Developing Countries, Least-Developed Countries and Special Treatment

The case that fixed the limits of preferences

European Communities: Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/AB/R, adopted 20 April 2004. Facts. The European Communities' GSP scheme gave extra preferences under a drug arrangements window to twelve named countries, including Pakistan, and excluded India. India complained.

Held. the Enabling Clause is an exception to Article I:1 which the respondent must invoke and justify; preferences may differentiate among developing countries, but only in response to a development, financial or trade need assessed against an objective standard, and the benefit must be available to all similarly situated beneficiaries. The drug arrangements, with a closed list and no criteria, failed. India won.

Why it matters: it establishes that special and differential treatment is law, not charity, and that a donor's discretion in granting preferences is reviewable.

The limitations of least developed countries, which the 2022 paper asks about

Six, and they are structural rather than legal.

Supply capacity. A preference is worthless without something to export. Least developed members are concentrated in a few primary commodities.

Preference erosion. As most favoured nation tariffs fall, the value of a preference falls with them, so multilateral liberalisation can leave a preference-dependent exporter worse off.

Rules of origin. Preferential access is conditioned on origin rules that are often stricter than the productive structure of a poor economy can satisfy.

Standards. Sanitary, phytosanitary and technical requirements in export markets require laboratories, inspectorates and traceability systems, which cost more than the trade is worth to build.

Trade costs. Landlocked members and members with poor ports face freight and delay costs that exceed any tariff.

And the inability to use the remedies. Retaliation is a tariff a member imposes on its own importers, so a small economy gains nothing by it. Only one dispute in thirty years has been brought by a least developed member, Bangladesh in DS306 in 2004, and it was settled.

What the system actually delivers, stated fairly

Real: the abolition of the Multifibre quotas on 1 January 2005; duty free quota free access schemes; the TRIPS transitions to 2034; the Enabling Clause; the ACWL and the Secretariat's legal assistance; and a forum in which a small member can defeat a large one, as Antigua did and Costa Rica did.

Not real: most of the special and differential provisions are drafted in best endeavours language, using shall take into account or shall give special consideration, which no panel can enforce. The Doha mandate to make them precise, effective and operational has produced very little.

The honest verdict is that special and differential treatment shifted from exemption, which is what Part IV and the Enabling Clause offered, to delay and assistance, which is what the Uruguay Round agreements offer. Whether that is progress depends on whether the assistance arrives.

A worked example

Two members accede in the same year and both declare themselves developing. One has a per capita income of about nine hundred dollars, the other about eleven thousand. Follow what each actually gets, because the answer shows how little the label decides.

Transition periods. Both would have had the same TRIPS transition under Article 65: one year for everyone, five more for a developing member, and a further five for product patents in fields not previously protected, all long expired. A member acceding later negotiates its transitions one by one in its accession protocol, and recent acceding members have received very few.

Subsidies. The poorer member is exempt from the export subsidy prohibition only if it is listed in Annex VII of the SCM Agreement, which covers least developed members and members below one thousand dollars of gross national product per capita. At nine hundred dollars it qualifies; at eleven thousand the other does not, and neither self-designation nor the developing label has anything to do with it. India lost that exemption the same way.

Agriculture. Both get the ten per cent de minimis of Article 6.4(b) instead of five, both may use the Article 6.2 development box for input and investment subsidies, and neither ceiling depends on how poor the member is.

Dispute settlement. Both may ask for a developing country panellist under Article 8.10 and for the report to record how special and differential provisions were taken into account under Article 12.11. Neither can afford to litigate without help.

The lesson. Self-designation buys longer deadlines and softer language; the provisions that transfer anything real, such as Annex VII, run on objective thresholds, and a member crosses them without deciding anything.

