Report of the Secretary-General of UNCTAD to the ninth session of the Conference

June 1996

Chapter II

PROMOTING INTERNATIONAL TRADE AS AN INSTRUMENT FOR
DEVELOPMENT IN THE POST-URUGUAY ROUND WORLD

136. As argued in the preceding chapter, globalization and liberalization have created the premises for international trade to become an engine of economic growth on an unprecedented scale. The scope for deepening and widening the international division of labour has been greatly increased by the successful conclusion of the Uruguay Round, as well as by the adoption by the developing countries of outward-oriented growth strategies. It is expected that the present trend whereby the pace of world trade growth outstrips that of world output will strengthen in the period to come, and with it the increased participation of all countries in international trading.

137. How to facilitate the economic and institutional integration of developing countries and countries in transition into the world trading system is a major challenge for international economic cooperation. It is also an issue of special interest to the developed countries. The gains to industrial countries from increased trade integration with developing countries are potentially larger than the gains from additional integration among themselves. Trade integration arising from the ongoing liberalization process and from its extension to new areas such as services is likely to generate dynamic gains from increased market size, competition and technology transfer. As developing countries are forecast to grow about twice as fast as industrial countries, and as countries in transition develop stronger supply capacities and become more competitive internationally, the dynamic gains from increasing trade with them are likely to be specially important.

138. The realization of these gains will, however, depend on the extent to which the adjustments required by the process of integration are carried out. International trade can only fulfil its potential as an engine of global economic growth if the necessary reallocation of resources in line with countries' different and changing comparative advantage is allowed to take place and the inevitable frictions and protectionist pressures that will arise in implementing appropriate structural adjustment policies are resisted. Furthermore, the weaker trading partners, especially the LDCs and commodity-dependent economies, must be enabled to strengthen their economic, technical and human capacities to engage in trade and to participate fully in the multilateral trading system.

139. Not all developing countries are equally able to seize the new opportunities in international trade that are likely to arise in the process of globalization. For example, the speed of integration in international trade of LDCs since 1990, measured by the differential between the growth rate of trade and output, has only been one third as fast as that of developing countries as a group. A similar situation is faced by many commodity-dependent economies which have not been successful in utilizing their commodity sectors as a springboard for economic growth and structural transformation or in reducing their dependence on one or two commodity exports. These countries and other structurally weaker economies are also poorly equipped to participate in the multilateral system of trade rules and disciplines. The danger of marginalization of a large number of countries in the international trading system is therefore real.

A. Opportunities and challenges for promoting economic growth and sustainable development

140. The trade liberalization resulting from the Uruguay Round and from regional economic integration, combined with the autonomous liberalization measures of developing countries, has created both opportunities and challenges for promoting economic growth and sustainable development. The economic impact of these liberalization efforts will, however, be spread out over a number of years because the Uruguay Round Agreements provide for a phased implementation of commitments and because economies will take time to adjust to policy changes.

141. Meanwhile, there are likely to be transitional impacts. First, varying time lags in the expansion and contraction of industries due to the policy changes induced by the Agreements imply that the factors released from contracting industries may remain unemployed for a period before they become reabsorbed in expanding industries. Second, while the reductions in MFN tariffs will increase market opportunities in general, they will also put a competitive squeeze on the exports of those countries whose access was hitherto facilitated by preferential tariffs. These countries are likely to experience a transitional loss of export revenue. Other short-term effects are expected as a result of the reform process in agriculture and of the reforms concerning intellectual property rights. The reform process in agriculture could lead to higher prices for basic food products and therefore involve transitional costs in terms of higher import bills for low-income food-deficit developing countries. On the other hand, the extended and stricter patent protection is likely to result in higher prices for high-technology and pharmaceutical products.

142. The likelihood of adjustment pressures on developing countries was recognized at the Marrakesh Ministerial Meeting in 1994. As a result, the Uruguay Round Agreements incorporate a range of measures aimed at spreading out the adjustment process in order to minimize costs. These measures should, however, be complemented by a positive approach designed to smooth the process of economic adjustment by addressing the rigidities which slow it down. International support should be mobilized for the efforts by developing countries to rationalize resource allocation and develop supply capabilities, as well as to increase the elasticity of supply in critical areas by encouraging investments in food production and non-traditional export industries and in labour retraining schemes.

143. As indicated in chapter I, special attention should be paid to the contribution of the services sector to development and the role of trade in services, as well as access to efficient ways of trading (especially through electronic commerce) in the integration of developing countries and economies in transition into the world economy. Given the rising service intensity of production, a strong producer services sector has a major impact on the competitiveness of firms and of the economy as a whole, and consequently on the chances of success of export-oriented development strategies. Moreover, global competition is now characterized by a declining trend in the share of profits arising from product- or process-based comparative advantage, with a correlative increase in profitability and competitiveness based on information advantages and reductions in transaction costs. Strengthening service capacities in general, and capacities for "trade efficiency" in particular, is thus a major challenge for developing countries in the period ahead.

144. Particular difficulties are faced by the primary commodity export-dependent developing countries in using international trade as an engine of economic growth and sustainable development. These are mostly low-income countries, with a large proportion located in sub-Saharan Africa. Because of their heavy commodity dependency, the economies of these countries tend to be highly vulnerable: generally, they are characterized by a high degree of export-earnings instability, a persistent decline in the terms of trade, a high external debt burden, small inflows of foreign direct investment, and limited developmental linkages within the domestic economy.

145. In sum, the immediate task for national and international policy is to secure an enhanced role in world trade for developing countries and countries in transition through export expansion and diversification, in terms of both products and markets. This objective can be promoted through policies and actions designed to strengthen supply capabilities and capacities for trade efficiency, to improve market access, and to help the weaker countries overcome transitional difficulties and constraints arising from commodity dependence. Institutional integration can be promoted by helping countries to participate actively in the multilateral decision-making process, to meet their new obligations deriving from the Uruguay Round Agreements and to defend their rights effectively. As for non-members of WTO, it also involves facilitating accession to the Organization. Integration can also be promoted through strengthening the capacity of developing countries to formulate and pursue autonomous trade liberalization policies, as well as by strengthening regional integration to enable them to diversify markets and take full advantage of global trading opportunities.

B. Enhancing the participation of the developing countries and countries in transition
in international trade: policy approaches and measures

146. Achieving enhanced participation of developing countries and countries in transition in international trade calls for measures and actions aimed at improving national and international trade policy, developing trade efficiency and addressing commodity dependency.

1. Trade policy

(a) Effective implementation of the Uruguay Round commitments and further liberalization

147. The first urgent objective is to ensure effective implementation of the Uruguay Round results, especially in the area of market access for goods and services of export interest to developing countries and countries in transition. As already indicated, the Uruguay Round Agreements leave considerable margin for interpretation; this allows countries an element of discretion in their trade policies that may lead to the reintroduction of protectionist measures. It is essential that countries, and particularly major trading nations, implement their commitments fully and exercise appropriate restraint in the application of trade remedies such as safeguards and anti-dumping and countervailing measures against products of developing countries and countries in transition.

148. Furthermore, the Uruguay Round Agreements contain a built-in future work programme containing commitments to launch new negotiations aimed at further trade liberalization in agriculture and services beginning around 1999; the negotiation of certain missing provisions in the GATS; a review of the possibility of extending the Agreement on Trade-Related Investment Measures (TRIMs) to cover investment and competition policy; and a series of reviews of the operation of various Agreements which could lead to proposals for their amendment. To continue the momentum toward further liberalization of multilateral trade and the increased participation of the developing countries, there would also be a need for further multilateral trade negotiations on trade liberalization to focus on issues related to tariff peaks and tariff escalation.

