Wto Issues for Acceding Countries: the Cases of Lebanon and Saudi Arabia

ECONOMIC AND SOCIAL COMMISSION FOR WESTERN ASIA

WTO ISSUES FOR ACCEDING COUNTRIES:

THE CASES OF LEBANON AND SAUDI ARABIA

United Nations

Distr. GENERAL ESCWA/ED/2001/13 25 October 2001 ORIGINAL: ENGLISH

ECONOMIC AND SOCIAL COMMISSION FOR WESTERN ASIA

WTO ISSUES FOR ACCEDING COUNTRIES:

THE CASES OF LEBANON AND SAUDI ARABIA

United Nations New York, 2001

01-0922

Acknowledgments

The United Nations Economic and Social Commission for Western Asia (ESCWA) extends its thanks to Mr. Farhat Farhat for his invaluable contributions to this study. Mr. Farhat was in charge of the country study on Saudi Arabia, and also contributed much useful material on Lebanon. We are grateful for his efforts.

iii iv CONTENTS

Page

Acknowledgements ...... iii Abbreviations ...... viii Introduction ...... 1

PART I. LEBANON ...... 3

Summary ...... 3 Introduction ...... 5

Chapter

I. THE TRADE REGIME AND TRADE PERFORMANCE IN LEBANON...... 6

A. Overview and main issues ...... 6 B. The import regime ...... 6 C. Export competitiveness ...... 12

II. ASSESSMENT OF LEBANON’S FOREIGN TRADE REGIME FOR CONFORMITY WITH WTO REQUIREMENTS...... 18

A. Lebanon’s preparations for WTO accession...... 18 B. Trade in goods ...... 20 C. Trade in intellectual property rights ...... 34 D. Trade in services...... 37 E. Summary and conclusion ...... 40

III. STRATEGIES FOR NEGOTIATIONS: SELECTED ISSUES ...... 43

A. WTO accession negotiations on tariffs...... 41 B. WTO accession negotiations on agriculture...... 51

PART II. SAUDI ARABIA...... 61

Summary ...... 61 Introduction ...... 65

I. TRADE IN GOODS...... 66 II. TRADE IN INTELLECTUAL PROPERTY RIGHTS ...... 76 III. TRADE IN SERVICES ...... 79 IV. KEY INSTITUTIONAL REQUIREMENTS ...... 83

References ...... 97

LIST OF TABLES

1.Tariff rates in Lebanon, 1996-2000...... 7 2.The Lebanese industrial sector, 1999 ...... 10 3.Openness and competitiveness indicators ...... 12

v CONTENTS (continued)

Page

4. Lebanon’s top 30 exports in terms of export share, 1999 ...... 14 5. Lebanon’s major export partners in 1999...... 16 6. Intra-regional trade among ESCWA member countries, 1997 ...... 16 7. Original signatories to the zero-for-zero sector agreements...... 21 8. Remaining key reform measures required to bring Lebanon’s foreign trade regime into full conformity with the WTO and allow accession...... 40 9. Status of conformity with WTO institutional requirements...... 42 10. Breakdown of the service sector in Saudi Arabia by contribution to GDP and employment, 1999...... 79 11. Remaining key reform measures required to bring Saudi Arabia’s foreign trade regime into full conformity with the WTO and allow accession...... 83 12. Status of conformity with WTO institutional requirements...... 84

LIST OF FIGURES

1. Tariff dispersion, 1996-2000...... 8 2. New tariff changes at the end of 2000...... 9 3. The new tariff structure: a major trend reversal ...... 9 4. Protection reduction for various sectors...... 11 5. Tariff revenues in relation to total revenue and GDP ...... 11 6. Lebanon’s exports as a percentage of GDP...... 13 7. Export diversification in MENA countries ...... 14 8. Technological composition of exports, Lebanon and the region (1997)...... 15

LIST OF BOXES

1. WTO mandatory agreements and understandings...... 18 2. Domestic support—some you can, some you can’t ...... 29 3. The WTO Agreement on Trade Related Investment Measures ...... 33 4. The modification procedure prescribed in Article XXVIII of GATT...... 46 5. Explanations of column items of a concession schedule ...... 50

