautious approach based on reciprocal concessions from trading


partners. Therefore, the broader objective for Turkey in the world trading system has been to


maximise its benefits from multilateral liberalisation while defending its national interests (!) for


social and economic development considerations. In this respect, domestic sensitivities helped to


keep higher tariffs (mainly in agriculture and labour-intensive industries), and induced


proliferation of trade remedy measures.


Turkey is a particular country among middle powers in Doha Round negotiations in that


its overall position has been an amalgamation of the perspectives of both developing and


advanced economies. This made Turkey a sui generic party with a developing country status on


the one hand, but having aspirations of an OECD member. The EU process had a strong affect in


shaping the outlines of Turkish position in many areas. However this ‘Janus-face’ had often


rendered Turkey to be perceived as a developed member supposedly to give more concessions in


the eyes of developing countries. Its intermittent membership to coalitions like G-20 in WTO


was therefore challenged. This is not surprising when Turkey had to coordinate many of its


commercial policies with the EU and this made highly unlikely for it to support confrontational


developing country policies against the EU without incurring the risk of damaging its candidacy


status. It is also understandable that Turkey’s need to diversify its export markets necessitated a


more assertive trade policy in multilateral and bilateral tracks. However, such assertiveness can


be sustained only if domestic challenges and global imperatives are not disregarded under a


comprehensive trade strategy.




  199
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Nikolay A. Kozhanov*


The Problem of Food Security in Iran during the Period 1990 – 2010


At present, Iranian officials state that, after two decades of the successful implementation


of different development programs, the Islamic Republic of Iran (the IRI) has managed to


achieve serious progress in ensuring food security: allegedly, since 2004, the country has been


almost completely satisfying its domestic demands for wheat, barley and meat. Moreover, Iran


has also begun to export these agricultural products to foreign markets.163 However, a number


of analysts argue that official reports display the government’s wish list rather than reflect the


actual situation.164 According to them, in the last two decades, the level of mechanization of


Iranian agriculture and its labour efficiency have not grown. The high cost of agricultural


production and its extreme vulnerability to the influence of adverse climatic conditions could be


still considered as the main characteristics of the Iranian agricultural sector.165


Experts within the Food and Agricultural Organization (the FAO) define the term “food


security” as “a situation that exists when all people, at all times, have physical, social and


economic access to sufficient, safe and nutritious food that meets their dietary needs and food


preferences for an active and healthy life”.166 The achievement and further sustainability of food


security are considered by the Iranian authorities to be one of the main tasks of their national


security policy. In accordance with current regulations, Iran's state doctrine of national food


security is based on the principle of the achievement of self-sufficiency in the production of the


so-called strategic agricultural produce (such as wheat, barley, rice, oilseeds, meat and dairy


products) with the subsequent evolution of Iran into a major regional exporter of these food


products.167


Within the framework of this article we aim to evaluate the success of the policy of


ensuring food security which was implemented by the Iranian government during the last two



* Nikolay A. Kozhanov is an expert of the Insitute of the Middle East (Moscow, Russia). In 2010, he got his PhD
degree (international economics and economic security) from the Faculty of Economics (World Economy
Department) of the Saint-Petersburg State University (St.Petersburg, Russia).
163 Muḥammadkhānī & Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i tuṣi῾iih
164 F. A. Malayiry & G-R. Yavary, Barrasī-yi siyāsāt-i ḥimāyatī az bakhsh-i kishāvarzy dar kishvarha-i muntākhib
va īrān (Tehran: Markaz-i pizhuhishhā-yi majlis, 1387)
165 Central Bank of the Islamic Republic of Iran, Annual Review. 1387 (2008/09) (Tehran: Central Bank of the
Islamic Republic of Iran, 1388), pp. 3 – 6
166 R. Barichello & E. Clay, Trade Reforms and Food Security. Conceptualizing the Linkages (Rome: the FAO,
2003), p. 31
167 M. R. Muḥammadkhānī & E. Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i
tuṣi῾iih (Tihrān: Markaz-i pizhūhishha-yi majlis, 1387)




  202
decades. We assess the achievements of the Iranian authorities in this field with the following


parameters which are usually used by FAO experts in their work with such tasks:168


1. constant availability of sufficient quantities of food for the whole population of a


country;


2. economic capabilities of the population to obtain food of appropriate quality and


in necessary volumes;


3. existence of the appropriate level of food consumption to correspond to the daily


dietary needs of the population.




The achievements of the agrarian policy of the Iranian government in solving the problem


of food security during the period 1990 – 2010


The abilities of a state to provide the population with sufficient quantities of food largely


depend on the productive capacities of the agricultural sector of this country and the relative


success of the government in its development. During the last two decades, it may initially seem


that the Iranian government has achieved tangible successes in agricultural development: by


2010, the overall volume of agricultural produce supplied by farmers to the domestic market


grew from 43 to 73.5 million tonnes. Fruit production increased from 10.3 to 16.5 million


tonnes, meat supplies grew from 6.2 up to 11.3 million tonnes and fish production rose from 328


to 399 thousand tonnes.169


According to different reports provided by official Iranian organizations, the state support


of agriculture was (and still is) the decisive factor which boosted agricultural production during


the last two decades. Thus, during this period the Iranian authorities encouraged the creation of