149. In the agricultural sector, where various analyses have shown that the process of tariffication has led in several cases to the establishment of tariffs that provide more protection than the non-tariff barriers they replaced, the objective would be to reduce out-of-quota tariff rates to non-prohibitive levels. The approach to tariff reduction should also include the goal of reducing tariff escalation on products of interest to developing exporting countries to give them increased access to markets for processed products and to promote the diversification of their traditional commodity exports into higher-value-added products. Experience with the implementation of the Agreement on Agriculture - for example, in the administration of tariff quotas, the actual incidence of reduction commitments on those products most subject to export subsidies and domestic farm support - should reveal specific priorities for further liberalization in this sector.

150. In the services sector, within the context of the GATS, negotiations are continuing on maritime transport and basic telecommunications services; on achieving a truly MFN-based agreement on financial services; on formulating a set of rules on subsidies, safeguards and government procurement; and on disciplines to ensure that measures relating to qualification requirements and procedures, technical standards and licensing requirements in the field of professional services do not constitute unnecessary barriers to trade.

151. Progressive liberalization of services, in accordance with the objectives of the GATS, will be based on the promotion of interests of all participants on a mutually advantageous basis and on securing an overall balance of rights and obligations, including obligations on increasing participation of developing countries in trade in services. The latter relate to strengthening of the domestic services capacity of developing countries, inter alia through access to technology, the improvement of their access to distribution channels and information networks, and the liberalization of market access in sectors and modes of supply of export interest to them.

152. The inclusion of the "temporary movement of natural persons supplying services" within the definition of trade in services in the GATS responded to the concern of developing countries that this was the main mode of supply of labour-intensive services in which they were deemed to possess a comparative advantage, and in order to maintain a symmetry between movement of factors of production as part of the compromise to include investment within the scope of the GATS. However, the post-Uruguay Round negotiations on movement of natural persons, which were supposed to achieve higher levels of commitments, have only resulted in some limited improvements on the part of a few developed countries.

153. Pending further liberalization in the next round of negotiations, steps could be taken in the meantime to ensure increased transparency regarding immigration legislation and regulations and non-discrimination in the movement of persons from different countries. Measures could also be taken to reduce the restrictive impact of economic needs tests and to exempt more categories from such requirements. Access opportunities could also be improved by allowing the temporary movement of service teams and project personnel.

154. Although unconditional MFN treatment is a basic obligation under the GATS, time-bound exemptions are allowed. The fact that some of the MFN exemptions are couched in terms that would cover future measures and that most of the measures scheduled will apply for an indefinite period brings in an element of sector-specific reciprocity and conditionality. The outcome of the negotiations on financial services clearly demonstrates how sectoral interests could endanger the integrity and comprehensiveness of the GATS and the basic principle on which the whole multilateral system is established, namely non-discrimination. Criteria therefore need to be developed to ensure that exemptions from MFN treatment would indeed be reviewed and phased out without additional payment, with a view to ensuring that the multilateral approach of the GATS is applied as far as possible to all sectors and modes of supply.

155. In order to enable developing countries to extract the expected economic benefits from the provisions of article IV of the GATS, this article would need to be supplemented by additional principles relating to capacity-building in services sectors, access to and use of distribution channels and information networks, and liberalization in sectors and modes of supply of export interest to them. Developing countries undertaking programmes to liberalize their services sectors should be provided with assistance to enable their firms to acquire the capacity necessary to compete in the domestic and export markets.

(b) Measures to alleviate transitional costs

156. The burden of adapting to the results of the Uruguay Round will be borne to a relatively greater extent by developing countries, and particularly by the least developed and net-food-importing developing countries. The acceptance by the international community of the need to assist these countries to face the challenges and difficulties posed by reform and the liberalized international trading context - and in particular to adjust to possible increases in prices of imported foodstuffs - constituted a significant step. It was embodied in the Marrakesh Ministerial Decisions on Measures in Favour of Least-Developed Countries and on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Countries. The challenge, which has been addressed in several high-level meetings, is to translate these commitments into concrete action and the Conference should contribute to this process. The primary focus of such action should be on minimizing the transitional costs to be borne by these countries.

157. However, the problems facing many developing countries in adapting to the post-Uruguay Round trading system extend beyond such emergency measures. Developing countries which are unable to compete effectively in international trade or to defend their interests within the multilateral framework of rights and obligations will become further marginalized. Thus, measures must be taken to assist developing countries to increase their competitiveness in world markets in the light of reduced preferential tariff margins, to effectively implement the multilateral trade agreements, notably in setting up the necessary institutions and domestic mechanisms, and to defend effectively their rights and interests in multilateral and regional forums. The Conference could define a specific action programme of technical and financial assistance in this respect.

158. More specifically, to offset the possible deterioration in LDC trade balances, a range of measures would be required. The Marrakesh Ministerial Decision on LDCs and net-food-importing countries points to the need for improved conditions for, and an increase in, food aid (para. 3 (i) and (ii)) and for balance-of-payments support through access to compensatory financing schemes (para. 5); as stated in chapter I, more vigorous debt-relief measures are also necessary. Simultaneously, efforts by LDCs to improve agricultural production and infrastructure should be supported by the provision of technical and financial assistance (para. 3 (iii)). Financial assistance is also required to help upgrade the transport and communications infrastructure in LDCs and ensure availability of essential medicines at affordable cost to their populations.

159. Trade measures should aim at improving the trading opportunities of the LDCs, taking into account the erosion of preferential margins, as well as their limited capacity to participate in an increasingly competitive global market in goods and services. Steps should, therefore, be taken to maximize the remaining possibilities for preferential treatment (improvements in GSP schemes for the LDCs are proposed below). Additional measures to help the LDCs compete in world markets could involve the removal of all remaining barriers to imports from LDCs and effective action by the relevant agencies in the major markets to promote imports from these countries. More specifically, in applying anti-dumping and countervailing duties, the LDCs could be exempted from any cumulative assessment of injury, and importing countries could refrain from taking safeguard action against LDC imports. As for textiles and clothing, LDCs could be exempted from all restrictions during the 10-year phase-out period established by the Agreement. At the same time, LDCs' participation in trade in services could be enhanced by: effective application of article IV of the GATS on a unilateral basis so as to liberalize sectors and modes of supply (i.e. movement of persons) of interest to them; facilitating their access to information networks and distribution channels and to technology; and giving LDC suppliers of services facilitated access to information.

160. LDCs also need support in the development and diversification of their production and export bases, including those of services, as well as in trade promotion, and the Decision on LDCs calls for substantially increased technical assistance for these purposes (para. 2 (v)). Finally, LDCs will also require technical cooperation to strengthen their institutional capacity to deal effectively with an increasingly complex international trading system. In addition to helping LDCs identify new trading opportunities in particular sectors and markets, assistance will need to focus on human resource development in the areas of export production, diversification and promotion as a means of strengthening export supply capabilities. Particular attention should be devoted to identifying appropriate technologies, including in the public domain, which could considerably reduce the high cost of imported technology resulting from the implementation of the TRIPs Agreement.

(c) Measures to enhance the effectiveness of the generalized system of preferences (GSP)

161. The contribution of the GSP to export growth of developing countries has been significant but not evenly distributed. Those beneficiaries which have both the supply capacity to take advantage of the market opportunities and the administrative capacity to identify the opportunities and conform to the required documentary procedures have derived maximum benefits. This problem can be corrected not by the graduation of such countries, but through the expansion of product coverage and technical and financial assistance to the less competitive beneficiaries.

162. Important limitations in product coverage, among them the exclusion of key sectors of interest to developing countries (such as textiles and agriculture), have significantly reduced the positive impact of the GSP schemes in that only half the dutiable products for developing countries are covered by the schemes. This, combined with stringent rules of origin, tariff quotas, difficulties in complying with the procedural requirements and lack of information, results in three quarters of all dutiable imports from developing countries not receiving GSP treatment. In addition, there is a tendency to introduce greater conditionality and complexity in the schemes through the inclusion of provisions on social and environmental standards.