LIST OF ANNEXES

I. Articles XI, XX, and XXI of GATT ...... 86 II. WTO-minus and WTO-plus...... 88 III. Outline of commitments: market access ...... 91 VI. Outline of commitments: export subsidies...... 95

vi ABBREVIATIONS

ACC Accession ACC/1 Outline of the Memorandum on the Foreign Trade Regime ACC/4 Information on Domestic Support and Export Subsidies in Agriculture ACC/5 Information on Policy Measures Affecting Trade in Services AD Agreement on Anti-Dumping AG Agreement on Agriculture AMS Aggregate Measure of Support APEC Asia Pacific Economic Cooperation ASYCUDA Automated System for Customs Data BOP Balance-of-Payments CAIRNS Cairns group (consists of sixteen countries: Argentina, Australia, Brazil, Canada, Chile, Colombia, Fiji, Hungary, Indonesia, Malaysia, New Zealand, Paraguay, Philippines, South Africa, Thailand and Uruguay) CVA Customs Valuation Agreement CVD Countervailing Duties ESCWA Economic and Social Commission for Western Asia FAO Food and Agriculture Organization FERP Fixed External Reference Price GAFTA Greater Arab Free Trade Area GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GOL Government of Lebanon HS Harmonized System IEC International Electrotechnical Commission IFS International Financial Statistics IMF International Monetary Fund INR Initial Negotiating Right IP Intellectual Property IPPC International Plant Protection Convention ISIC Industrial Standard International Classification ISO International Organization for Standardization ITA Information Technology Agreement LDC Least Developed Country LIBNOR Lebanese Norms and Standards Institution MENA Middle East and North Africa MFN Most-Favoured-Nation MFTR Memorandum on the Foreign Trade Regime NAFTA North American Free Trade Agreement NAV Non-ad-Valorem NTM Non-Tariff Measures OECD Organization for Economic Cooperation and Development OIE International Office of Epizootics ROO Rules of Origin Agreement SASO Saudi Arabian Standards Association S&D Special and Differential (Treatment) SCM Agreement on Subsidies and Countervailing Measures SG Agreement on Safeguards SGS “Société Générale de Surveillance” SITC Standard International Trade Classification SOE State Owned Enterprise SPS Sanitary and Phytosanitary

vii ABBREVIATIONS (continued)

SSG Special Safeguards TBT Technical Barriers to Trade TRIMS Agreement on Trade-Related Investment Measures TRIPS Agreement on Trade-Related Aspects of Intellectual Property Rights TRQ Tariff Rate Quota UNCOMTRADE United Nations Commodity Trade Statistics UNCTAD United Nations Conference on Trade and Development UPOV “Union Internationale pour la Protection des Obtentions Végétales”, International Union for the Protection of New Varieties of Plants UR Uruguay Round USAID United States Agency for International Development VAT Value-Added Tax WCO World Customs Organization WIPO World Intellectual Property Organization WTO World Trade Organization

viii INTRODUCTION

The past decade has seen an upswing in the pace of global economic integration: the ratio of world trade volumes to real GDP has risen at three times the rate that prevailed in the previous decade; global foreign direct investment as a share of world GDP has doubled to nearly $200 billion in the 1990s; more and more services are being transacted internationally. Globalization is altering the world’s economic landscape in fundamental ways. It is being driven by a widespread push toward the liberalization of trade and capital markets, together with increasing internationalization of corporate production and distribution strategies. At the same time, rapid technological change is dismantling barriers to international trade and mobility of capital.

Globalization has profound implications for developing countries. It creates promising new opportunities in the form of wider markets for trade, larger private capital inflows and improved access to technology. These new opportunities, however, are accompanied by daunting new challenges in the area of economic management. Global integration entails the adoption and maintenance of a liberal trade and investment regime. In trade, competition is increasingly ferocious. In finance, international capital market integration and the potential volatility that comes with it are making macroeconomic management in developing countries more complex. With financial markets so highly integrated, problems are transmitted rapidly from one country to another, with detrimental effects on exchange rates, output and employment.

In this new global economic environment, ESCWA member countries that are not yet members of the WTO must position themselves quickly, integrating more fully and more rapidly, in order to avoid being marginalized. At present, seven ESCWA countries, the United Arab Emirates, Bahrain, Egypt, Jordan, Kuwait, Qatar and Oman, are members of the WTO. Three countries, Lebanon, Saudi Arabia and Yemen, are seeking membership.