1850 new farming cooperatives.170 At the same time, crop insurance, the system of state


purchases of agricultural produce at guaranteed prices, the provision of indirect subsidies and


exemption from income tax were among the main instruments used by the Iranian authorities to


support domestic agricultural producers.171 For instance, Iranian farmers received government


payments for each tonne of strategic crops, each hectare of sown field or a certain number of


young animal stock. Peasants were also enabled to purchase forage crops, fertilizers, seeds, fuel


and machinery at reduced prices. The amount of public subsidies offered to growers from 1990



168 E. Clay, Food Security: Concepts and Measurement (Rome: the FAO, 2002)
169 Central Bank of the Islamic Republic of Iran, Annual Review. 1386 (2007/08) (Tehran: Central Bank of the
Islamic Republic of Iran, 1387), pp. 3, 34 – 35.
170 Muḥammadkhānī & Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i tuṣi῾iih, 18
171 Malayiry & Yavary, Barrasī-yi siyāsāt-i ḥimāyatī az bakhsh-i kishāvarzy dar kishvarha-i muntākhib va īrān, pp.
28 – 29




  203
to 2007 annually increased by 25.88%. Eventually, this assistance reached 860 million dollars


per year.172


In accordance with Iranian laws, the state was obliged to insure at least 50% of a year’s


yield if it was requested by a farmer. From 1990 to 2008, the number of insurable crops


increased from 6 to 66. The system of state purchases at guaranteed prices was also actively


promoted by the Iranian government. The list of crops to be purchased at guaranteed prices was


notably widened. By 2009, apart from wheat, rice, barley, maize, sugar beet, cotton, oilseeds,


potatoes, onions and legumes, it included grapes, raisins, dates, dried fruits, apples,


pomegranates, figs and silk cocoons.173 Subsequently, the number of purchase contracts


gradually rose from 98 in 1990 to 1.7 million in 2008.174


During the period of 1990 – 2005, the amount of investment in the Iranian agricultural


sector increased from 410 to 590 million dollars.175 It is notable that during the last two decades


the share of government investment gradually declined, whereas the volume of private


investment increased. As stated by Iranian officials, this process was encouraged by the


government. The authorities created a number of regional investment funds and involved in their


activities the private sector. Thus, by 2004, the private sector accounted for 68.8% of all


investment made in Iranian agriculture.176 Moreover, to support agricultural producers, the


Iranian state provided farmers with soft loans. The amount of these loans offered to the


population increased from 290 million dollars in 1992 to 74 milliard dollars in 2004.177 In 2003,


in order to facilitate the distribution of these financial transfers, the authorities even established a


special loan fund. Most notably, private capital was also involved in the process of its creation:


according to existing data some agricultural cooperatives became shareholders of this fund.178





172 M. Khānlu, ‘Pardākht-i 52,4 khizār millyārd riyāl yārānih-i kālāhā-i asāsy dar sāl-i 1386’ in Barnāmih, №204
(Tihrān: 1386), p. 15
173 A. Dihshīrī & E. Suliymānī, Kharīd-i tażmīny-i maḥṣulāt-i kishāvarzī (Tehran: Markaz-i pizhuhishhā-yi majlis,
1386), pp. 5 – 15
174 F. Nuruzī, Bimih-i mahṣūlāt-i kishāvarzī dar īrān va jahān (Tihrān: Markaz-i pizhūhishhā-i majlis, 1387), pp. 16
– 20
175 R. Muqaddasī-Aidamurab, Sarmāyihguzari dar bakhsh-i kishāvarzī (Tihrān: Markaz-i pizhūhishhā-yi majlis,
1386), pp. 7 – 8.
176 Muḥammadkhānī & Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i tuṣi῾iih, p.
19
177 M. Nāmjūyān & E. Suliymanī, Jāyigāh-i ma῾dan va kishāvarzi dar ῾iqtiṣād-i kishvar (Tihrān: Markaz-i
pizhūhishhā-i majlis, 1386), pp. 20 – 35.
178 M.-K. Mukhaqqaq, Sanduqhā-yi ḥimāyat az tuṣi῾iih-i kishāvarzī (Tihrān: Markaz-i pizhūhishhā-i majlis, 1386),
pp. 4 – 12.




  204
The failures of the agrarian policy of the Iranian government in attempting to solve the


problem of food security during the period 1990 – 2010


Some Iranian officials often stress the fact that during the period 1990 – 2010 the positive


trend of the rise of agricultural production volumes was accompanied by the negative tendency


of a decrease in the share of the country’s labour force employed in the agricultural sector. Thus,


in 1990, 24% of Iran’s labour force was employed in the agricultural sector, whereas, by 2007


this figure had declined to 22%. As stated by the Iranian authorities, the ability of the country’s


agriculture to meet domestic needs despite this trend proves the success of the development


programs of the Iranian government.179


However, in our opinion, any references by the Iranian government to the decrease in the


percentage of the country’s labour force employed in the agricultural sector were nothing but


attempts to divert public attention from other socio-economic indicators which could cast doubt


on the success of the Iranian authorities in the field of agricultural development. For instance,


Iranian officials usually avoid mentioning the fact that, in terms of sheer numbers, during the


period 1990 – 2007, the number of people involved in agricultural production increased from


3.23 to 5.1 million. This trend by no means proves the growth of the productivity of the Iranian


agricultural sector. On the contrary, it shows the low efficiency of agricultural production.180