163. The Uruguay Round MFN tariff reductions have resulted in an erosion of preferential margins, as has the extension of free trade areas and customs unions. This process can be expected to continue. Thus, in the longer run the GSP is likely to lose its importance as a means of providing competitive opportunities to less competitive countries. However, in the short and medium term, for the GSP to continue to play a significant role in enhancing the participation of developing countries in international trade, its effectiveness would need to be enhanced in two respects in particular. Firstly, preferences should be sufficiently secure so as to enable exporters in developing countries to build an export strategy on them. Secondly, the benefits of the GSP should accrue to the largest possible number of countries.

164. Specific measures to enhance the effectiveness of the GSP should include: extension of product coverage to agricultural and resource-based products, tropical industrial products, leather, footwear, metals and minerals, textile and clothing products; the establishment of multilaterally agreed criteria for country/product graduation from the GSP; and the harmonization of GSP rules of origin among preference-giving countries, drawing on the Uruguay Round Agreement on Rules of Origin. The extension of product coverage will not only reduce the existing mismatch between the export structure of GSP beneficiaries and the product coverage of the major GSP schemes, it will also enable more developing countries to benefit from the schemes.

165. In order for the LDCs to derive adequate benefits from the GSP, the special treatment accorded to them needs to be strengthened through: (i) the granting of comprehensive product coverage to all dutiable products, including agricultural and textile products; (ii) the relaxation of existing rules of origin to include full and global cumulation and flexible administration of documentary and shipment requirements (this point was particularly emphasized by LDCs at the twenty-second session of UNCTAD's Special Committee on Preferences in October 1995); and (iii) enhanced support for the technical cooperation programme on GSP.

(d) Assistance to enhance the capacity of the developing countries and countries in transition to participate effectively in the WTO system of rights and obligations

166. An increased reliance on international trade in the development strategies of many developing countries was accompanied by their more active participation in the Uruguay Round of multilateral trade negotiations and in the GATT/WTO system of multilateral trade rights and obligations. Thirty-two developing countries and territories acceded to GATT during the Uruguay Round or before WTO's entry into force as from 1 January 1995, thus bringing the total number of GATT contracting parties to 128 by the end of 1994. All of these countries qualified to become members of the WTO. In addition, about 15 developing countries have initiated their accession negotiations to WTO since then. Concerning the economies in transition, several of them had been GATT contracting parties before the Uruguay Round, one country (Slovenia) acceded to GATT after the conclusion of the Uruguay Round and thus was eligible to become an original WTO member, and many others are in the process of acceding to WTO. It is expected that WTO membership will continue to expand. The trend towards more universality of the WTO membership is thus evident. On the other hand, some of the most important trading nations, like China and the Russian Federation, are not members. It is widely recognized that the WTO system cannot be regarded as universal as long as this situation continues.

167. Accession to WTO poses important institutional challenges to the country trying to accede. The extension and intensification of obligations as compared to "GATT 1947" has greatly complicated the accession process. Countries are facing increasing demands which, in certain cases, go beyond the scope of the Agreements. This is particularly true of acceding countries in transition, which in some cases are still affected by trade restrictions introduced to deal with the previous economic regimes.

168. Countries in transition face a complex internal and external situation which may complicate their accession negotiations. They are undergoing a fundamental transformation into market-based economies, and integration into the international trading system plays a central role in the process. They will undoubtedly need a degree of flexibility with respect to putting in place trade regimes which are consistent with WTO membership. For example, these countries' tariff regimes have only begun to develop over the last two to three years and, in some cases, are still not in place; the approaches applied in the Uruguay Round to maximize tariff cuts and tariff bindings of all participants may not necessarily be applicable to countries in transition. Another matter of concern for them would be in the new areas falling within WTO competence - i.e. trade in services and protection of intellectual property rights - where, in general, many essential aspects of foreign trade regimes, legislation and regulations are still missing, while national policies in those areas are still being worked out.

169. Given the link between accession to WTO and the transition to a market-oriented economy, it would be desirable for the systemic transformation of these countries to be given priority in the accession negotiations. Thus, issues concerning reduction of tariffs and other restrictions to trade should be dealt with in the context of resumption of economic growth, structural adjustment and the increased capacity of their economies to compete internationally. In addition, it should of course be ensured that WTO membership would result in elimination of the "residual" discriminatory elements still existing in the trade regimes of major trading countries vis-à-vis countries in transition.

170. A further challenge facing developing countries and countries in transition concerns their ability to exercise their rights and meet their obligations under the WTO system. Apart from substantive obligations and rights, WTO members must also satisfy onerous procedural requirements. There are, for example, some 160 notification requirements arising from the Agreements. In some cases, the implementation of notification obligations may affect the substantive rights of a WTO member, including the use of provisions on differential and more favourable treatment in the case of a developing-country member. Active participation in the WTO system will also require constant involvement in the work of WTO councils, committees and working parties, as well as in the ongoing negotiations on some specific issues. Finally, an active defence of rights will depend on a country's ability to use the WTO dispute settlement mechanism in the case of a trade conflict.

171. Many developing countries and economies in transition - both existing and aspiring members of WTO - will have to strengthen their capacity in the areas of trade policy formulation and negotiation and institutional adaptation, since the depth and range of expertise required are often not available to them. This weakness will also affect their ability to deal with the complex unfinished business of the Uruguay Round and with the new issues on the international trade agenda. It is therefore incumbent upon the international community to formulate a programme of assistance for these countries, which would otherwise not be able to participate effectively in the international trading system.

(e) Structural adjustment policies of developed countries

172. As the world economy becomes more global and trade liberalization continues, industries in all countries will face growing pressures to adjust their patterns of production and trade to changing competitive positions. Responding to this challenge calls for improving productivity and product quality, refining product lines, retreating from areas in which industries are no longer competitive, relocating in lower-cost countries and shifting into new activities with longer-term growth potential. Governments can facilitate such structural adjustment by creating a favourable macro-economic policy environment, as well as by adopting cross-sectoral or industry-specific measures which aim to influence the process of adjustment at the micro-economic level.

173. UNCTAD's member States have agreed that structural adjustment policies should follow a positive approach so as to promote shifts in the patterns of production and trade in line with changes in comparative advantage and provide support which is temporary, transparent, linked to the phasing-out of obsolete capacity, and free of protectionist measures against imports. This would create substantial room for the expansion of production and trade of developing countries and economies in transition in those sectors where they had gained comparative advantage. It would also facilitate trade policy reforms in developing countries, as well as the effective implementation of the Uruguay Round Agreements, and lower resistance to further liberalization.

174. Action is called for in three main areas. In the agricultural sector, structural adjustment policies should focus on accommodating increases in import competition which will occur in the longer-term process of liberalization initiated by the Uruguay Round. In the textiles and clothing sector, the objective should be to accelerate the process of liberalization. Delaying the removal of quotas until the very end of the 10-year phase-out period could result in a concentration of structural adjustment problems in the last stage. Finally, developed countries' support of investments abroad and other forms of cross-border production cooperation should focus more on encouraging the relocation of uncompetitive lines of production to developing countries and to economies in transition. This may require refocusing investment guarantee schemes, as well as strengthening the fiscal incentives directed towards this goal. Such policies would help to integrate a greater number of these countries into the process of globalization in line with each country's best ability to produce, while facilitating the industrial upgrading of the home country.

2. Trade efficiency

175. Efficiency in the conduct of international trade transactions is essential for the participation of developing countries in international trade. Trade efficiency capacities can be enhanced through improvements in trade-related service infrastructures, such as transport systems, ports and telecommunications, as well as through trade facilitation practices. In addition, recent advances in information technologies offer opportunities for considerably more efficient ways of conducting international trade transactions, including electronic trading.