Acceding to the WTO is a complex, challenging, and lengthy process for any country. The acceding country must implement extensive reforms to its policy, legal, regulatory and institutional base to conform fully, prior to accession, to all WTO mandatory agreements and understandings. It must also sit down with those of its trading partners that are members of the WTO and negotiate market access for goods and services and the reduction or elimination of certain subsidies in the agricultural and industrial sectors.

Depending on the state of the foreign trade regime of the acceding country, WTO-related reform may require extensive changes in policies (in such areas as trade, foreign exchange, they payment system, investment, competition, the tax system and pricing) and laws and legal acts1 in a wide range of fields, including intellectual property, customs, trade in goods (including import licensing, anti-dumping measures, countervailing measures, safeguards, standards, sanitary and phytosanitary measures, agriculture, trade- related investment measures and subsidies), trade in services, and government procurement.2 In addition, the acceding country must establish an adequate legal framework characterized by transparency, effective administrative and judicial procedures, and criminal/civil procedures and penalties.

This study seeks to assess the extent to which the foreign trade regimes of Lebanon and Saudi Arabia are in conformity with the WTO. It examines the reforms needed to adjust those countries’ policy, legal, and institutional frameworks to WTO requirements, particularly in the areas of trade in goods, trade in intellectual property rights, trade in services and institutional requirements. The study offers recommendations for key reforms that will allow the countries in question to accede to the WTO. It consists of two parts, the first dealing with Lebanon and the second with Saudi Arabia.

1 Legal acts include regulations, decrees, decree-laws, decisions, instructions and orders.

2 Although optional in principle, a committment to accede to the WTO Government Procurement Agreement is becoming a de facto requirement for WTO accession. In addition, the next round of multilateral negotiations is likely to lead to a new agreement on transparency in government procurement where the primary focus will be on government procurement methods.

This assessment was conducted through an examination of key Lebanese and Saudi Arabian laws and legal acts. It was also based on interviews with relevant State bodies within the Governments of Lebanon and Saudi Arabia, and publicly accessible materials available through the Internet, including the WTO Web site.

2 PART I. LEBANON

SUMMARY

Lebanon was one of the original contracting parties that founded GATT in 1947, but it left GATT in 1951. In February 1999, Lebanon applied for full membership of the WTO.3 Following a meeting of the WTO General Council in April 1999, Lebanon was granted WTO observer status, and a working party, chaired by Madame Laurence Dubois-Destrizais (Head of the French mission to the WTO), was established to examine the matter of Lebanon’s accession. Membership of the working party is open to all WTO members.

In May 1999, the Government of Lebanon issued a decision of the Council of Ministers establishing a National Committee on WTO Accession. The National Committee is chaired by the Minister of Economy and Trade and consists of the heads of relevant ministries and State bodies, including the Ministry of Finance, the Ministry of Economy and Trade, the Ministry of Agriculture, the Ministry of Public Health, the Banque du Liban, the Ministry of Transport, the Ministry of Tourism, the Ministry of Post and Telecommunications and the Higher Customs Council. The National Committee is currently in the process of setting up a WTO Unit, to be staffed by qualified persons responsible for handling the day-to-day technical and administrative matters, providing co-ordination in preparation for accession, preparing accession documents and leading the forthcoming negotiations.

Lebanon, with the assistance of USAID, prepared a Memorandum on the Foreign Trade Regime (MFTR) and submitted it to the WTO Secretariat in May 2001. Lebanon expects to receive some initial questions on its MFTR from interested working party members during the summer of 2001, and it intends to provide replies in a timely fashion in the hope that the working party will hold its first meeting before the end of the year. As yet there has been no significant progress in the matter of preparing market access offers on goods and services and initiating the bilateral negotiating process. Background documents for bilateral negotiations (such as ACC/5), however, are nearing completion.