As stated by some researchers, in 1990 – 2010, the Iranian government preferred the


extensive way of development of the agrarian sector to its intensification. Facing the problems of


high unemployment rates in rural areas (13% by 1990) and active migration of poor people from


villages to cities, the Iranian authorities were compelled to abandon their plans concerning the


intensification of agricultural production in order to stop the process of urbanization.181 As a


result, instead of promoting agricultural mechanization, the authorities encouraged the creation


of a large number of new low-skill jobs in the agricultural sector. As was mentioned above, by


2010, the government had supported the creation of 1850 new farming cooperatives. However,


one of the main distinctive features of these cooperatives was the massive usage of unskilled


work force to compensate for the practical absence of agricultural machinery.182


At the beginning, this government strategy gave some positive results. In addition to the


rise in the amount of agricultural production (due to the increase of the number of people


involved in farming, husbandry of fishing), it also led to a decrease in rural unemployment and



179 Nāmjūyān & Suliymanī, Jāyigāh-i ma῾dan va kishāvarzi dar ῾iqtiṣād-i kishvar, pp. 33 – 35.
180 Muḥammadkhānī & Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i tuṣi῾iih, pp.
2 – 4
181 Muḥammadkhānī & Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i tuṣi῾iih, p. 4
182 Muḥammadkhānī & Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i tuṣi῾iih




  205
the rates of urbanization. For instance, in 2008, only 6% of the rural population were


unemployed whereas for cities this indicator was twice as high.183


On the other hand, this strategy led to the low level of agricultural mechanization. By


2008, the demands of Iranian agriculture for tractors and harvesters were met only by 39.6% and


15.4% respectively. During the years 1990 – 2005, the indicator of the aggregate horsepower of


agricultural machinery per hectare184 decreased from 0.72 to 0.57 whereas initially it was


supposed to increase up to 1.05.185


Moreover, by 2010, the potential of the extensive method of agricultural development in


Iran had achieved its limits. As stated by Iranian analysts, to keep the volumes of agricultural


production at the necessary level the Iranian government should start the process of the


intensification of labour.186 However, the Iranian government is not rushing to take this step. The


experience of developed countries shows that the intensification of production is linked to a


reduction of employment in the agricultural sector. This, in turn, will inevitably increase social


tensions in rural areas and again boost urbanization.187


In terms of food security, the extensive development of the Iranian agricultural sector was


also unable to guarantee the stability of the volumes of agricultural production and,


subsequently, the sustainability of domestic food supplies. This could be partly confirmed by the


fluctuations in the level of Iran’s self-sufficiency188 in some strategic food products during the


period 1989 – 2009 (Table 1). During that time, the annual output of wheat, rice, barley and red


meat experienced both periods of rapid rises and drastic falls. In some years the indicator of self-


sufficiency for a number of products even fell below the minimum of the years of the Iran-Iraq


War. For instance, that happened with wheat yields in 1997 and with the rice output in 1995


(Table 1).


The reduction of the country’s self-sufficiency in strategic agricultural produce during the


periods 1994 – 1997 and 1999 – 2001 was caused by a number of factors. On one hand, the


insufficient level of agricultural mechanization led to the inability of farmers to resist the


negative influence of natural disasters. For instance, the severe droughts of 1994 – 1997, 1999 –


2001, and 2008 – 2009 drastically decreased the volumes of agricultural production in the


country.



183 Central Bank of the Islamic Republic of Iran, Annual Review. 1386 (2007/08), p. 11
184 It is used as a benchmark by the Iranian government for planning the development of the agricultural sector.
185 Muḥammadkhānī & Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i tuṣi῾iih
186 H. Asāyish, ῾Iqtiṣād-i rustāī (Tihrān: 1374), p. 53; A. Nasīmī, Zarūrat-i takhavvul-i kishāvarzy-i kārburdy
(Tehran: 1378), p. 342
187 Muḥammadkhānī & Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i tuṣi῾iih, pp.
19 – 20
188 According to the FAO instructions, the self-sufficiency of a country in a given agricultural product is determined
by the ratio of the domestic production of this product to the domestic demand for it.




  206
On the other hand, the financial crises of 1994 – 1997 and 2008 – 2009 limited the


government ability to provide the Iranian peasants with financial assistance or to import


necessary food products. This, in turn, led to the instability of the domestic food markets,


fluctuations in domestic production volumes and uncontrollable changes of food reserves. The


authorities were able to stabilize the situation only in 2004 – 2007 when the growth of


agricultural production coincided with favourable climatic conditions and improvement of the


overall situation of Iran's economy. However, the subsequent drought and economic crises of


2008 – 2009 again put the food security of Iran in question.189 As shown below, such instruments


of state support as crop insurance, the system of public purchases at guaranteed prices, provision


of indirect subsidies and exemption from income tax were either misused by the Iranian


government or improperly applied.


The droughts and financial crises showed the inability of the Iranian government either to


mitigate or to compensate for the negative influence of external factors. From our point of view,


official Iranian reports concerning the role of the state in the development of national agriculture


exaggerate the actual volumes of governmental support and overestimate the real capabilities of


the Iranian authorities in this field.


