Getting the fundamentals right

The early stages of Afghanistan’s WTO accession process

Afghanistan should be in no rush to join the World Trade Organisation. Rapid accession would have few benefits and could undermine efforts to reduce poverty. Careful planning and negotiation is the only way to avoid onerous commitments that have been forced on other very poor countries and to make the best of the potential benefits that membership of the multilateral system can offer. Given the country’s severe poverty, massive reconstruction effort and ongoing security concerns, all parties involved in the process should promote an appropriate, pro-development accession package for Afghanistan that is in line with its least developed country (LDC) status.

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Summary

Afghanistan has recently embarked on the process of joining the World Trade Organisation (WTO). While increased trade can help lift countries out of poverty, the experience of countries at similar levels of development to Afghanistan’s which have joined the WTO suggests that, unless great care is exercised, the terms of that membership may adversely affect poverty reduction. This paper seeks to identify how Afghanistan can give itself the best possible chance of achieving a WTO accession package that supports its efforts to develop sustainably and to reduce poverty.

Background to Afghanistan’s accession

Afghanistan is one of the poorest countries in the world. It is classified by the United Nations system as both a least developed country (LDC) and a landlocked developing country (LLDC). Years of conflict and neglect have had a devastating impact on its human, social, and economic development. As a result, Afghanistan’s human development indicators are below those of most sub-Saharan African countries. Life expectancy — 46.4 years at birth — is around 20 years lower than in all of the countries neighbouring Afghanistan and 4.2 years lower than the average for LDCs. Like Cambodia and Nepal — other LDCs that have recently acceded to the WTO — Afghanistan will struggle to get a fair deal within an inherently biased WTO accession process. Not only must a country abide by all the WTO’s rules to enter the organisation, but also individual members are able to ask for further commitments and concessions from applicants, known as ‘WTO-plus’ or ‘WTO-minus’, in return for supporting its application.

On 21 November 2004, Afghanistan submitted a renewed request for WTO membership. Under the Afghan National Development Strategy, a key strategic benchmark for trade is that Afghanistan will have acceded to the WTO by the end of 2010. The WTO Working Party on Afghanistan will meet when the country has finalised and submitted its Memorandum on the Foreign Trade Regime (MFTR), the first step in the accession process. This MFTR, essentially an overview of the applicant’s trade regime, is currently being redrafted by the Government of Afghanistan in consultation with the WTO and will probably be formally submitted during 2007.

Negotiating a fair package

Afghanistan would be in a stronger position to negotiate effectively if it gave itself the time to encourage political and economic stability and to establish its independence from foreign governments. As one of the poorest countries in the world, struggling to recover from conflict, Afghanistan has more pressing development and poverty reduction priorities than WTO accession. If the Government chooses to go ahead, then it should be mindful that at this stage there are major economic risks within the accession process and potentially few benefits for the Afghan people.

There are five key perceived benefits for developing countries and LDCs seeking to join the WTO:

1. Technical assistance with economic and institutional reforms required of applicant countries by the accession process.
   
   Afghanistan is already undergoing reform of its customs and taxation systems, its legislature, and the operating capacity of its ministries, with donor assistance. It is important to note the difference between assistance that consists essentially of trade facilitation, such as customs reform, and assistance that leads to internal legal reform linked to WTO agreements. The latter type of assistance could tie Afghanistan into trade-related legislation that may not be in its best interests and which could compromise its development in the future, even before it gets to the negotiating table. Afghanistan should therefore try to use donor support for internal reforms that are to its own advantage, and should resist any proposed reforms that may be overly restrictive. Technical assistance for trade facilitation must support the national development priorities of Afghanistan and must be substantial enough to be meaningful.
   
   
2. The boost that countries hope membership will give to their exports, due to improved access to international markets.
   
   Afghan products do not yet have a competitive advantage in the global economy and most of the country’s economic institutions, businesses, and infrastructure have been destroyed by years of conflict. Before it can really take advantage of increased market access, Afghanistan first needs to take the time to invest in and develop its local industrial and agricultural sectors, so that it has products to export in significant quantities. In any case, given the market access that Afghanistan currently enjoys through its preferential trade agreements (PTAs) with its main trading partners, it is difficult to identify how WTO accession would give it significantly increased access to these markets.
   
   
3. Attracting increased foreign direct investment (FDI).
   
   Some countries believe that membership of the WTO offers proof of a business-friendly environment and that this in turn attracts FDI into the export sector. However, recent investment reports from the World Bank show that there is no link between FDI and the signing of trade agreements, including WTO membership. Moreover, without both political and economic security, including access to land, electricity and an educated workforce, foreign investors will continue to choose alternative destinations to Afghanistan.
   