The Government of Lebanon (GOL) has made WTO accession its second priority, after the conclusion of negotiations on the Euro-Mediterranean Partnership, thereby pushing back by several months the initial target date of November 2002 for the completion of negotiations on its accession to the WTO.4 Not only will WTO membership integrate Lebanon fully into the world economy and the multilateral trading system, it is essential to attract the investment needed to bring about economic recovery and productive growth in the Lebanese economy. WTO membership will significantly reduce the currently high risk level associated with commercial investment in Lebanon, thereby offsetting the high political risk level. WTO membership will send a signal to the international investment community that (1) Lebanon has a stable, predictable, transparent and non-discriminatory trade and investment environment, (2) Lebanese goods and services have access to the markets of the 141 WTO countries (soon to be at least 170 countries), and (3) Lebanon provides adequate legal protection for investments and, in particular, protection for intellectual property rights. Such protection is crucial for the transfer of modern technology and know-how to Lebanon, which in turn is essential if production is to be improved, competitiveness enhanced and goods and services delivered in accordance with international safety and quality standards and requirements.

3 The WTO is the successor to GATT. There are 141 member countries in the WTO and 33 countries in the process of accession. See Exhibits 1 and 2 in the Attachment. 4 This was the target date specified in Lebanon’s Accession Master Plan, which was prepared during the summer of 2000, with the assistance of USAID, and adopted by the GOL in September of that year.

3 foreign trade regime fully5 into line with WTO requirements and provide market access for specific foreign goods and services originating in WTO countries. This may involve protracted negotiations with WTO members interested in trading with Lebanon; however, the most probable outcome is that Lebanon will find itself on a level playing field with most other developing countries while still maintaining advantages with respect to access to the markets of developed countries.

Regardless of Lebanon’s prospective accession to the WTO, modernization of its legal regime is long overdue. Most Lebanese laws date back more than 40 years, and laws of relevance for many areas within the purview of international trade are altogether absent from Lebanon’s legal regime. Modernization would not only meet WTO requirements, it would also be highly beneficial to Lebanese businesses. Furthermore, it would strengthen the rule of law in Lebanon, simplify and streamline business procedures, ensure greater transparency, ensure accountability and curtail discretionary authority and corrupt practices.

In the course of the past three years, Lebanon has taken several steps toward the modernization of its legal regime, with the enactment of a law on copyright in 1999, a law on patents in 2000 and a decree-law on customs in 2000. All three laws are substantially in conformity with WTO requirements. In 1999, moreover, the Ministry of Agriculture implemented a major tariffication programme eliminating most quantitative import restrictions, and early in 2000 the Ministry of Economy and Trade eliminated restrictions and prohibitions on many imported food products. In accordance with the Accession Master Plan, a number of other laws are currently being drafted, including a new law on trademarks and geographical indications which will increase Lebanon’s level of compliance with the WTO’s TRIPS agreement, a new law on standards and metrology which will conform to the WTO’s TBT agreement, and a law on international trade in goods which will establish an international trade policy framework in line with WTO requirements, especially the 1994 version of GATT and the import licensing agreements. On the other hand, a number of other initiatives currently under way appear to contradict WTO principles and may cause major concerns during the accession process. These include the introduction of export subsidies for agricultural commodities and new import prohibitions, and a proposed law designed to encourage investment which fails to provide foreign investors with any legal guarantees or protection and contains many troubling provisions that are inconsistent with WTO requirements relating to transparency and non-discriminatory treatment. The outcome of these measures may be violations under the GATS, AG and SCM agreements.

Judging from this evaluation of Lebanon’s foreign trade regime, its current accession status and the experience of other acceding countries, its accession to the WTO is technically feasible and is likely to occur toward mid-2003, provided it (i) implements policy and legal reform before the end of 2002 to bring its foreign trade regime into full conformity with the WTO agreements, and (ii) actively pursues bilateral negotiations with the aim of concluding them before the end of 2002. A summary of the remaining key reform measures required to enable Lebanon to accede to the WTO will be found in Table 8 below.

As a member of the WTO, Lebanon will be able to take full advantage of its economic potential and attract the investment needed to bring about economic recovery, provide broader opportunities for Lebanese at home and abroad, and increase its production and exports of goods and services.

5 It is important to note that none of the countries currently in the process of acceding to the WTO or the countries that have recently acceded to it has been granted any transitional arrangements for implementing WTO legal requirements.

4 INTRODUCTION

Lebanon has traditionally been characterized by an open economy, and it remains committed to greater trade integration. This is amply demonstrated by Lebanon’s current negotiations for accession to the Euro- Mediterranean Partnership, which aims at creating a free trade area between the European Community and countries around the Mediterranean Sea. Those negotiations are going well, and an agreement seems likely in the near future. Lebanon is also proceeding smoothly toward accession to the WTO.