176. The realization of those opportunities for developing countries will however require appropriate practical support measures on the part of the international community. Following the United Nations International Symposium on Trade Efficiency (UNISTE, Columbus, Ohio, October 1994), the UNCTAD secretariat has identified three areas where action needs to be taken as a matter of priority: establishing a Trade Efficiency Review Mechanism (TERM); providing the emerging Global Information Infrastructure (GII) with a development dimension; and creating GII subregional nodes to serve the structurally weakest economies, notably in Africa.

(a) Establishing a Trade Efficiency Review Mechanism (TERM)

177. TERM has been proposed as a means to address the need to:

(a) Maintain awareness, both at the national and international levels, of the constraints that developing countries and small and medium-sized enterprises (SMEs) face for their integration in the post-Uruguay Round trade environment;

(b) Evaluate the validity of the policy approaches followed in response to those constraints; and

178. The core of TERM would be the examination of the way in which UNCTAD's recommendations and guidelines for trade efficiency are relevant to local conditions, as well as of the manner and degree of their implementation. The examination would involve a secretariat report - at the request of the Government concerned - and a subsequent intergovernmental discussion. National policy approaches to trade efficiency issues would be reviewed from the perspective of the needs of traders, especially SMEs. Trade efficiency reviews would also look at more general elements of the microeconomic environment in each of the areas of UNCTAD's work in trade efficiency, including relevant governmental policies, institutional structures and business practices, from the standpoint of reduction of barriers to entry to international trade. The review would attempt to quantify the cost of inefficiencies for traders and consumers, thus contributing to greater transparency.

179. Trade efficiency reviews could provide policy-makers and decision-makers in the public and private sectors in developed countries with an array of signals about a country's strengths and weaknesses in some of the main determinants of trade competitiveness, which may be of particular interest for potential international investors and traders. This could also be of use to multilateral lending organizations such as the World Bank and regional development banks. As a result, TERM could also provide significant additional leverage to poorer countries to attract investment, trade and financial support for their development process. TERM could furthermore feed UNCTAD's work in trade efficiency in terms of the intergovernmental consensus-building process and the analytical base of its operational activities, as well as supplying valuable information to multilateral and bilateral donors who have been providing financial support to technical cooperation activities in trade efficiency about the results of these efforts and priorities for the future.

180. TERM could also provide useful inputs for work in the area of enterprise development. In particular, the evaluation of the conditions in which traders in the developing world and SMEs worldwide have access to international trade would be relevant for the design of policies that aim at fighting exclusion through the encouragement of entrepreneurship, as well as for the activity of non-governmental organizations working with micro-enterprises and the informal sector.

(b) Providing the Global Information Infrastructure with a development dimension

181. The emergence of the Global Information Infrastructure concept (GII) has closely followed that of the National Information Infrastructure (NII) promoted in the United States. GII is predicated upon a rapid deregulation of telecommunications at the world level. The Buenos Aires Declaration adopted at the ITU Conference on Telecommunications for Development (Buenos Aires, April 1994) recalled the importance of telecommunications for development, and UNISTE also called the attention of the international community to the necessity to endow GII with a development dimension at an early stage.

182. The rapid emergence of global information infrastructures is affecting all areas of international trade, either directly, as in the case of services, or indirectly, through shifts in value-creation processes along the trade transaction chain. Information-intensive activities, especially when they are network-based, are becoming increasingly important. Lack of access to relevant trading methods and to up-to-date and affordable information is becoming a major cause of marginalization for many developing countries, especially the least developed ones; in an increasing number of cases, the information "have-nots" are also being marginalized in the context of the modern transport, insurance and banking networks.

183. However, this outlook is by no means all bleak. Some characteristics of the current situation make it potentially very promising from the point of view of development:

(a) The more advanced countries and enterprises have a vested interest in allowing greater participation in the "advanced sectors" of global trade. For example, electronic commerce (and, more broadly, trade facilitation) allows faster and cheaper transactions, and increased profitability for both exporters and importers. Broader access to information also contributes to increased transparency (and hence efficiency) in international markets. This situation therefore offers significant opportunities for positive-sum processes in which the integration of developing countries and economies in transition in international trade can be pursued as a common objective by the international community. The fact that three recent G.7 meetings (Naples, Brussels and Halifax) have devoted central attention to the issue of Global Information Infrastructure (GII) suggests that considerable investment will be made in this sector over the next decade.

(b) What appears to be a major strategic ingredient in international competition, i.e. information technology, happens to be one whose price/power ratio has decreased steadily over the last two decades. This offers unprecedented opportunities to developing countries and countries in transition for leapfrogging to new methods and areas of trade. For instance, such opportunities provide fresh avenues for the diversification (both horizontal and vertical) of commodity-dependent economies. There are also abundant instances of problems of underutilization of resources as a consequence of inadequate regulations or inadequate practices whose correction requires little or no investment. A careful examination of the effects of telecommunications deregulation on the domestic economies of developing countries could lead to the identification of new, more efficient ways to use existing infrastructures (e.g. copper lines) as well as of avenues likely to generate higher rates of return on new infrastructures (e.g. Low Earth Orbit satellites).

(c) The creation of subregional GII nodes

184. Many poorer developing regions, in particular in the African continent, are still characterized by a remarkably low level of information flow connectivity. This applies both to main telephone lines and specific new services, such as the Internet.

185. As already indicated, some of these problems can be addressed through more efficient use of existing resources, for instance by redesigning regulations. At the same time, being a late starter in a rapidly changing area of technology can be a significant advantage, since it can allow the selection of state-of-the-art technology at relatively low prices and in a stabilized environment, especially with regard to international norms. As the Global Information Infrastructure takes shape, developing regions with low levels of information flow connectivity could greatly benefit from having access to GII.

186. However, the ability of poorer economies to connect to GII will be a direct function of their ability to identify and generate a local critical mass of users. Hence the necessity, at least in a first stage, to focus on subregional groups of users likely to benefit from the establishment of appropriate communication capabilities, transmit part of these benefits to the rest of their respective national economies, and contribute to the generation of secure and relatively rapid returns for the investors involved.

187. In other words, most developing regions should, in the first stage, focus on establishing GII nodes. A GII node is a subregional "hub" able to provide three major ingredients for the rapid integration of developing countries in GII, namely:

(a) A pole for concentration of users' demands to enable them to reach a critical mass that will attract investment and help to lower the price of services offered;

(b) A laboratory and information centre where the latest developments regarding the GII can be learned, tested and evaluated with respect to the specific needs and characteristics of local communities, especially smaller firms (including the informal sector) and rural communities; and also where appropriate interfaces and applications are developed, and training is offered in the use of technologies and management techniques;

(c) A "telecentre" where the commercial use of information technologies and GII connections contributes to financial support for the provision of GII access to local institutions involved in education, health, environment protection and other socially important activities.

188. Ensuring that GII is really global will require the establishment of "GII nodes" in developing regions. Since 1992, a global network of trade points has been creating electronic trade and information links between developing and developed countries and among developing countries. The consolidation and expansion of this initiative should be a key element of any networking strategy that aims at putting the developing world and industrialized economies on a more equal footing in the field of electronic trade and information flows.

3. Measures and actions to address commodity dependence

189. As indicated earlier, developing countries which are heavily dependent on commodity exports face formidable challenges in using international trade as an instrument for promoting their economic growth and sustainable development. These countries share a number of characteristics: lack of significant diversification of their economies; inability to attract sufficient volumes of FDI; and very low levels of social indicators such as life expectancy, infant mortality, per capita availability of doctors, literacy rates, average length of school attendance, and number of telephones per capita. At the same time, their ability to draw development resources from international trade is seriously hampered by their vulnerability to external shocks, and notably to large swings in the prices of the commodities on which they are most highly dependent. For these countries, the key to escaping this "poverty-cum-marginalization trap" lies in the more sustainable and efficient use of their natural resources, by both developing the traditional commodity sectors and building on the existing resource base to develop new exports. Diversification, whether horizontal or vertical or both, of the country's commodity base is likely to play an important role in this process.