Quick revision

• Self-designation for developing status; the United Nations list for least developed, recognised by Article XI:2 of the Marrakesh Agreement.
• Five kinds of provision: longer transitions, lower thresholds, freedom to use measures, preferential access, technical assistance.
• Numbers to keep: TRIPS Article 65 transitions; Article 66:1 extensions to 1 July 2034 and 1 January 2033 for pharmaceutical patents; SCM two and three per cent de minimis under Article 27; Agriculture ten per cent de minimis.
• Enabling Clause, 28 November 1979: GSP, preferences among developing countries, and least developed country treatment, as an exception to Article I.
• EC: Tariff Preferences, adopted 20 April 2004: the Enabling Clause is an exception the respondent must justify; differentiation needs a development need on an objective standard; India won.
• Least developed limitations: supply capacity, preference erosion, rules of origin, standards, trade costs, and unusable remedies; one LDC dispute in thirty years, Bangladesh DS306, 2004.
• The shift: from exemption to delay and assistance, with most provisions in best endeavours language.

Test yourself

1. How does the WTO identify developing and least developed members, and what is the objection? There is no definition of a developing country member anywhere in the WTO agreements and no list; the practice is self-designation, so a member claims the status and enjoys the provisions that attach to it unless another member successfully challenges a particular claim in a particular context. For least developed country members the WTO borrows an external list, that maintained by the United Nations, and Article XI:2 of the Marrakesh Agreement refers to the least developed countries recognised as such by the United Nations, requiring them to undertake commitments only to the extent consistent with their development, financial and trade needs and their administrative and institutional capabilities. The objection, pressed principally by the United States, is that self-designation allows very large economies to claim flexibilities intended for the poor, so that special and differential treatment is captured by members who no longer need it. The answer of the developing members is that aggregate output is not development, that per capita income, poverty and institutional capacity tell a different story, and that any graduation rule would in practice be administered by the members who benefit from graduating others.

2. Describe the five kinds of special and differential treatment with an example of each. First, longer time: TRIPS Article 65 gave developing members until 1 January 2000, and until 1 January 2005 for product patents in fields not previously patentable, while Article 66:1 has extended least developed members to 1 July 2034 generally and 1 January 2033 for pharmaceutical patents. Second, lighter obligations expressed in thresholds: Article 27 of the SCM Agreement raises the de minimis subsidy level from one per cent to two, and to three for certain members, and the Agreement on Agriculture permits a ten per cent de minimis level of domestic support to developing members against five per cent for others. Third, freedom to use measures others may not: Article XVIII of GATT lets a developing member modify concessions to promote the establishment of a particular industry and restrict imports for balance of payments purposes on easier terms than Article XII allows. Fourth, preferential market access: the Enabling Clause of 28 November 1979 authorises the Generalized System of Preferences, preferences among developing countries and special treatment for least developed countries as an exception to Article I. Fifth, technical assistance: DSU Article 27:2 requires the Secretariat to provide a qualified legal expert to a developing member in a dispute, and programmes such as the Enhanced Integrated Framework build trade capacity.

3. What are the limitations of least developed countries in international trade, and can WTO law cure them? Six limitations, and most are structural rather than legal. Supply capacity, since a preference is worth nothing without something to export and these economies are concentrated in a few primary commodities. Preference erosion, since the value of preferential access falls as most favoured nation tariffs fall, so multilateral liberalisation can leave a preference-dependent exporter worse off in relative terms. Rules of origin, whose value added and transformation requirements are often stricter than a thin industrial base can meet. Standards, since sanitary, phytosanitary and technical requirements in export markets demand laboratories, inspection services and traceability that cost more to build than the trade initially earns. Trade costs, particularly for landlocked members, where freight and border delay exceed any remaining tariff. And the unusability of the system's remedies, because retaliation is a tariff imposed on one's own importers and a small economy gains nothing from it, which is why only one dispute in thirty years has been brought by a least developed member, Bangladesh's DS306 in 2004, and that was settled. WTO law can address rules of origin, standards assistance and trade facilitation directly, and has; it cannot create supply capacity, and it cannot make retaliation useful to an economy that buys little.