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Compendium of Teaching Materials on the International Trading System (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


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



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).

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



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.

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.


Table 1

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

Year 1980 1985 1990 1995 1996 1997 1998 1999 2000
export 3,424 1,936 4,127 14,457 17,041 20,584 20,362 15,163 17,741
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
import 3,424 1,936 4,238 14,441 17,041 20,584 20,848 15,761 17,713
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
export 15,170 10,208 12,719 17,114 21,138 25,794 32,443 41,587 33,000
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
import 15,820 10,635 13,360 17,879 22,091 26,415 33,917 44,535 32,000
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


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

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,

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

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

Uruguay Meat, soy beans, rice, malt, milk

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

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).

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


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)


Merchandise trade of MERCOSUR countries by major product group and by

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

World MERCOSUR Other

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

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

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
Agricultural products 58 28.1 37.7 1 10.5 5.5 57 30.9 41.3
Fuels and mining

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
Agricultural products 3 80.2 88.7 1 83.2 81.5 2 75.0 92.0
Fuels and mining

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
Agricultural products 4 55.7 73.4 1 41.2 35.1 3 67.3 83.3
Fuels and mining

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
Agricultural products 2 6.5 4.9 1 9.2 7.3 1 5.5 3.7
Fuels and mining

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
Agricultural products 9 8.5 6.4 4 34.1 30.0 5 4.3 3.8
Fuels and mining

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
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

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
Agricultural products 1 14.1 12.2 1 21.7 18.8 0 8.2 6.7
Fuels and mining

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.

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

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


‘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


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

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


Share of disputes (%) initiated


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

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-


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


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.


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

Mexico as a complainant
Country Year of

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,


2009 Measures Related to the
Exportation of Various Raw

GATT Panel proceedings

Ecuador 1999 Provisional AD Measure on

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,

Second recourse
to the Appellate

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

AD, GATT Implementation

Panama 2005 Tariff Classification of Certain
Milk Products

AD, GATT Mutually agreed

The USA 1996 AD Investigation Regarding
Imports of Fresh or Chilled

AD, GATT Withdrawal

2001 Continued Dumping and Subsidy
Offset Act of 2000

SPS, Agreement
Establishing the WTO,

under Article 22
DSU (remedies)

2003 Countervailing Duties on Steel

SPS Panel proceedings

2003 AD on Cement Agreement Establishing

Mutually agreed

2003 AD Measures on Oil Country
Tubular Goods (OCTG)

Agreement Establishing


2005 AD Determinations regarding
Stainless Steel

Agreement Establishing


2006 Final AD Measures on Stainless

Agreement Establishing


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,

Panel proceedings

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

AD, GATT consultation

Chile 2001 Measures Affecting the Import of

IL, TBT, GATT withdrawn

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

on Olive Oil from the European

Agriculture, SCM consultation

2006 Definitive Countervailing Measures
on Olive Oil from the European

Agriculture, SCM,


Guatemala 2003 Certain Pricing Measures for
Customs Valuation and Other

GATT, Agriculture,
Customs valuation,
Establishing the WTO


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

2000 Measures Affecting Trade in Live

SPS, Agriculture,


2000 Measures Affecting
Telecommunications Services

GATS implementation

2003 Definitive AD Measures on Beef and

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

DR. E.F. (Ric) Riccio


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

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.

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


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

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.


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.

Nikita E. Lisitsyn

Associate Professor

Department of World Economy
St. Petersburg State University

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


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

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


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

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


Table 1

Wood industry of certain countries, 2009

Country Wood resources,
cubic metre of wood
per resident

consumption of
paper and
cardboard, kilogram
per resident

Total length of
forest roads, km
per resident

Wood industry
exports, USD

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:

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


Alexander I. Pogorletskiy


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


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:

 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


 $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

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

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

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


 $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).

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,

Milan London Oslo Stockholm St.Petersburg Moscow


105.19 144.51 48.98 72.98 No direct flights No direct

easyJet (SXF) 96.98 135.32 No direct

No direct

No direct flights No direct


No direct

No direct

87.20 114.10 No direct flights No direct

Air Berlin

219.98 466.98 218.98 313.98 248.98 203.98






No direct

328 No direct flights 208.99


No direct

250.17 No direct

No direct

No direct flights No direct


No direct

177.33 No direct

No direct

No direct flights No direct


No direct

No direct

No direct

No direct

No direct flights 277.62

Rossija (SXF) No direct

No direct

No direct

No direct

No inbound
direct flight

No direct


No direct

No direct

No direct

No direct

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)


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
 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?

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

S7 Gazpromavia Sapsan


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


2 355

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


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

 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-

 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/


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

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

 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

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


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

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?

Sergey F. Sutyrin

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

The WTO Chair holder


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.


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

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).


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

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


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

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.

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


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

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


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?

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

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

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

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



 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


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

Mode 2: Consumption abroad

5 GNS/W/120 Services Sectoral Classification List

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

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

Create employment opportunities Internal brain drain from public to private

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

Promote exchange of knowledge among

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,

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

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


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

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

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

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
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).


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



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.)


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.


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


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.

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




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


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


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

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


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.

provided for by Articles XI and XII of GATT ’94 and by the WTO Agreement on Protection


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

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

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


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

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.

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


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

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


Table 5 - Relations of WB Countries with the European Union (2011)

Country Status SAA

Applied for

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.

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


“… 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.

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

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)

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

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


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.

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


“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.”


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.

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

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


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).

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.

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)

(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;

- 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


- 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.