First of all, despite the quantitative growth of the funds allocated by the government to


farmers, the share of the subsidies provided to the agricultural sector in the total amount of state-


allocated financial assistance decreased significantly from 20% in 1990 to 10.8% in 2005.190 The


government of the IRI, just as previously the government of Mohammad Reza Shah Pahlavi


during the last decade of its existence,191 preferred to invest revenues from the country’s oil


exports into development of the national energy sector, rather than in its agricultural sector. It is


also noteworthy that within the total amount of subsidies allocated to producers and consumers


of agricultural products, the share of the former was merely 17%, while the share of the latter


reached 83%.192


Second, the system of public purchases of produce at guaranteed prices appeared to be


used by the Iranian government as a way to acquire cheap products for the urban population.


Usually, the prices which were offered by the state were just slightly higher than production


costs. Under these circumstances, farmers often preferred to dump or store the crops, keeping


them away from the market.193 The situation with the government purchase of wheat was, to a



189 Muḥammadkhānī & Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i tuṣi῾iih
190 A. Maḥmudy & M. Qazimnijād, ‘Barrasī-yi ḥimāyāt-i kishvarhā-yi ῾użv-i OECD va īrān az baksh-i kishavarzī’
dar ‘Iqtisād-i kishavarzī va tuṣi῾iih №46 (Tīhrān: 1383), p. 45
191 A. Schirazi, Islamic Development Policy. The Agrarian Question in Iran (London: 1993)
192 M. Khānlu, ‘Pardākht-i 52,4 khizār millyārd riyāl yārānih-i kālāhā-i asāsy dar sāl-i 1386’ in Barnāmih, №204
(Tihrān: 1386), p. 15.
193 Dihshīrī & Suliymānī, Kharīd-i tażmīny-i maḥṣulāt-i kishāvarzī, pp. 5 – 6




  207
certain extent, different. This type of crop (which is considered to be one of Iran’s staple


agricultural products) accounted for the lion’s share194 of state-contracted purchases of


agricultural produce. As opposed to the situation with farmers’ other produce, the wheat prices


offered by the authorities were higher than the cost of production. They were also periodically


indexed by the government.195 However, notwithstanding relatively high purchase prices,


farmers complained that still they were not high enough to create tangible profit.196 Moreover, in


the mid-1990s, due to the overall budget deficit, the Iranian government occasionally had


problems with the financing of state purchases in the agricultural sector and failed to implement


all contracts concerning the purchases of agricultural produce including wheat.


Third, significant yield losses during the periods of drought created a huge number of


insurance cases with considerable insurance payments. As a result, crop insurance became a loss-


making business for the Iranian government. Thus, during the period 1990 – 1995 the crop


insurance fund had to pay out 179 rials of insurance coverage per 100 rials of insurance


premium.197 According to some Iranian researchers, during that period, the amount of actual


public spending in this field exceeded the originally planned amount. This, in turn, challenged


the state insurance company with funding problems which were additionally aggravated by the


general financial crisis of Iran’s economy in the mid 1990s.198


The volumes of Iran’s food imports during the period 1990 – 2010 also prove that Iranian


government policy in the field of food security was only partially successful. Despite a


significant increase in the volume of agricultural production, imports of food not only remained


at the same level, but in some years even increased. By 2004, the share of agricultural produce in


the country’s imports amounted to 6.7% in terms of value and 25.6% in terms of weight.199 In


2005, according to official government plans, Iran was to spend on the import of food (excluding


wheat) 2.4 billion dollars given its exports revenue of $1.8 billion.200


At the same time, domestic production losses remained relatively high. The Iranian


government was compelled to admit officially that this problem was created by the lack of


efficiency in agricultural production, the low skills of the labour force and the low level of


mechanization as well as by the underdevelopment of the necessary infrastructure for product



194 In some years it was up to 99%.
195 Dihshīrī & Suliymānī, Kharīd-i tażmīny-i maḥṣulāt-i kishāvarzī, pp. 9 – 10
196 Malayiry & Yavary, Barrasī-yi siyāsāt-i ḥimāyatī az bakhsh-i kishāvarzy dar kishvarha-i muntākhib va īrān, p.
32
197 Nuruzī, Bimih-i mahṣūlāt-i kishāvarzī dar īrān va jahān, p. 16
198 Malayiry & Yavary, Barrasī-yi siyāsāt-i ḥimāyatī az bakhsh-i kishāvarzy dar kishvarha-i muntākhib va īrān, p.
32
199 Muḥammadkhānī & Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i tuṣi῾iih, p.
11
200 Vizārat-i kishāvarzī, Sanad-i barnāmih-i tuṣi῾iih-i kishāvarzī va manābih-i ṭabī῾ī (Tihrān: Vizārat-i kishāvarzī,
1383), pp. 255 – 256




  208
storage and processing. Thus, in 2006, production losses in arable farming amounted to 16.8% of


overall produce. For horticulture, livestock and the fishing industry the shares of losses in the


overall production were 28.1%, 6.5% and 7% respectively. The Iranian government intended to


cut these figures in half only by 2010.201 However, there is no official information concerning


whether the authorities of the IRI managed to reach their goal.




The approaches of the Iranian government to the issue of the regulation of domestic rice


and red meat markets


The way in which the government of any state regulates domestic food markets is a key


factor in terms of guaranteeing the food security of the country. Due to the lack of accessible


information concerning the approaches of the Iranian authorities to this issue, it is impossible to


give a complete picture of the situation. Nevertheless, we have managed to gather some


information concerning state interference in the work of the rice and red meat markets.