Status of Lebanon’s WTO accession: Lebanon was one of the original contracting parties that founded GATT in 1947, but it withdrew from GATT in 1951. In February 1999, Lebanon applied for full membership of the WTO. Following a meeting of the WTO General Council in April 1999, Lebanon was granted WTO observer status, and a working party, chaired by the head of the French mission to the WTO, was set up to examine Lebanon’s accession to the Organization. In May 1999, the Government of Lebanon issued a decision of the Council of Ministers establishing a National Committee on WTO Accession, headed by the Minister of Economy and Trade. Lebanon submitted a Memorandum on the Foreign Trade Regime (MFTR) to the WTO Secretariat in May 2001. Lebanon expects to receive some initial questions on its MFTR from interested working party members during the summer of 2001, and it intends to provide replies in a timely fashion in the hope that the working party will hold its first meeting before the end of the year. As yet there has been no significant progress in the matter of preparing market access offers on goods and services and initiating the bilateral negotiating process.

Benefits of WTO membership: Not only will membership of the WTO integrate Lebanon fully into the world economy and the multilateral trading system, it is essential in order to attract the investment needed to bring about economic recovery and productive growth in the Lebanese economy. WTO membership will significantly reduce the relatively high risk level associated with commercial investment in Lebanon, and will send a signal to the international investment community that Lebanon has a stable, predictable, transparent and non-discriminatory trade and investment environment, that Lebanese goods and services enjoy access to the markets of the 141 WTO countries (soon to be at least 170 countries), and that Lebanon provides legal protection for investments and, in particular, protection for intellectual property rights. Such protection is crucial for the transfer of modern technology and know-how to Lebanon. As a member of the WTO, Lebanon will also be able to take full advantage of its economic potential and attract the investment needed to bring about economic recovery and provide broader opportunities for Lebanese at home and abroad.

The first part of the study is a case study of Lebanon. It comprises four sections. The first of these is the introduction. The second section examines the trade regime and trade performance in Lebanon. The third contains an assessment of Lebanon’s foreign trade regime for conformity with WTO requirements, and the last section discusses selected issues of relevance for the country’s negotiating strategy.

5 I. THE TRADE REGIME AND TRADE PERFORMANCE IN LEBANON

A. OVERVIEW AND MAIN ISSUES

Lebanon has traditionally been characterized by an open economy and, like other small countries, it has relied heavily on external trade to overcome its inherent scale and resource limitations. The importance of trade is now taking on a new dimension. With globalization proceeding at high speed, Lebanon must position itself quickly, integrating more fully and more rapidly in order to avoid being marginalized. Moreover, trade could represent a crucial source of growth for an economy suffering from a post-war recession, and greater trade openness would strengthen the sustainability of a high growth path.

While Lebanon continues to demonstrate its commitment to open trade, the difficult economic circumstances confronting the country today are creating problems for further trade liberalization on many fronts. In the first place, tariffs, which represent the largest source of tax revenue, are difficult to cut at a time when the government is plagued by a huge fiscal deficit. In the second place, reducing tariffs would jeopardize a fragile industrial sector that is still recovering from the war and is not yet fully able to compete. In the third place, the currency exchange rate has been pegged to the dollar since 1992, and while this has successfully maintained confidence and kept inflation low during the period of reconstruction, it has done so at the price of a substantial real appreciation in the exchange rate, which may ultimately erode the competitiveness of Lebanese exports.

The new government, which took office in November 2000, adopted a revised tariff schedule as one of its first policy measures, reducing most tariffs, with the exception of those relating to agricultural products. The main purpose of this measure was to administer a salutary shock to a stagnating economy. This is a step in the right direction; however, more remains to be done. First, the tariff regime could be further simplified through a consolidation of tariff rates across products and countries. Moreover, the anticipated higher growth on which the government is relying to compensate for the revenue loss resulting from the reduction in tariffs may not materialize. The situation will have to be monitored closely, and alternative tax mechanisms (such as a value added tax) explored if necessary. Finally, protection remains high, as tariffs have been reduced mainly on goods that are not produced locally. Protection should be gradually reduced in order to create incentives to enhance the efficiency of local production.