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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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


Table 2 - Tariffs in WB Countries (2009)



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)

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

 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%)


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

(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:

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)


Sometimes several scenarios (event chains) lead to the same consequence and therefore

several final nodes ],...,[ )()(1
)( s

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








n iipiiAPBPp






)()( ),...,(],...,[)(  , (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

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)(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

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 IiiIiIiiIiipE



),...,1,0( );,...,();();,...,();,...,(~  , (4)


  

 

















and covariance


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 


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


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 ,


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


 denote covariance of random estimates of transition

probabilities ),...,( )1(


jj iip  , ),...,( )2(



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)



 E˜ p (0,1,...,k)(i1(s),...,ik(s);I)

Sn  (i (s);I)

, (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))


Sn 
 D˜ p (0,1,...,k)(i1(s),...,ik(s);I)  2


Sn cov( ˜ p (0,1,...,k)(i1(s),...,ik(s);I), ˜ p (0,1,...,k)(i1( t ),...,ik( t );I))
s t

Sn (8)

of random estimates )(~),...,(~ )()(1 IpIp

B of probabilities )()(1 ,...,


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

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


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.

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.


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
• 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

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

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

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

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


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

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

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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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.


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


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

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

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


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

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,


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.

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


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).

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)

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).

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

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

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,


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

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.

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).

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)

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)

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,


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)


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,


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Juliana Peixoto Batista65

Flexibilities for Developing Countries in the Doha Round as “À La Carte”

Special and Differential Treatment66


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.


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.

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.


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.

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).

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


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.

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


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


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).

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.

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.

flexibility with some obligations and procedures, in addition to certain provisions on technical


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


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.

beneficiaries. The other path moved around the speeches and negotiations under way at the Doha

Round. The following section will map those two paths.


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


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

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

subject to use
of national

Adaptation period: 5 years, non-

Adaptation period: 8
years, non-

subject to

- Adaptation period: 8 years,
- 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

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

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.

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

not seem to have changed for exercise of those rights, particularly by middle-income developing


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
countries and

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

They shall eliminate the
notified TRIMs in a term
of 7 years from the
effective date of the
WTO Agreement.

n period

Article 5,
paragraph 3:

The transition period for
developing countries may be
extended, subject to the Goods
Council’s approval and
fulfillment of certain

The transition period for
LDCs may be extended,
subject to the Goods
Council’s approval and
fulfillment of certain

Grant of extension

- Until May 2003: Romania

- Until June 2003: The


- Until December 2003:
Argentina; Colombia;
Malaysia; Mexico;
Pakistan; Thailand.


Measures in favor of LDCs in
Hong Kong (Annex F of
General Council Decision,
WT/MIN(05/DEC, of

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)


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.

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).

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 -


In relation to intellectual property, let us analyze the following chart:

Box III: Differentiated terms for developing countries and the LCDs under the TRIPs


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.



Transition period: Article
65, paragraph 1: 4
additional years.

Transition period for
technology sectors:
Article 65, paragraph 4:
additional period of 5


Transition period: Article 66, paragraph 1: 10
additional years.

for/Grant of

Maldives Islands:
- Application for extension: August 2004.

- Grant of extension: until December 2007.
Mandate on
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.


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

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.

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


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

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.

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.

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
- 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.

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).


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.

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).

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


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:.

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
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.

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

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



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


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.

favorable results in the international scenario, thanks to the fact that the WTO is strongly rule-


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


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


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.

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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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


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

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:
126 Dolgikh.com, Natural Gas Research, Natural Gas in Russia’s Fuel and Energy Complex, URL:
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.

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


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


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

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


- 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.

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.

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


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


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.

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:


6. Appendix 1. World Natural Gas Reserves by Country

The source: Oil and Gas Journal, 1 January 2010


Appendix 2. World Coal Reserves by Country

The source: World Energy Council Interim Update 2009


Appendix 3. World Oil Reserves by Country

The source: Oil and Gas Journal, 1 January 2010


Appendix 4. Energy consumption by source for major countries

The source: BP Statistical Review of World Energy, 2009


Appendix 5. The Structure of Russia’s Primary Energy Consumption by

energy source (1985-2009), tons of oil equivalent

natural gas
nuclear energy
hydro energy

The source: Rosstat data (Dolgikh.com, Natural Gas Research), 2010


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


Appendix 7.Major Russian Gas Basins

The source: US Energy Information Administration


Appendix 8. Russia’s Natural Gas Production (1998-2009)

Natural gas production (million of cubic metres)
Growth rate

The source: ABARUS Market Research, 2010


Appendix 32. Major Recipients of Russian Natural Gas Exports

The source: Energy International Agency, 2008


M. Sait Akman*

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

Challenges and the EU Process


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


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.

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.



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

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.

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.

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.

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).

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).


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

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


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

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


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

-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


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).

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

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.

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

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-

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

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

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).

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 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).

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)

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.

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



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).

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.

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

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).

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

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
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).

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).

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

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:
160 For a detailed analysis of Turkey’s approach in TF, see (Oğuz, 2008).

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.


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/

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.


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.


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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


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)

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


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

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.
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.

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

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


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.

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

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.
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.
199 Muḥammadkhānī & Suliymānī, Jāyigāh-i bakhsh-i kishāvarzī dar ῾iqtiṣād-i kishvar va barnāmaha-i tuṣi῾iih, p.
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

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

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% -


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.

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


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.

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
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.

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


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

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


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


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

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


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

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 (%)

in rice (%)

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.

Year Self-sufficiency

in wheat (%)

in rice (%)
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 - - -


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


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?