190. Concrete policies, measures and actions towards addressing the negative consequences of commodity dependence can be identified in three areas, as discussed below.

(a) Reduction of the instability and risks faced by the commodity-export-dependent developing countries

191. Although instability is still a major problem for developing-country commodity exporters, it should be recalled that during the 1980s the main problem from which most such exporters suffered was the substantial decline in both nominal and real commodity prices (-2.2 per cent per annum in nominal terms and -5.2 per cent per annum in real terms from 1979-81 to 1991-93). In many cases, these price declines were due in part to excess supply on the markets over sustained periods of time. There are many reasons which can be adduced for such excess supply (including "exit barriers" and the response to the debt-servicing burden), but they are all consistent with the same policy conclusion, namely that producers should consider taking measures to bring supply into equilibrium with demand on a long-term basis, preferably with the cooperation of the consumers.

192. The International Cocoa Agreement 1993 provides an example of how such cooperation might be organized. It contains new economic provisions aimed at achieving equilibrium between supply and demand through adjustments of production and promotion of consumption. The supply rationalization plan is based on the adoption by the International Cocoa Council of annual forecasts of world production and consumption and the establishment of indicative figures for annual levels of global production necessary to achieve and maintain equilibrium between supply and demand. In the light of these indicative figures, producer member countries draw up a programme for the adjustment of their production and are responsible for the policies and measures applied for the purpose. While this experience is too recent to allow final judgement to be passed on the effectiveness of this approach to stabilization of commodity markets, the introduction of schemes of this sort deserves further serious consideration by the international community. It should be emphasized, however, that, except in the case of a very few commodities, producer rationalization plans depend on consumer cooperation to enhance their chance of success.

193. The past two decades saw a striking increase in the volatility of primary commodity prices, and the recent sharp movements in such diverse commodities as coffee and aluminium suggest that the "quieter" period of the early 1990s may have been an aberration. At the same time, international cooperation to reduce commodity price fluctuations through buffer-stock interventions has collapsed, and arrangements to compensate producing countries for export-earnings losses have either failed to achieve their objectives or have been transformed into conditional devices on which countries are reluctant to draw. Moreover, the application of structural adjustment programmes has led to the dismantling of the instrumentalities of government intervention in commodity markets, particularly marketing boards and stabilization funds, which, for all the inefficiencies associated with them, did provide a measure of stability of revenue to domestic producers.

194. This new context has thrown into sharp relief the need for risk-averse private agents to be able to use market-based instruments to hedge the commodity risk they face. The past decade has seen the development of a number of financial instruments - such as swaps, options and commodity-linked bonds - which can be used for such purposes. However, the development of coherent risk management strategies making safe use of futures and derivatives is neither straightforward nor costless. Moreover, access to these instruments is limited to those entities which meet creditworthiness tests, and they are thus of limited use to individual small producers. On the other hand, hedging substantial revenue flows - as in the case of minerals - raises the requirements as regards the competence of those undertaking the hedging and creates an imperative need for safeguards against mistakes and unauthorized operations.

195. There is therefore an urgent need for both a major programme of technical assistance to help private developing-country producers to make use of these risk-limiting instruments, and a concerted effort of international cooperation to develop means of overcoming barriers to entry posed by high levels of sovereign risk (for example, by collateralization and guarantee mechanisms).

196. High levels of sovereign risk pose problems not just for access of developing countries to risk management markets, but also for access to credit in general. This adds considerably to the costs of commodity trade, in particular for poorer developing countries: as these countries are perceived as presenting a high risk of default, lenders require high risk premiums. These risk premiums can be considerably reduced if ways are found to provide more security. Such security can be provided if loan reimbursements are tied to the normal commodity export flows of the countries concerned. In many cases, unfortunately, the current international commodity-trade framework does not allow for such ties, particularly because of a lack of securitization facilities. In this light, the promotion of commodity warehouses able to issue warehouse receipts and the development of international facilities which would promote the use of such warehouses require serious attention.

197. In the light of the above, the Conference could consider the following proposals for action aimed at reducing the instability and risks faced by the commodity-export-dependent developing countries:

(a) Promotion of exchange of information and voluntary cooperation among producers (as in the Cocoa Agreement) to help bring supply and demand into better balance;

(b) Reduction of subsidies for domestic overproduction of agricultural commodities (especially in OECD countries);

(c) Notification (as in the subsidies agreements of WTO) of national policies (and those of international financial institutions) regarding commodity production;

(d) Reduction of the conditionality of IMF's Compensatory and Contingency Financing Facility (CCFF) and significant expansion of the resources made available to EU's STABEX;

(e) Creation of an "international commodity observatory" in UNCTAD to increase market transparency;

(f) Establishment of a mechanism in UNCTAD to examine the feasibility of establishing a facility to enhance the availability of securitized commodity finance using warehouse receipts.

(b) Promotion of commodity diversification

198. During the past decade, most developing economies have undertaken a series of economic policy reforms and liberalization measures designed to accelerate the structural adjustment process and domestic growth. However, the experience of these economies has been extremely varied. Many South-East Asian and Latin American countries have seen their traditional commodity sectors expand rapidly over the past two decades alongside equally rapidly growing new, non-traditional sectors. In contrast, other countries, in particular low-income countries in Africa, have experienced a stagnation of their traditional economic sectors without any progress towards diversification into new ones.

199. This contrasting experience indicates that, to a large extent, the same conditions that allow for sound growth of traditional commodity sectors also permit commodity diversification. Nevertheless, there are specific policies which, within a sound general policy framework, can help the private sector to identify and exploit diversification possibilities; indeed, such specific policies have played a large role in the diversification success of a number of developing countries. Identifying and exploiting diversification opportunities can be "learnt": at the country level, past diversification experience is a good indicator for future experience, and some studies have shown that entrepreneurs use the know-how they gain in the export of fruits or vegetables (often the first "non-traditional" step into the international market) as a springboard for further diversification efforts. Such first efforts also allow the development of a service sector, which facilitates further exports of non-traditional products.

200. Successful diversification appears to a large extent to be related to the flexibility of producers and exporters in identifying and exploiting potentially beneficial market niches. New market opportunities are opening up continuously, not only in the traditional markets in Europe and the United States or in the Middle East, but also in the fast growing economies of Asia and, to some extent, Latin America, which have grown into significant importers of a wide range of commodities.

201. The development of markets for environmentally preferable products may also generate opportunities for successful diversification. Good market information is necessary to identify such opportunities, and a country's producers and exporters need to have the flexibility to react to them. In order to be flexible, they require easy access to production and market information, investment and trade capital, technology, and marketing networks: a sound, stable macroeconomic framework, although essential, is clearly not enough. Governments and the international community can play a major role in providing the enabling framework for diversification, which not only helps producers in seizing new market opportunities for traditional commodities, but also enables them to enter into non-traditional commodity production and exports.

202. Experience also shows that successful diversification, as concerns both the development of new commodity exports and the pre-export processing of traditional commodities, is to a large extent correlated to high FDI flows. FDI provides not only the capital but also, perhaps more importantly, the technology and market access required to make a diversification effort successful.

203. Another policy which would stimulate diversification is a more active engagement of Governments, the private sector and the international community in research and development, both for non-traditional export products and for local food crops. Farmers will often be hesitant to shift from a crop they know well into one which is new for them. To stimulate them to innovate, governments should, in addition to undertaking agricultural research, provide farming communities with rural infrastructure and extension services and ensure a regulatory framework which allows for a reliable supply of inputs and good access to credit. These factors played a major role in South-East Asia's success.

204. In many cases, the private sector will be able to generate the necessary finance for diversification activities. Where the private sector is not able to do so because of, for example, a poor credit system or other market failures, alternative sources of finance for diversification would become important. Some countries have successfully employed national diversification funds, with taxes on the main commodity exports used to develop new sectors. An international producer/consumer fund financed by export or import levies, like the one established by one of the earlier coffee agreements, may also be a viable alternative. The World Bank and other financial institutions could contribute by allocating more of their funding to diversification activities and, more generally, to the development of an institutional framework which enables the public and private sector to follow an active diversification strategy.