Before Lebanon embarks on negotiations with a view to WTO accession, its trade regime and trade performance must be assessed and the problems confronting its trade sector analysed, with a view to the formulation of recommendations for a sounder and more efficient trade regime, taking into account the country’s difficult circumstances and small size. Lebanon’s import regime and export competitiveness will be discussed in this section.

B. THE IMPORT REGIME

Despite Lebanon’s open economy, its import regime has become more protectionist and more complex in recent years. Although the upward trend in tariff rates that has been observable since 1996 is rooted in the need to generate revenue—given the large budget deficit and the government’s lack of other revenue sources—some of the increases have been protectionist in an ad hoc manner. The tariff structure has also become unnecessarily cumbersome. Furthermore, the tariff regime may be described as having an anti- export bias, as it shifts incentives away from production for export toward import-substitution activities. The recent tariff reductions introduced by the new government represent a major reversal of the trend, but further reforms are needed to correct some of the anomalies in the import regime.

1. Overview of the tariff structure before the recent changes

Until the recent measures taken by the new government, Lebanon’s tariffs have systematically been on the rise in recent years. In 1996, the average tariff rate was just under 10 per cent, which compares well to open countries such as Malaysia or Korea. However, it gradually increased thereafter, reaching 15 per cent by 2000. The collected tariff rate (calculated as the ratio of import tax collected to the value of imports), which reflects the impact of exemptions, preferential tariffs and additional trade duties, reveals an even more

6 alarming trend: the import-weighted average collected rate increased from 15 per cent in 1996 to 22 per cent in 2000 (table 1).

More worrisome than the rising tariff rates, some of which may have been justified for revenue purposes, is the increase in tariff rate dispersion, a phenomenon that may reflect high effective protection and creates opportunities for tax evasion. Between 1996 and 2000, the standard deviation for Lebanon’s tariffs increased by 50 per cent. The maximum tariff also increased, from an already high 100 per cent in 1996 to 105 per cent in 2000. Moreover, the number of products subject to higher tariffs increased. This trend was accompanied by an increasing number of exemptions. Experience in developing countries has shown that there is typically a nonlinear relationship between statutory tariff rates and rates actually collected; that is, the higher the rates, the greater the incentive for importers to seek exemptions. As a result, revenue tends not to increase in proportion to an increase in tariffs. In Lebanon, however, average tariff rates increased by 48 per cent between 1996 and 1999, while tariff revenue increased by 47 per cent.

TABLE 1. TARIFF RATES IN LEBANON, 1996-2000 Average tariff rate Effective rate Actual rate

Import weighted Unweighted Import weighted Unweighted Standard Standard Year Rate (%) Rate (%) deviation Rate (%) Rate (%) deviation 1996 14.93 10.49 10.52 9.88 9.39 1997 17.07 10.65 11.14 11.57 11.43 8.47 1998 19.91 13.41 9.40 11.32 13.35 8.96 1999 22.78 14.95 13.63 13.75 14.64 13.91 2000 21.75 16.02 15.57 16.28 14.75 13.87 Source: Lebanese Customs.

The tariff regime has become more cumbersome. First, the number of tariff rates increased from 14 in 1996, which was already high, to 20 by 2000. During the period 1996-2000, rates varied over a range extending between 0 and 105 per cent. Most tariff lines fall under eight tariff rates, and about 70 per cent of tariff lines fall under four rates (figure 1). This multiplicity of rates reflects the effect of lobbying by certain sectors, and makes the tariff system more subject to interference. Second, additional specific duties were introduced during that period, targeting three sectors for the most part: petroleum products, agricultural products and textile products. Third, exemptions for specific product use have added to the complexity of the tariff schedule. Fourth, preferential trade agreements with specific countries have set up additional hurdles. Lebanon has signed trade agreements with several countries, applying lower tariffs to the goods it imports from them. For example, Lebanon has signed free trade agreements with Syria, Egypt, Kuwait, and Saudi Arabia. Such agreements specify a tariff reduction schedule over a period of time, which means that every year the rates will change compared to the current rates.