Traditionally, Iran annually imports at least one third of the total amount of domestically


consumed rice. However, since 2005, the volumes of the imports of this crop largely exceeded


domestic demand. For example, from April to August 2009, Iran imported from 653 to 900


thousand tonnes of rice, although its actual domestic need in imports was only 400 tonnes per


year. This, in turn, lowered the prices in the domestic market and seriously struck Iranian rice


producers, whose prices, due to high production costs, were traditionally higher than that of


imported rice.202


In our opinion, this policy of the government could be explained only by the high level of


poverty existing in Iran.203 Under these circumstances, rice remained the major staple food for


the poorer levels of the Iranian population. As a result, the Iranian leadership did its best in


trying to stop food prices from rising. By 2009, the initial policy of buying rice from the local


producers at prices which were lower than production costs (approximately 3 dollars per kilo)


had failed. Farmers either stored their crops waiting for higher prices on the domestic market or


even destroyed them. As a result, in 2009, the authorities increased rice imports, buying this


product abroad at a price of $1.2 per kilo. At the same time, the Iranian government agencies


either stopped buying rice from domestic producers or sensibly lowered the amounts of their


purchases.204 As stated by some Iranian experts, if the authorities continue to implement such a



201 Markaz-i pizhuhishhā-yi majlis, Sanad-i millī-yi baksh-i kishāvarzī va manābih-i ṭabī῾y dar barnāmih-i
chakhārum (Tihrān: Markaz-i pizhūhishha-yi majlis, 1384), p. 228.
202 ‘Ittimād, ‘Vurud-i daulat bih bāzār-i birinj va chāy-i kishvar’ dar ‘Ittimād №2163 (Tihrān: 8.11.1388), p. 5
203 From 30% to 60% of the Iranian population live below the poverty line (L. Nasseri, ‘Iran Opposition Struggles as
Ahmadinejad Gets Boost’ in Bloomberg (June 9, 2010 http://www.bloomberg.com/news/2010-06-08/iran-
opposition-struggles-as-nuclear-sanctions-wrangle-boosts-ahmadinejad.html). Last accessed on March 3, 2011).
204 Central Bank of the Islamic Republic of Iran, Annual Review. 1387 (2008/09), pp. 3 – 6




  209
strategy for several more years, this will finally make Iran dependent on rice imports and


completely drive domestic rice producers from the market. It is noteworthy that in 2009 local


brands of rice were hard to find on sale even in the provinces of Guilan and Mazandaran, where


this crop was traditionally cultivated.205


The situation in the markets of beef and mutton is different from the rice market. Despite


the fact that Iran’s domestic producers traditionally fully satisfied local demands in red meat, the


Iranian government failed to ensure the affordability of red meat for the population. Over the


past few years, the consumption of beef and mutton has reduced significantly due to the rise in


prices. As stated by some analysts, unlike in the situation with rice, the Iranian authorities failed


to establish effective mechanisms for red meat provision for the domestic market and delegated


this function to intermediaries. As a result, during the last five years, retail prices of beef and


mutton annually rose by 50% - 90% whereas the increase in the production costs was only 10% -


15%.206




Food consumption patterns in Iran by 2010


The economic capability of the population to obtain food of appropriate quality and in


necessary quantities is another parameter which allows researchers to judge the degree of success


of government policy in the field of food security. To a certain extent, this parameter is affected


by the socio-economic situation in a country.


During the last two decades, the overall socio-economic situation in Iran remained


relatively unfavourable. The unemployment rates for urban areas stayed relatively high (11 –


20% during some years) and were accompanied by growing inflation rates (11 – 20% during


some years) and rising consumer goods prices. By 2010, the social stratification of the Iranian


population was also increasingly polarized.207


By 2010, 50.5% of Iranian households consisted of 3 - 4 people.208 The average annual


expenses of an urban household amounted to approximately 10.1 thousand dollars.209 For rural


areas these figures were lower and reached only about 3.7 thousand dollars.210 It should be noted


that the steady increase in general household expenses over the period 1990 – 2010211 was not


due to an actual increase in the welfare of Iranian households but rather due to the mandatory

205 ‘Ittimād, ‘Vurud-i daulat bih bāzār-i birinj va chāy-i kishvar’ dar ‘Ittimād №2163 (Tihrān: 8.11.1388), p. 5
206 In early September of 2009, the production cost of one kilogram of live-weight red meat of top grade was $3.2 –
$3.3 while in food retail chains it was offered at $12.3.
207 Central Bank of the Islamic Republic of Iran, Economic Report and Balance Sheet of the Central Bank of Iran.
2003/04 (Tehran: Central Bank of the Islamic Republic of Iran, 2004), pp. 45, 135, 140
208 Bānk-i markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1386 (Tihrān:
Bānk-i markazī-yi īrān, 1387), p. 32
209 Bānk-i markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1386, p. 8
210 Statistical Centre of Iran, Iran Statistical Year Book. 1383 (Tehran: Statistical Centre of Iran, 1383), p. 761.
211 In some periods this expenditure steadily rose by 13% - 24.6% annually.