205. A key element for successful diversification is no doubt an appropriate macro-economic policy framework. However, to enable economic actors to make full use of the possibilities offered by the framework, a number of specific actions are required, both at the national and at the international levels. At the national level, specific actions to stimulate the capacity of public and private sector entities to actively identify, publicize and exploit diversification opportunities are needed. At the same time, the international community has to commit itself to not creating undue tariff and non-tariff barriers against new commodity exports. With this objective in view, the Conference could take the following actions:

(a) Call upon Governments, within the framework of WTO, to determine the modalities and set a timetable for the elaboration of precise proposals for the reduction of tariff escalation on processed primary commodities and for the elimination or reduction of non-tariff barriers to market access for these commodities;

(b) Propose concrete measures to enhance the access to finance for diversification of low-income countries, either through existing instruments or the establishment of a new instrument;

(c) Call for increased support for ITC and other relevant organizations, specifically for their work in the development of products and markets likely to enhance the diversification of developing economies.

(c) The efficient management of natural resources

206. The survival of human and other life systems is a universal goal that underlies efforts - increasingly articulated since the United Nations Conference on Environment and Development (UNCED) - to address concerns about the impact of economic growth on the natural environment in the context of sustainable development. Such concerns arise notably with regard to the management of natural resources, since both commodity and industrial production activities affect the natural resource base. However, since production is primarily driven by demand, the level, pattern and pace of consumption activity - and thus population growth and lifestyles - will play a major role in determining the feasibility of sustainable natural resource use.

207. Accordingly, changing consumption patterns and demand towards environmentally preferable products and improving production techniques - making them both cleaner and "leaner" - are very important requirements for natural resource conservation. Meeting this requirement is facilitated by the process of globalization in so far as the latter entails a faster and more widespread diffusion of the relevant conservation technology.

208. To the extent that environmental costs (and benefits) are not internalized in the prices of products, the changes required in production and consumption patterns will not come about. This has been recognized by several developing countries through the creation of taxes on traffic in urban areas and by some OECD countries in their application of, for example, energy taxes. The principle could be extended more broadly into the commodities field by international cooperation to create framework agreements within which incentives would be made available to commodity producers to use "cleaner and leaner" production techniques; such agreements, known as "International Commodity-Related Environmental Agreements" (ICREAs), merit serious further consideration.

209. In the context of global sustainable development, the efficient management of natural resources means ensuring that the natural resource base is used so as to produce socially optimum quantities of various commodities in perpetuity with no irreversible damage to the physical environment and without imposing significant risks on future generations. The process of liberalization is creating challenges to such management because the emphasis on private-sector activity, and the concomitant retreat of government, is entailing a shift in time preference towards the short term. Nevertheless, this opens up possibilities for the design and implementation of a multitude of national and international policies which would promote sustainable and efficient use of natural resources, as well as maintaining and improving environmental quality.

210. At the national level, the specific content of natural resource management will vary between countries according to their level of development, including their financial and institutional capacities, and the relative importance of natural resources in their economies. More and more developing countries are under pressure to allow both exploitation of their natural resources and the deterioration of their environments in order to enhance export earnings. For such countries, the challenge is to use the natural resource base judiciously and in a proactive manner - for example so as to promote diversification and multiply economic opportunities, inter alia by creating developmental linkages between the natural resource sector and other sectors of the economy, to protect the environment so as to help improve the quality of life and ensure the sustainability of development, and, in the case of non-renewable resources, to ensure their replacement with lasting capital that can provide the basis for future economic development.

211. Action is needed at the national level, and especially in developing countries, to improve information about the natural resource base and to ensure that this information is properly integrated with development planning and national accounting processes; to capture resource rents and to manage resource revenue so as to maintain economic stability in the short term while generating income for the longer term; to improve the capacity of government to undertake the latter actions; and to monitor and regulate, in a participatory framework, the impact of economic activity on the national resource base. At the international level, action is required to establish a multilateral cooperative approach to deal with externalities that compromise the sustainability of natural resources, to encourage the recycling of resource-based products, and to improve the competitiveness and promote the use of natural products with environmental advantages. Specifically, it is proposed that the Conference take the following actions:

(a) Promote the negotiation of International Commodity-Related Environmental Agreements as an element of a multilateral cooperative approach to deal with environmental externalities;

(b) Promote the establishment of a voluntary trust fund to encourage the production and trade of environmentally advantageous natural products;

(c) Urge the establishment of a window in the Global Environmental Facility to deal with environmental problem areas such as the rehabilitation of mining sites and mineral processing facilities.

C. New and emerging issues

212. Even before the agreements negotiated in the Uruguay Round had been accepted at the Marrakesh Ministerial Meeting, efforts were being made to seek international agreement on the future work programme of the new WTO as a component of the final "package". Agreement was reached to establish a committee to deal with trade and environment; the other proposals, upon which agreement was not reached, are laid out in the Concluding Remarks of the Chairman of the Marrakesh Ministerial Meeting. Of these issues, the relationships between trade and (i) environment, (ii) investment, (iii) competition policy and (iv) labour rights can be seen as components in the overall pursuit of deeper integration and of the "level playing field" described in the preceding chapter.

213. More recently, OECD adopted a report at the Ministerial level setting out a programme for action for the post-Uruguay Round trading system. As mentioned in chapter I, this programme is aimed at maintaining the momentum towards freer trade based on the concepts of deeper integration and "contestability of markets", i.e. ensuring that foreign firms are provided with access and opportunities to operate that are equivalent to those of domestic firms, with a view to ensuring that national markets are open to global competition. This emphasis on firms rather than products reflects the realities of globalized production of goods and services, where the value of sales of foreign affiliates far exceeds that of exports. It would also seem to build upon some of the new elements introduced into the multilateral trading system by the GATS through the definition of trade in services to include the notion that the sales of foreign-controlled firms on the domestic market of the host country can be considered as "exports" and that foreign Governments have acquired rights with respect to the treatment of the subsidiaries of "their" firms, and conversely, the possibility that host developing countries can seek commitments from such enterprises.

214. Such initiatives are clearly related to the preparation of the agenda for the first Ministerial Meeting of WTO, to be held in Singapore in late 1996, which can be expected to address the issues contained in the Marrakesh list to the extent that a consensus on how to deal with these issues can emerge. The process of building consensus in favour of negotiating new multilateral disciplines in these areas would have to take account of the existing international framework of obligations, including bilateral investment treaties and cooperation agreements on competition policy. Furthermore, various formulae have been devised for addressing these issues in the context of regional and subregional agreements, which, as mentioned below, are often seen as laboratories for the eventual development of multilateral disciplines in new areas. The need for specific trade-related disciplines in these areas to reinforce the disciplines of existing multilateral trade agreements would also be an important consideration.

215. Most importantly, it should be recognized that these proposals for new multilateral disciplines are aspects of the broader question of the implications of a further extension of multilateral trade obligations into additional areas of domestic policy, including those pertaining to property rights. Such an extension would imply that to a large extent global governance would be carried out within the framework of trade agreements. This, at the moment, is a hotly contested issue, with some developing countries indicating strong opposition to extending multilateral trade disciplines to non-trade areas. Furthermore, most of the initiatives on new and emerging issues to date emanate from forums in which developing countries are absent or only partially represented. Thus, the challenge facing the consensus-building process is to ensure that the development implications of various approaches and scenarios are fully understood, so that the interests of developing countries can be adequately taken into account.

1. Competition policy

216. The implementation of market-oriented economic reforms, including deregulation, price liberalization, privatization and liberalization of trade and foreign direct investment have led to an emerging consensus worldwide on the importance of the role of competition in increasing efficiency in resource allocation. As a result, a rapidly growing number of countries (all OECD countries, as well as many developing countries and economies in transition) have adopted competition legislation and created a national competition agency as an effective tool of competition policy.

