Ransford Smith | Global Trade: Navigating a world of constricting trade policy space (Part I)

This article looks in two parts at the erosion of trade policy space in global trade. Part I focuses on the incompatibility with World Trade Organization (WTO) rules of GCT levied solely on imports. Part II observes that regional and inter-regional trade arrangements entered into have as well constricted policy space – thus narrowing overall options for protection facing small developing countries such as Jamaica.

Minister Nigel Clarke’s recent contortions on the matter of General Consumption Tax (GCT) levied on certain imported agricultural products – raw foods – and the political and public commentary the episode has triggered has revealed the lack of clarity on the WTO, and its role and functions, in both high and more quotidian places. But especially, there seems to be insufficient awareness that being a WTO member and party to the agreement signed in Marrakesh in 1994, and its related annexes, as well as to a network of regional and inter-regional agreements, significantly constrains Jamaica’s autonomy as to what it can and cannot legitimately do in trade-policy terms.

This has been certainly made clear by the current imbroglio over GCT and stamp duties. Undoubtedly, GCT, which is an internal tax, should never have been applied selectively to imported products. It bears exploring why. As has been indicated, this contravenes Article III of GATT 1994 – a constituent part of the WTO’s Marrakesh Agreement. And while this may elicit the instinctive response that this is an affront to sovereignty, there is a clear rationale at play. We live in a world in which all countries have an interest in engaging in trade with others. If anything, this is especially the case for a small developing country, such as Jamaica, which, given its size and location, can have no pretensions to trade or economic autarky. At the WTO, countries essentially negotiate reciprocal terms on which members can enter each other’s market. At the most basic level, this establishes the customs tariffs and other border duties that will apply to a given product. The outcome is then legally ’bound’ in each country’s national schedule at the WTO. In a sense, this is both an exercise of sovereignty – and a relinquishing of sovereignty.

But why would this be done at all? The fact is that this is indispensable in facilitating global trade: it maximises certainty and predictability regarding terms and conditions of access for goods and services in the market of each of the organisation’s 166 members. Thus Jamaica, having agreed on a legally binding set of tariffs and other border duties, as reflected in its WTO national schedule, gives up the right to arbitrarily change conditions of access to its market. It does so in exchange for certainty and predictability regarding the conditions its own businesspersons and exporters will face in other markets. The paramount importance of this should be obvious – no rational businessperson, or enterprise, would seriously contemplate producing and exporting in a world where border protection could change arbitrarily and unpredictably at any time, indeed perhaps substantially so as this or that country exercised its sovereign right!

PROHIBITION ON INTERNAL TAX

Therein lies the rationale as well for the prohibition on an internal tax – in this case GCT – being applied only to imported products. This stricture is intended to ensure that once admitted to a market, imports encounter a level playing field. While the WTO refrains from, and indeed would have no standing to dictate the internal tax policy that a country decides to pursue, Article III of GATT 1994 nonetheless obliges countries to apply any internal tax they may choose to levy to both imported and domestic products. Indeed, the WTO Agreement casts an even wider net in seeking to ensure that the conditions of access agreed on and applicable at a member’s borders are not undermined by discriminatory measures imposed once an imported product has entered national commerce: the WTO requirement is that an imported product “be accorded treatment no less favourable than that accorded like products of national origin in respect of all laws, regulations, and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution, or use.” Once the imported product has crossed the border, it has paid its dues, so to speak, and must now be treated on the same footing as like domestic products!

This newspaper has rightly pointed out that the WTO does not as an institution sanction or blacklist members. The trade policy commitments and measures that are embedded in the several agreements that were agreed in Marrakesh in 1994 are legal obligations among members. Any complaint of violation – which may then lead to consultations and to formal dispute settlement proceedings – must be initiated by a member, and normally one with a direct or indirect interest in the particular matter being complained about. Interestingly, while all members’ trade policies are reviewed periodically, and Jamaica’s seven yearly review is scheduled for later this year, the objective of these reviews is the promotion of transparency, understanding, and the collective appreciation of trade policies and practices. The reviews are not intended, or mandated, to serve as a basis for “enforcement of specific obligations, or for dispute settlement procedures, or to impose new policy commitments on members”.

UNDER REVIEW

It would be pollyannaish, though, not to surmise that the wealth of information provided by the country under review, and by the WTO Secretariat itself, may concentrate the minds of other WTO members on policies and practcces, which may affect their own interests and which may contravene WTO obligations. This may lead them to seek regularisation even if not initiating formal dispute resolution procedures against the member under review. An example of this was in evidence in Geneva at meetings of the WTO’s Committee on Market Access in 2022 and 2023. The Market Access Committee’s agenda provides the opportunity for members to bring specific trade concerns they may have to the attention of other members. Under an agenda item, initiated by the European Union, and titled Dominican Republic – Discriminatory Taxation on Some Imported Food Products, the EU asserted in the committee that the Dominican Republic was applying a special Value-Added Tax (VAT) to certain imported food products but did not apply the tax to the same domestic products. The EU had taken bilateral steps to resolve the matter without success: it would now welcome clarifications on what measures the DR intended to take and within which timelines. The United States advised the committee that it shared the EU’s concerns. In response, the DR emphasised that there were no discriminatory provisions in its law; acknowledged, however, anomalies in how some local producers applied the tax law and indicated that it had taken steps to address this; and reaffirmed its dedication to fulfilling commitments made in the international agreements it had signed and in its own legislation.

It is also, of course, quite possible that the Jamaican Government, independently, recently had a road to Damascus moment and simply recognised that which no one would dispute: that GCT applied only to an imported category of agricultural products, and not to like domestic products, violates its trade treaty obligations. My view, though, is that a more profound road to Damascus moment is in order. As stated at the outset, it needs to be recognised more fully and widely that the options for protecting local producers within the parameters of current trade rules, while not entirely non-existent, are very narrow and dwindling!

The policy consequence of this cannot be resignation, and neither should it be tenuous and economically inefficient short-term trade fixes. Rather, it must involve focusing steadfastly and realistically on the supply side for both agricultural and non-agricultural products – an area in which Jamaica, to put it mildly, has conspicuously lagged hemispheric and global peers. This should entail directing more energy and creativity into addressing and remedying the basic social and economic shortcomings, such as those relating to education, skills development, security, transport, infrastructure, and technology upliftment, which, elsewhere, have been shown to lead in the medium term to greatly enhanced output, productivity, and competitiveness.

Ransford Smith served previously as Jamaica’s ambassador to the World Trade Organization. In the 1990’s, he was permanent secretary in the Ministry of Industry, Investment and Commerce. Subsequently, he was Commonwealth Deputy Secretary General. Send feedback to columns@gleanerjm.com