  210
annual increase of the minimum monthly wage made by the government.212 In percentage points,


this increase was typically not much higher than the inflation rate. In this regard, it could be said


that, in terms of base prices, Iran's household income was virtually stable.213


Some Iranian analysts traditionally emphasize that the share of food in the expenditure of


an average urban household declined from 34% in 1990 to 23% in 2008.214 In their opinion, this


could be considered as a good sign demonstrating the gradual improvement of the socio-


economic situation in Iran.215 However, government experts usually try to avoid admitting the


fact that due to the deep social stratification in Iran at this time216 the averages of statistical data


fail to reflect the real picture. Thus, in 2008, the share of food-related expenditure in the budgets


of poor families217 reached 45% whereas this figure for an average household was only 23%.218


The main food expenditure was spread between meat (26.3%), fresh fruit (18.2%), dairy


products and eggs (11.3%), vegetables (10.3%) as well as flour, flour products and cereals


(10.5%).219


An analysis of the changes in the structure of food spending of Iranian urban households


during the period 1990 – 2007 shows the following two trends:


1. Steady decline of the growth rate of food expenditure (especially during the years


when the economy of Iran experienced high rates of inflation); 220


2. Steady decline of annual per capita consumption of red meat (from 95 to 59 kg),


rice (from 205 to 175 kg) and bread (from 709 to 475 kg), products which formed the traditional


basis of the nutritional habits of the Iranian population and the gradual increase of consumption



212 Bānk-i markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1384 (Tihrān:
Bānk-i markazī-yi īrān, 1385), p. 20
213 Statistical Centre of Iran, Iran Statistical Year Book. 1383, pp. 795 – 814.
214 Bānk-i markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1380 (Tihrān:
Bānk-i markazī-yi īrān, 1381), p. 10; Bānk-i markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i
shahrī-yi īrān. Sāl-i 1384, p. 16
215 According to the basic rules of economics, the proportion of food expenditure in the budget of an average
household shrinks with the rise of its members’ incomes.
216 For instance, the incomes of the upper class are 16 times higher than those of the poor classes (Central Bank of
the Islamic Republic of Iran, Economic Report and Balance Sheet of the Central Bank of Iran. 2003/04, p. 45).
217 They form 60% of Iranian households (L. Nasseri, ‘Iran Opposition Struggles as Ahmadinejad Gets Boost’ in
Bloomberg (June 9, 2010 http://www.bloomberg.com/news/2010-06-08/iran-opposition-struggles-as-nuclear-
sanctions-wrangle-boosts-ahmadinejad.html). Last accessed on March 3, 2011).
218 Bānk-i markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1384, p. 8; Bānk-i
markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1386, p. 8; A. Djazayery & R.
Marchesich, Iran. Nutrition Country Profiles (Rome: the FAO, 2002), p. 13
219 Bānk-i markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1384, p. 23
220 Bānk-i markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1380, p. 11; Bānk-i
markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1384, p. 17; Bānk-i markazī-
yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1386, p. 17.




  211
of poultry (from 60 to 88 kg), eggs (from 41 to 45 kg), fish (from 16 to 20 kg) and milk (from


147 to 216 kg).221


In our opinion, the emergence of these two trends was caused by the difficult socio-


economic situation in the country. Thus, by 2007, prices for all consumer goods in Iran had


increased considerably whereas the level of average household income remained relatively


stable.222 This, in turn, caused a reduction in the purchasing power of the population. It is also


noteworthy that, by 2007, even an average Iranian household spent more223 than it earned.224


Traditionally, this type of household behaviour (absence of savings or even the consumption of


previously saved financial resources) is caused by a generally unfavourable social situation in a


country.225 As a result, by 2010, a new trend appeared in the household spending on food.


Iranian families started to spend their money on food more carefully, which partially explains the


decrease in the annual rates of food consumption during recent years, and began to replace


expensive food products,226 such as meat, with cheaper and more high-calorie substitutes, for


instance, poultry. It is also notable that by 2010, the Iranian domestic food market also witnessed


an decrease in demand for products whose consumption was traditionally seen as an indicator of


a good level of Iranian household welfare. Thus, during the period 1990 – 2008, there was a


tangible fall in the domestic consumption of tea ( from 8 to 6 kg), lump sugar (from 54 to 29 kg)


and sugar sand (from 30 to 17 kg).227


The expenditure structure of rural households was slightly different. In villages, the share


of food expenses accounted for about 39% of a family budget. The main expenditure was spread


between meat (24%), flour and bakery foods (22%), dairy products and birds' eggs (11%), fresh


fruits (8%), vegetables (8%) and sugar, tea and coffee (7%).228 In comparison with urban


households, the rural population of Iran lived in more austere conditions. The level of their


earnings was much lower than the incomes of urban households. The share of the food


expenditure of an average rural family declined from 46% in 1990 to 39% in 2008 whereas for


the poor households this figure still accounted for 57% of their budgets.229





221 Bānk-i markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1380, p. 18; Bānk-i
markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1384, p. 26.
222 As mentioned above, the increase in the nationwide minimum wage just slightly exceeded the inflation rate in
Iran.
223 This means that they were consuming their previous financial savings.
224 Bānk-i markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1386, pp. 8 – 9.
225 Bānk-i markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1386, pp. 8 – 10.
226 Thus, in the case of rice, the price hike of 2006 – 2008 led to a decrease in its consumption.
227 Bānk-i markazī-yi īrān, Natāīj-i barrasi-i būjih-i khānivār dar manātiq-i shahrī-yi īrān. Sāl-i 1386, p. 26.
228 Statistical Centre of Iran, Iran Statistical Year Book. 1383, pp. 761, 778.
229 Djazayery & Marchesich, Iran. Nutrition Country Profiles, 13; Statistical Centre of Iran, Iran Statistical Year
Book. 1383, p. 761.