217. There has been a process of convergence in the objectives and application of national competition policies, although there continue to be significant differences among such policies. A significant degree of convergence exists in prohibiting cartels and collusive tendering, but most national competition policies still do not apply to restrictive business practices (RBPs) which solely affect foreign markets, such as export cartels. In such cases, it is often difficult or impossible for the country whose markets are affected (particularly if it has limited resources) to take effective remedial action without full cooperation from the authorities of the country where the RBP originates. Difficulties may also be faced where the authorities in a country seek to gather evidence or enforce their laws in respect of RBPs practised by foreign investors.

218. There is growing recognition that, in an increasingly globalized world economy, national competition policies need to be complemented by action at the international level to protect and promote the vitality of competition in the global market. The specific objectives of such international action would be to strengthen consultations and cooperation among competition authorities, to encourage better mutual understanding and possible convergence of national competition policies, to ensure that trade obligations and concessions are not frustrated by private anti-competitive practices, to bring trade rules more into line with competition principles, to reduce trade tensions among Governments, as well as tensions from enforcement of competition laws overseas, and to address competition issues arising in relation to foreign investors. This could be done within the framework of the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices.

219. As competition, trade and investment policies are bound to be brought even closer together in the future, in addition to the mechanisms available under the Set of Equitable Principles and Rules governing RBPs, new mechanisms to coordinate approaches to the interface between trade, investment and competition policies may have to be conceived. Strengthening of the multilateral trade agreements through the incorporation of additional legally binding competition policy provisions may also be needed. It should be noted that several of the Uruguay Round Agreements recognize that competition policies are relevant to the effective implementation of multilateral trade obligations. The importance of collaboration to deal with anti-competitive practices has been recognized in the GATS; the Agreement on Safeguards prohibits parties from encouraging or supporting private measures which could have the effect of voluntary export restraints; and the Agreement on Trade-Related Aspects of Intellectual PropertyRights recognizes that action may be necessary to prevent the abuse of intellectual property rights to restrain competition. As noted in chapter I above, the TRIMs Agreement will be reviewed before the end of 1999 to determine whether it should be complemented by provisions on competition and investment policy.

220. The Third United Nations Conference to Review All Aspects of the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices (November 1995) recommended "the continuation of the important and useful work programme within UNCTAD's intergovernmental machinery that addresses competition law and policy issues". It might be appropriate for UNCTAD to embark on preparatory work to clarify the issues related to the interface between competition and trade policy and to help build the consensus needed to integrate competition principles into the international trading system.

2. Trade and investment

221. Consideration of investment is already included in the future work programme of WTO. The TRIMs Agreement provides for a review of its possible extension to include investment and competition policies within five years of WTO's entry into force. This decision to treat investment and competition in parallel flows from the recognition that many conditions are imposed on foreign investors with the objective of pre-empting anti-competitive practices which would otherwise be difficult to contain within the framework of national competition law, as well as from the recognition that competition policy may interfere with investment flows in certain cases but may also be necessary to ensure that foreign investors obtain effective national treatment when granted.

222. The GATS provides a framework to negotiate commitments on investment within multilateral trade obligations. Commitments on investment (i.e. commercial presence) can be traded off against reciprocal commitments with respect to other service sectors, other modes of supply (e.g. movement of natural persons), or even, in a broader round of negotiations, access to markets for goods. In accordance with the objectives of the GATS, however, progressive liberalization negotiations are aimed at promoting the interests of all participants on a mutually advantageous basis and securing an overall balance of rights and obligations, while respecting national policy objectives. The GATS also recognizes the right of developing countries to seek commitments from enterprises with respect to access to technology and to distribution channels and information networks in return for market access granted under the Agreement (arts. IV and XIX). All GATS commitments, including those relating to investment, are covered by the unconditional MFN clause.

223. The interface between trade and investment covers a spectrum of issues ranging from those which are closely "trade-related" (e.g. export performance requirements) to "pure" investment issues such as taxation, transfer pricing practices, the extent of the legitimate exercise of extra-territorial jurisdiction, home countries' obligations with respect to the behaviour of firms, and compensation for expropriation. Any efforts toward building a consensus for multilateral action in this area, regardless of the forum chosen, will also have to take account of the fact that investment policies in developing countries are conceived as part of a strategy supportive of transfer of technology, industrialization and better standards of living and are designed to enable the developing countries not only to attract investment but also to ensure that it is channelled to activities that have been given priority in the national economic and social development strategy.

3. Trade and environment

224. Much of the international debate on trade and environment has focused on three basic issues: (a) the linkages between environmental policies and international competitiveness; (b) the use of trade measures for environmental purposes; and (c) the appropriateness of harmonizing environmental policies across countries.

225. On the first issue, concern is sometimes expressed in developed countries that trade and investment may be lost to countries which have less stringent environmental standards, or that competitiveness considerations may discourage the implementation of more stringent domestic environmental requirements. At the same time, in developing countries the main question raised is how environmental protection impinges on their trade and development.

226. Available empirical evidence indicates that the competitiveness effects of environmental policies have, so far, not been significant on developed countries. As far as developing countries are concerned, the competitiveness effects of external environmental policies, standards and regulations could become more significant for small-scale firms and for firms in sectors such as textiles, footwear, electronics and furniture, as the need to comply with environmental requirements would frequently result in increased production costs in relation to competitors. There is a degree of vulnerability of exports from developing countries to environmental regulations of developed countries. Moreover, where developing countries lack the infrastructure or technology to comply with increasingly complex environmental requirements, new technical barriers to trade may arise. However, environmental policies may also have positive competitiveness effects and create trading opportunities; and in any case, attempts may be made to mitigate competitiveness effects by policies at the national and international levels.

227. It is increasingly recognized that "positive measures" (rather than trade-restrictive measures) should be implemented to support the developing countries in their efforts to internalize environmental costs and to assist them in meeting internationally agreed targets in the context of Multilateral Environmental Agreements (MEAs). The Commission on Sustainable Development (CSD), at its third session held in May 1995, invited UNCTAD and other relevant international organizations to identify such positive measures. The UNCTAD Ad Hoc Working Group on Trade, Environment and Development, meeting in November 1995, recognized that positive measures such as improved market access, improved access to finance, transition mechanisms, access to and transfer of technology, capacity-building and special provisions for small firms and for some sectors are effective instruments in supporting developing countries and countries in transition in their efforts to meet the objectives of sustainable development.

228. The Ad Hoc Working Group undertook a preliminary analysis of the trade and competitiveness effects of MEAs, in particular the Montreal Protocol on Substances that Deplete the Ozone Layer, the Basel Convention on Transboundary Movements of Hazardous Waste and the Convention on Trade in Endangered Species (CITES). It recognized that these effects are different for each agreement and may change as a result of dynamic factors such as the rate of economic growth, the availability of environmentally friendly technologies and substitutes, amendments to the agreements, and the timely availability of finance. It also felt that interim assessments of MEAs may offer a useful opportunity to take account of such changes. The Group recommended further analytical and empirical work on the trade and competitiveness effects of MEAs.

229. The Working Group furthermore recognized that positive measures could be valuable in assisting developing countries to meet multilaterally agreed targets in keeping with the principle of common but differentiated responsibility. In this context, the Group discussed incentives that encourage trade in environmentally friendly substitutes, voluntary mechanisms in respect of foreign direct investment and technology transfer, and market-based instruments.

230. Building on the results of the Ad Hoc Working Group on Trade, Environment and Development, including its recommendations for future UNCTAD activities, the Conference could recommend that activities on positive measures should focus on: (1) building consensus on principles and propositions to better integrate trade and environment policies within the context of sustainable development; and (2) proposing policy measures aimed at alleviating the potentially negative trade and competitiveness effects of environmental policies.