2. The new tariff structure and its revenue implications

On 29 November 2000, wide-ranging cuts in import duties were introduced. The government was prepared to take the risk of accepting a short-term decline in income for the Treasury in return for long-term incentives for the private sector (figure 2). The highlights of these amendments to the customs duties are as follows:

(a) The maximum tariff was reduced from 105 per cent to 70 per cent, and the minimum tariff was set at zero;

(b) The 3 per cent tariff on all raw materials not found locally was abolished, and the 6 per cent duty on almost all intermediate goods not manufactured locally was scrapped, while other materials not manufactured in Lebanon were reduced to 5 per cent;

7 (c) All duties on computers and accessories were lifted;

(d) Duties on goods of kinds produced in Lebanon were cut by 25 per cent, with all rates formerly above 100 per cent reduced to 70 per cent (except on tobacco);

(e) Duties on finished goods of kinds not made in Lebanon, which had varied over a range extending between 10 and 100 per cent, were reduced to a range extending between 5 and 70 per cent;

(f) Tariffs on agricultural goods remained the same, except those above the new maximum tariff, which were reduced to 70 per cent;

(g) Import products that account for a large share of government revenues (such as petroleum products, tobacco and cement) were not subject to the new tariff cuts; luxury products that had been subject to high tariffs but account for only a small proportion of the State’s revenue (such as cosmetics and alcoholic beverages) and are not produced locally enjoyed substantial tariff cuts (from 55 per cent to 15 per cent in the case of cosmetics and from 105 per cent to 15 per cent in the case of alcoholic beverages).

Figure 1. Tariff dispersion, 1996-2000

Tariff dispersion in 1996 (in per cent)

35 30 25 20 15

Frequency 10 5 0 0 2 5 10 15 20 25 30 35 40 50 60 80 100 Rates

Tariff dispersion in 2000 (in percent)

30 25 20 15 10 Frequency 5 0

0 2 3 6 10 15 18 20 23 25 30 35 40 45 50 55 70 80 90 105 Rates

Source: Lebanese Customs.

8 Figure 2. New tariff changes at the end of 2000

120%

100% 80% Old tariff 60% New tariff 40%

20% 0%

Selected products

Source: Lebanese Customs.

Further reductions in duties on other products, including imported cars, have recently been introduced.

The new tariff reductions are fairly drastic. The average tariff has been reduced by more than half, from nearly 15 per cent to 6 per cent (figure 3), and over 80 per cent of tariff lines are subject to a rate of zero or 5 per cent. Several important steps in the direction of a more efficient tariff structure have been taken. The largest tariff cuts, on raw materials and intermediate goods, are aimed at reducing the cost of production. Although this measure raises effective protection, it may be regarded in a positive light as a means of stimulating the industrial sector temporarily. At the sectoral level (figure 4), tariffs remain relatively high in sectors where domestic production and employment are substantial, such as clothing and the agro-food industry (table 2). The total removal of tariffs on computers and computer products is very important to boost productivity, and allows Lebanese consumers and producers to benefit from this technology. Finally, given the sensitivity of agriculture from a social standpoint, the government could not have reduced tariffs in that sector at this stage, although it may find it has to reassess its protectionist stance in the near future.

Figure 3. The new tariff structure: a major trend reversal (Average tariffs and standard deviation, in per cent)

20 import- 15 weighted unweighted 10

5 standard deviation 0 1996 1997 1998 1999 2000 2001

Source: Lebanese Customs.