   
4. The protection that the multilateral system can offer small countries against bilateral pressures and unfair trade practices.
   
   Afghanistan will have access to the Dispute Settlement Understanding (DSU) once it is a WTO member. The DSU is the binding WTO procedure for resolving trade-related quarrels between member countries. In practice, although poor countries have the right to pursue disputes in this forum, they rarely do so, due to a range of financial, logistical and political obstacles, such as lack of technical capacity or political pressure. For the near term, the dispute resolution process is likely to be of very limited value to Afghanistan.
   
   
5. Influencing the formation of global trade rules.
   
   Prospective members often cite the ability to be involved in negotiating the direction and detail of global trade rules as one of the benefits of joining the WTO. It is true that the collective voice of developing countries within the WTO has grown in power and volume in recent years. The Hong Kong meeting in 2005 saw the formation of a loose alliance of all 110 developing countries, united in opposition to the status quo. However, the WTO continues to be dominated by the most powerful countries in the world, and as a result its agenda largely reflects their ambitions.

The extent of the risks posed by WTO accession largely depends upon the terms and conditions agreed within the package — which are impossible to change once agreed. These conditions effectively lock a country into a situation where it may not adopt policies once used by today’s rich countries to develop or industrialise. It is possible to set out four potential risks posed by WTO accession to Afghanistan’s development prospects:

1. Vulnerable sectors of the economy risk being damaged or undermined by international competition.
   
   WTO membership usually means increased liberalisation of a country’s trade regime. Just as trade liberalisation can increase the opportunities for exports, it also exposes local producers to foreign competition that they may be unable to withstand, particularly in poorer countries.
   
   There are strong grounds for LDCs such as Afghanistan to be allowed to use tariffs to shelter vulnerable domestic sectors from competition; in order, for example, to promote key national development objectives or to support the livelihoods of poor communities. Even though Afghanistan will go to the negotiating table with a tariff system that is already extremely liberal, it will undoubtedly be faced with pressure to bind these low rates, or to lower its applied tariffs even further. Afghanistan’s priority must be to resist this pressure. If it does not, the flood of cheap imports from neighbouring Pakistan and China that it is already experiencing will only increase, with a potentially devastating impact on the livelihoods of the majority of Afghans who live in poverty.
   
   
2. Privatisation of essential services could lead to an absence of provision in remote regions.
   
   Even though the General Agreement on Trade in Services (GATS) is a flexible agreement that allows countries to choose if and when they liberalise their services sectors, developing countries can come under huge pressure to open up certain sectors. There are sensitive sectors in Afghanistan, as in other countries, that provide essential services vital for welfare, such as water, education, sanitation and electricity supply. The experience of other countries shows that a heavily privatised service is even less likely to reach poorer citizens. For this reason, such services should be excluded from GATS commitments.
   
   
3. Income and benefits from FDI may be lost due to insufficient linkages to the domestic economy.
   
   Through performance requirements, local content provisions and technology transfer, successful developing countries have retained a substantial proportion of the benefits of foreign investment within their own economies. However, the WTO Agreement on Trade-Related Investment Measures (TRIMS) does not allow local content provisions. Given the scale of Afghanistan’s development challenges, it should be allowed to negotiate a significant transition period for TRIMS compliance upon accession, based on development indicators, so that it too can ensure that foreign investment plays an integral role in the development of its industrial and services sectors.
   
   
4. Government funds could be diverted from pressing development challenges due to the high cost of implementing WTO agreements.
   
   According to World Bank estimates, the cost of implementing WTO agreements stands at around $100m per agreement. The implementation costs for Afghanistan may not be this high, but would still be significant for a country that is emerging from conflict and whose budgetary priorities lie in sectors linked to poverty reduction, such as the provision of basic infrastructure, health care and education. Afghanistan will need support in order to spread the cost of accession over time.

The international community has granted LDCs special concessions within the multilateral trading system. For example, the Agreement on Agriculture (AoA) exempts LDCs from commitments to reduce domestic support and export subsidies, and to increase market access. Afghanistan should be able to take advantage of all flexibilities offered to LDCs within existing WTO agreements – including those recently agreed, in principle, within the Doha Round of negotiations – in the terms of its accession package. The experiences of recently acceded LDCs Nepal and Cambodia in their unsuccessful attempts to secure all of these flexibilities provide valuable learning for Afghanistan.

Action in the early stages of the accession process

If the negotiation continues, there is much that the key players in Afghanistan’s accession process should be doing at this early stage in order to give the country the best chance of successfully negotiating a fair package.