  212
Dietary patterns of the Iranian population by 2010


According to existing statistical data, by 2005, the agricultural sector of Iran was able to


maintain a daily energy diet of the population at the level of 2827 kilocalories per person


whereas, as stated by FAO experts, the actual daily energy requirement totalled 2108


kilocalories. In other words, judging by the indicators of the average calorie content of food


consumed by Iranians, the population of this country not only satisfied their daily demands in


food products but even overate.230


However, as previously mentioned, due to the existing tangible social differentiation the


averages of statistical data do not give us a real picture. Thus, some studies show that, by 2010,


20% of Iran's population were undernourished and 50% of Iranians did not receive the required


amounts of protein, calcium, and vitamins A and B, meaning that about half of the population


did not have full access to healthy food, whereas 40% of the population had excessive


nutrition.231 Moreover, as stated by different researchers, even in the years 2008 – 2009, 6% of


the population could be considered as starving during this period as deficiency of nutrient intake


totalled 190 kilocalories per day. In comparison with 1990, this figure had decreased only by


3%.232


During the period 1990 – 2010, the consumption ratio of major energy-producing


nutrients such as proteins, carbohydrates and fats in the basic energy diet of the population


remained relatively unchanged and constituted 11%, 69% and 20% respectively. Despite all the


socio-economic changes and developments of the last two decades, the national diet remained


based on cereals, bread and bakery products (50%).233 However, the range of food product


consumed by the population underwent certain transformations which created some dietary


differences between rural and urban areas.234 Thus, in cities, due to the influx of poor people


from villages and the subsequent growth of slums, the share of cheap cereals in the daily diet


increased whereas the share of more expensive meat products dropped. On the other hand, in


rural areas with traditionally lower food prices the share of meat in the villagers’ diet remained


virtually unchanged. At the same time, the consumption of cereals in rural areas decreased


whereas the share of fats, fruits and vegetables in the diet of the population rose.235


Nevertheless, Iranian nutritionists express huge concerns about the diet both in urban and


rural areas. They call upon the authorities to take measures aimed at a significant reduction of the

230 Djazayery & Marchesich, Iran. Nutrition Country Profiles, p. 8
231 Djazayery & Marchesich, Iran. Nutrition Country Profiles, pp. 8, 12
232 Muḥammadkhānī & Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i tuṣi῾iih, pp.
4 – 5
233 Djazayery & Marchesich, Iran. Nutrition Country Profiles, pp. 8, 10
234 A. Djazayery & B. Samimi, Food Consumption and Energy Intake Patterns in the Rural and Urban Areas of
Iran (Tehran: 1996), pp. 218 – 248
235 Djazayery & Marchesich, Iran. Nutrition Country Profiles, p. 11




  213
cereals share in the population’s diet (by 25%) and the increase of meat (by 25%) and dairy


products (by 30%).236 At the same time, most of the experts agree that from a short-term


perspective these plans are not feasible. On one hand, the low incomes and subsequent reduced


purchasing power of the majority of the Iranian population do not allow the authorities to make


Iranians reduce their consumption of cheap cereals and increase the share of more expensive


meat and dairy products in their diet. On the other hand, such significant changes in consumption


patterns will inevitably influence the situation in the domestic food markets eventually causing a


shortage of some products and overproduction of others. As stated by some analysts, Iranian


agriculture as well as the government of the IRI is not ready to face such changes and deal with


them.


Periodical surveys conducted by different Iranian organizations also reveal geographical


and regional differences in food consumption patterns. In most cases this differentiation could be


explained by the uneven development of Iran's regions. Thus, according to the official statistics,


the population of developed provinces (for instance, Tehran) consumes a lower amount of


cereals and eats more meat, fat and oil in comparison with the population of “chronically crisis-


affected” (the term used by Iranian statisticians) provinces such as Ilam, Kohgiluyeh and Boyer-


Ahmad, Sistan and Baluchestan, South Khorasan, Kordistan and Lorestan, where the situation


with an average diet is just the opposite. In particular, by the end of the 1990s the lowest


consumption of meat and eggs was registered in Sistan and Baluchistan (0.2% of the total diet,


with a maximum of 11% in Tehran), fats and oils in Yazd (9.6%, with a maximum of 17% in


Tehran) and dairy products in Bushehr (1.4%, with a maximum of 7% in the province of


Chaharmahal and Bakhtiari).237




Conclusion


All in all, the analysis of food security in Iran shows that the authorities of the IRI were


only partly successful in the achievement of their goals. During the period 1990 – 2010, they


managed to ensure an increase in agricultural production, but failed to guarantee its stability.


Due to a number of reasons (including low and inefficient levels of labour productivity together


with the underdeveloped mechanization of agriculture), Iranian agriculture remained vulnerable


to external challenges (most importantly, negative climatic conditions). Thus, the long drought of


2008 – 2009 became one of the recent major tests for Iranian agriculture. As shown in Table 1, it


significantly reduced the production volumes of the main strategic crops. For instance, in 2008,



236 M. Kimiāgar, M. Bāzhin & B. Samimy, ‘Barrasī-yi vaz’iyat-i arażih-i mahṣulat-i kishavarzī va taʾasir-i ān dar
algu-i maṣraf-i mavād-i ghaẕā-i dar īran’ dar ‘Iqtisād-i kishāvarzi va tuṣi῾iih №47 (Tihrān: 1383), p. 167.
237 Djazayery & Marchesich, Iran. Nutrition Country Profiles, p. 12




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wheat production fell to 8.5 million tons (in comparison with the necessary 15 million tons).