231. Principles and propositions could aim at ensuring appropriate transparency of newly emerging environmental policy measures with possible trade effects, including voluntary measures such as eco-labelling, inter alia by seeking inputs from interested countries; at creating mechanisms to help establish an appropriate balance between the environmental benefits and possible trade and development effects of environmental policy measures; and at further developing concepts such as equivalencies and mutual recognition in the framework of specific environmental policy instruments.

232. The issue of positive measures is closely linked with the broader question of national policies and strategies for sustainable development and the kind of international cooperation which can provide a favourable environment for their success. The Conference could examine how to promote the systematic integration of environmental aspects in ongoing international debates on measures to promote investment in infrastructure, on specific measures for SMEs and specific sectors, and on measures for improvements in trade policies, such as promotion of export diversification and elimination of trade-distortive subsidies.

233. The second issue is concerned with the circumstances under which the use of trade measures for the enforcement of environmental policy objectives is justified and consistent with international trading rules, while remaining conducive to economic development. Here the Ad Hoc Working Group on Trade, Environment and Development endorsed the commitment to Agenda 21 and Principle 12 of the Rio Declaration that "unilateral actions to deal with environmental challenges outside the jurisdiction of the importing country should be avoided. Environmental measures to address transboundary and global problems should as far as possible be based on international consensus". These principles also extend to unilateral import restrictions based on PPM (process and production methods)-based requirements.

234. With regard to Multilateral Environmental Agreements (MEAs), in a number of cases provisions have been included for the use of trade measures, and these provisions have played a role in addressing global environmental problems. However, the appropriateness of using trade measures in MEAs must be analysed on a case-by-case basis. This analysis should consider, among other issues, the necessity and effectiveness of such trade measures.

235. The third issue, namely the appropriateness of harmonizing environmental policies, is closely related to the increased pace of globalization and liberalization in the world economy. The concern of some Governments here is whether differences in environmental standards among countries, especially between developing and developed countries, result in unfair trade advantages and therefore call for a degree of harmonization. Consensus has emerged that the case for the use of trade measures to offset differences in costs arising from differences in environmental standards is weak, both from an economic and an environmental point of view.

236. In this context, the Ad Hoc Working Group on Trade, Environment and Development firmly rejected demands sometimes made to introduce so-called green countervailing duties or other protectionist or WTO-inconsistent trade measures to compensate for negative competitiveness effects, whether real or perceived, of environmental policies.

237. There is, however, continued debate on whether border tax adjustments should be allowed to compensate for differences in process-related standards and for differences in the use of non-physically incorporated inputs, such as energy. While border tax adjustment is permitted for product taxes, consensus appears to be growing in support of the view that such adjustments may not be of significant environmental benefit if applied to processes or non-physically incorporated inputs and that they could serve protectionist purposes. The Ad Hoc Working Group on Trade and Environment, at its final session, recommended a number of future UNCTAD activities within the theme "trade, environment and development".

4. Regionalism and the new and emerging issues

238. The negotiation of new regional trade agreements and the extension of existing ones, which took place in parallel to the Uruguay Round, have resulted in a further liberalization of trade among the countries concerned, which include the majority of WTO members. Regional agreements in certain cases have responded to the perception that countries' trade and economic relations had intensified to such an extent that more detailed and extensive disciplines than those included in GATT were required to govern their mutual trade and economic relations. While the extension of multilateral disciplines resulted in many cases in the multilateral obligations overtaking the regional disciplines, many regional agreements include policy areas which are not covered by the disciplines of the multilateral trade agreements, such as investment policy, labour rights, competition policy and environment.

239. Such measures pose important issues for the development of the multilateral system. In some cases, multilateral rule-making may be able to draw on the experiences of regional groupings, using them as "laboratories" for testing approaches. In other cases, such rule-making will necessitate adjustment in regional approaches which are incompatible with the objective of an open multilateral trading system and have adverse implications for the trade and development of third countries.

240. More generally, as regionalism proliferates and expands into new policy areas, the question arises whether regional integration could undermine the multilateral trading system or whether regional and multilateral approaches to integration at regional levels will rather be complementary, enhancing the prospects for effective multilateral rule-making and further global trade liberalization.

241. The impact of regional integration arrangements on trade and development depends not only on rule-making, but perhaps even more so on the way in which rules are implemented and on the nature and actual behaviour of regional groupings. In this context, the outward orientation of the regional groupings, whereby the net effect is trade and investment creation, is essential if adverse effects of such groupings on the trade of third countries, are to be avoided. Comprehensive assessments at the international level of the economic implications of integration arrangements and their actions can ensure that due account is taken of concerns over adverse impacts on trade of third countries, and in particular of developing countries and countries in transition outside particular integration groupings. Such assessments would also contribute to the development of multilateral approaches to the issues arising from integration measures. The UNCTAD Trade and Development Board already offers a forum where evaluations of significant new developments in regional integration can be carried out. A proposal has recently been introduced to the effect that a WTO committee be established to deal with regional trading agreements in a more comprehensive manner.

D. Promoting complementarity between UNCTAD and WTO

242. The functional complementarity between UNCTAD and WTO has been recognized both by the Trade and Development Board and by the WTO's Preparatory Committee, as well as by the United Nations General Assembly. This consensus creates the premise for constructive cooperation within the broader framework of relations between the United Nations and WTO, as agreed by their executive heads. In fact, the distinct but complementary functions of the two institutions should make it possible for the trade-related development concerns of the developing countries, and also those of the countries in transition, to be addressed in a more comprehensive and balanced manner.

243. This report has identified many such concerns resulting from the process of integration of developing countries and countries in transition into the post-Uruguay Round international trading system. In particular, support will be required to enable these countries to fulfil their obligations and to participate actively in the current activities of WTO and in the related negotiating processes. Prospective members of WTO will need help in acceding to membership.

244. A working relationship between UNCTAD and WTO could evolve in the following substantive areas:

(a) The implications of the Uruguay Round Agreements, particularly as regards new trading opportunities for developing countries and countries in transition arising from the implementation process, and assistance to these countries to take full advantage of such opportunities;

(b) Specific problems and challenges faced by the least developed and net-food-importing developing countries and by countries in transition in their integration into the international trading system;

(c) Trade in services, including measures to assist developing countries to benefit from the GATS, as well as issues to be addressed in future negotiations (e.g. data on measures affecting trade in specific services sectors, safeguards, subsidies, government procurement, etc.);

(d) Trade and environment;

(e) New and emerging issues on the international trade agenda, in particular trade and competition and trade and investment;

(f) Technical cooperation, particularly relating to:

(i) Strengthening of the capacity of developing countries and countries in transition to participate effectively in the international trading system;

(ii) Accession to WTO;

(iii) Capacity-building to deal with new issues on the international trade agenda;

(g) Continuation of the joint responsibility for the operation of the International Trade Centre UNCTAD/WTO.

245. Consideration could also be given to the holding of a regular review by the competent intergovernmental bodies of UNCTAD and WTO of issues relating to their mutual cooperation.

246. In this context, new and expanded cooperation between UNCTAD and WTO is under way in the framework of the general arrangement for cooperation between the United Nations and WTO, as agreed by the executive heads of the two Organizations in September 1995. In particular, the Director-General of WTO and the Secretary-General of UNCTAD have agreed: (a) to hold meetings, chaired jointly by them, every six months, beginning in mid-January 1996; (b) to improve the working relationship between the two organizations at all levels in such areas as research, trade and investment, trade and competition, trade and environment, and trade and development; and (c) to work for greater complementarity in technical cooperation - not only between UNCTAD, WTO and ITC, but also with other agencies, whether in the United Nations system, the Bretton Woods institutions, or regional bodies - in order to improve coordination across the board and make better use of resources. The executive heads have stressed their complete agreement on the high priority that must be given to Africa in the cooperative work of their two organizations.

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