The Government of Afghanistan should draw on and learn from the experiences of recently acceded countries. This includes building up a comprehensive knowledge of its Memorandum on the Foreign Trade Regime (MFTR) and identifying the issues on which it is either defensive or offensive; gaining a thorough understanding of the rules and flexibilities within the WTO that could be used to its advantage in negotiations; and separating the ultimate aim of WTO accession from any political goals. It would also include establishing a long-term, dedicated team of negotiators; cultivating allies within the Working Party group; including domestic stakeholders in the accession negotiations; making use of the media and NGOs; making the most of Afghanistan’s LDC and LLDC status and the benefits that this should provide; and taking full advantage of the positive political will that Afghanistan currently enjoys within the international community.

International donors have a vital role to play in strengthening Afghanistan’s ability to negotiate effectively by helping to conduct poverty and social impact analysis, which explores the potential consequences of WTO membership within vulnerable sectors.

Donors providing technical assistance for compliance with WTO agreements must ensure that such assistance serves the interests of Afghanistan and is guided by the priorities of the Afghan Government. Considering donor countries’ massive investment in the reconstruction and development of Afghanistan it would be self-defeating for them to undermine these efforts by denying Afghanistan a pro-development WTO accession package in line with its LDC status.

The United Nations Conference on Trade and Development (UNCTAD) provides technical assistance in the form of training and hands-on support for developing country negotiating teams during accession negotiations. It is essential for UNCTAD to fulfil this role, as it is impartial and does not reflect the ambitions of any particular donor country. UNCTAD must also work with the Government of Afghanistan to undertake sectoral studies in order to examine the impact of different levels of liberalisation on key sectors. Together with poverty and social impact analysis, these are the principal methods by which an acceding country can negotiate from an informed position, and they will be essential for Afghanistan to be able to identify its negotiating priorities.

There needs to be a complete overhaul of the way that WTO members and the WTO itself approaches LDC accession, taking into account the disadvantages that LDCs face in the world trading system. This should start during Afghanistan’s accession negotiations with implementation of the existing policy on accession outlined in the 2002 WTO Decision on the Accession of Least-Developed Countries. The WTO Secretariat, as the organisation with responsibility for ensuring that policy made by its members are acted upon, has a key role to play in the realisation of this new approach.

Conclusion and recommendations

It is clear that only through slow and careful negotiations will Afghanistan be able to minimise the potential risks from WTO accession and maximise the potential benefits for poverty reduction. If Afghanistan were to join the WTO without first building its economy and ensuring the best possible terms of membership, accession could actually undermine progress on poverty reduction. Oxfam believes that the following commitments must be made by those involved in the process in order to give the country the best chance of a fair accession package:

• International donors must provide vital technical assistance and poverty and social impact analysis to help Afghanistan to negotiate, then adapt to, WTO membership in a way that supports its pressing development needs. It is imperative that this assistance is recipient-driven, additional to existing development aid, free of economic conditions, predictable, and complementary to fairer trade rules.


• The Government of Afghanistan should maintain the policy space it needs in order to achieve its development priorities. This includes retaining the flexibility to set tariffs at appropriate levels according to conditions in different sectors; keeping control of incoming investment to all sectors, including essential services; and monitoring of the current donor-driven legal reform process to ensure that it exploits flexibilities for LDCs.
  
  
• Donor governments should refrain from making excessive demands of Afghanistan during the accession process, particularly those that would deny it access to the existing flexibilities granted to LDCs within the WTO.

Furthermore, given the concerns raised by the WTO accession negotiations of other developing and least developed countries, Oxfam believes that the accession process for LDCs, including Afghanistan, should be reformed in the following ways:

• The WTO should develop a fair and objective system, based on the existing 2002 LDC Accession Decision, that will enable LDC accession packages to reflect the development needs of the acceding country, rather than the demands of Working Party members.
  
  
• There should be full recognition that LDCs are entitled to the full benefit of all Special and Differential Treatment (SDT), all extended implementation periods, and all exemptions enjoyed by founding member LDCs, including those recently agreed in the Doha Round of negotiations.
  
  
• In order to ensure that such a system is actually implemented, far greater transparency is required and influential Working Party members should take their share of responsibility for ensuring a fair outcome from negotiations.
  
  
• LDCs that are in the process of acceding should be allowed to take full advantage of the recommended new process, if necessary by retracting any LDC-plus concessions already made in bilateral or multilateral negotiations.
  
  
• No acceding country, particularly LDCs, should be required to enter into accession negotiations until thorough and independent poverty and social impact analysis has been undertaken.

Date of publication: June 2007