This, in turn, compelled the Iranian authorities to import from abroad up to 5.7 million tons of


wheat valued at not less than two billion dollars during the period from April 2008 to March


2009.238


The agricultural sector still mainly relies on a low-skilled labour force. Its production


suffered great losses during the storage and processing of produce. The provision of food to


urban areas, as during the last decade before the Islamic revolution, was carried out at the


expense of the rural population and farmers. Due to a complicated social situation, Iranian


leaders failed to provide equal economic and physical access to necessary quantities of food for


the entire population of the country. The analysis of domestic household expenditure and levels


of national self-sufficiency in certain crops shows significant differences in food consumption


patterns between various social strata as well as between rural and urban areas.


Market analysts argue that the current situation poses a threat to the food security of Iran.


The country is not self-sufficient in a number of strategic food products, most notably rice, and is


dependent on food imports. It is supposed that, once food imports are cut short, Iran is likely to


suffer acute food shortage in six months’ time (assuming that Iran’s strategic food reserve will


last for 180 days)



238 Central Bank of the Islamic Republic of Iran, Annual Review. 1387 (2008/09), pp. 3 – 6




  215
Table 1


The levels of self-sufficiency of Iran in certain types of strategic food products during the


period 1989 – 2009.239


Year Self-sufficiency
in wheat (%)


Self-sufficiency
in rice (%)


Self-sufficiency
in barley (%)


Self-sufficiency in
meat products (%)


1989 53.7 62.7 79.3 89.1


1990 70.3 71.9 85.8 87.5


1991 70.7 74.4 94.5 88.8


1992 80.6 66.7 96.5 89.9


1993 81.4 61,2 90.9 88.9


1994 82.8 79.0 81.4 94.7


1995 78.3 53.0 85.5 96.4


1996 71.7 65.1 77.4 92.9


1997 63.5 74.7 80.5 95.0


1998 77.7 78.0 94.1 93.4


1999 58.9 68.9 82.5 97,2


2000 55.5 58.3 61.8 98.5


2001 59.8 67.2 72.1 97.9


2002 97.1 67.7 93.8 100.1


2003 92.4 66.2 99.8 98.1


2004 97 83 96 More than 100



239 Sources: http://faostat.fao.org/ Last accessed 30 June 2010; Central Bank of the Islamic Republic of Iran, Annual
Review. 1383 (2004/05) (Tehran: Central Bank of the Islamic Republic of Iran, 1384); Central Bank of the Islamic
Republic of Iran, Annual Review. 1384 (2005/06) (Tehran: Central Bank of the Islamic Republic of Iran, 1385);
Central Bank of the Islamic Republic of Iran, Annual Review. 1385 (2006/07) (Tehran: Central Bank of the Islamic
Republic of Iran, 1386); Central Bank of the Islamic Republic of Iran, Annual Review. 1386 (2007/08); Central
Bank of the Islamic Republic of Iran, Annual Review. 1387 (2008/09); Central Bank of the Islamic Republic of Iran,
Annual Review. 1388 (2009/109) (Tehran: Central Bank of the Islamic Republic of Iran, 1389); Central Bank of the
Islamic Republic of Iran, Economic Report and Balance Sheet of the Central Bank of Iran. 2000/01 (Tehran: Central
Bank of the Islamic Republic of Iran, 2001); Central Bank of the Islamic Republic of Iran, Economic Report and
Balance Sheet of the Central Bank of Iran. 2001/02 (Tehran: Central Bank of the Islamic Republic of Iran, 2002);
Central Bank of the Islamic Republic of Iran, Economic Report and Balance Sheet of the Central Bank of Iran.
2002/03 (Tehran: Central Bank of the Islamic Republic of Iran, 2003); Central Bank of the Islamic Republic of Iran,
Economic Report and Balance Sheet of the Central Bank of Iran. 2003/04.




  216
Year Self-sufficiency


in wheat (%)
Self-sufficiency


in rice (%)
Self-sufficiency
in barley (%)


Self-sufficiency in
meat products (%)


2005 95 90 96 More than 100


2006 98 86 96 More than 100


2007 105 90 103 More than 100


2008 52 70 50 More than 100


2009 90 - - -




Questions


1. How successful was the Iranian government in solving the problem of food


security in Iran during the period 1990 – 2010?


2. What lessons could be learnt from the Iranian experience of ensuring the


necessary level of food security?


3. How could the accession of Iran to the WTO influence the situation with food


security in this country?


4. How does the experience of the Iranian government demonstrate the


multidimensional nature of the issue of food security?


5. What effect could the accession to the WTO have on the domestic food market in


Iran?


6. What were the main drawbacks of the Iranian government strategy of the


development of the agricultural sector?


7. What effect could the accession to the WTO have on the imports of food products


to Iran?


8. What changes could be made by the Iranian authorities in their approaches to the


problem of food security in order to improve the situation?






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