TABLE 2. THE LEBANESE INDUSTRIAL SECTOR, 1999

ISIC Number of Number of Wages & Salaries Value added G.F.C.F* Code Economic activity establishments Work-force(1) employees(2) ($000)(3) Output ($000) Input ($000) ($000) ($000) 1 Products of agriculture & hunting 5 26 21 70 1 250 867 383 0 13 Metal ores 5 37 37 240 1 155 801 354 171 14 Other mining & quarrying products 121 756 546 5 433 14 385 8 710 5 674 429 15 Food products and beverages 4 482 26 389 18 342 116 824 1 011 313 578 516 432 793 147 989 16 Tobacco products 1 1 589 1 589 19 187 34 679 28 859 5 820 0 17 Textiles 804 3 670 2 206 12 077 100 874 59 796 41 077 3 340 18 Clothes and fur dyeing 2 262 10 560 6 653 36 024 212 026 120 528 91 497 4 392 19 Leather & leather products 1 292 6 481 4 211 32 253 111 012 65 899 45 113 5 296 20 Wood products (except furniture) 2 246 6 933 3 490 18 625 112 926 60 066 52 860 20 925 21 Pulp, paper & paper products 165 2 944 2 614 13 989 148 100 83 636 64 464 7 834 22 Printed matter & recorded media 782 4 818 3 276 20 046 154 772 75 453 79 319 26 036 23 Coke & refined petroleum products 36 311 281 2 349 13 808 5 095 8 712 893 24 Chemical products & man-made fibres 323 2 797 2 310 15 010 194 514 98 541 95 973 12 507 25 Rubber & plastic products 416 2 776 2 069 11 380 163 422 104 988 58 434 10 641 26 Other non-metallic mineral products 2 528 13 377 10 045 60 622 552 373 289 976 262 397 79 906 27 Basic metals 6 417 399 3 694 123 990 94 435 29 556 249 28 Metal products 3 554 14 492 9 342 58 192 454 975 269 808 185 167 26 189 29 Machinery & equipment n.e.c. 389 2 773 2 100 10 789 116 117 68 158 47 961 11 651 31 Electrical machinery & apparatus n.e.c. 208 1 589 1 360 9 212 96 084 58 116 37 968 1 860 Radio, television and communication 32 equipment 7 106 79 360 3 191 1 839 1 351 0 34 Motor vehicles, trailers and semi-trailers 24 152 125 596 3 623 2 848 774 0 35 Other transport equipment 18 44 28 116 430 296 133 0 Furniture & other manufactured goods 36 n.e.c. 2 350 11 068 7 512 45 332 327 889 168 864 159 027 13 101 Total 2 2024 114 105 78 635 492 420 3 952 908 2 246 095 1 706 807 373 409

Source: Ministry of Industry, Industrial Strategy Report, 2000. Notes: (1) owners, family members and employees exclusive of seasonal workers; (2) permanent employees; (3) wages and salaries exclusive of social security taxes. * Gross fixed capital formation.

Figure 4. Protection reduction for various sectors

Output-weighted average tariff in 2000 (in percent)

35 30 25 20 Old 15 New 10 5 0

yarn Glass,

metals cork, paper Fabric, cars Fresh food, Rubber, produce Clothing Grains, and meat Prepared plastics beverages Precision oils, sugar

Machines, equipment Cosmetics,

90 80 70 60 50 Est 40 Ouest 30 Nord 20 10 0 1er trim. 2e trim. 3e trim. 4e trim.

Source: Lebanese Customs.

The recent tariff reductions are not expected to have major revenue implications. Because of its openness to trade, Lebanon is heavily dependent on imports for its fiscal revenue (they accounted for nearly 50 per cent of total revenue and over 60 per cent of tax revenue in 1999). The high volume of external trade provides a convenient, broad base from which taxes can be collected at relatively low administrative cost. Moreover, customs duties as a percentage of total revenue and as a percentage of GDP have increased noticeably in recent years, from 35 per cent and 5 per cent respectively in 1994 to 47 per cent and 9 per cent respectively in 1999. The largest increase occurred in 1995 (figure 5).

Figure 5. Tariff revenues in relation to total revenue and GDP

30 Custom duties/total revenue 20 Custom duties/GDP

10 0

1994 1995 1996 1997 1998 1999

Source: Ministry of Finance.

The effect of tariff reductions on revenue depends on the levels and coverage of tariffs in effect before the reduction and on the extent to which they are then reduced. The precise impact is difficult to predict because it depends on complex economic responses. If import values are unchanged, the immediate effect of a reduction in tariff rates is to lower revenue. The value of imports, however, is likely to change in response to tariff reductions. Typically, demand for imports of final consumption goods is more elastic than demand for imports of intermediate goods and raw materials. The former are also subject to higher tariff rates. Since the recent tariff reduction (as is usually the case with trade liberalization) involved disproportionate reductions in higher tariff rates, the elasticity of demand for these goods may be quite high, mitigating the revenue loss. The government is also in the process of introducing a value added tax, which should offset some of the revenue loss resulting from tariff reduction.

C. EXPORT COMPETITIVENESS

For Lebanon, exports are potentially important as a means of overcoming the disadvantages associated with its small size, and act as a major driver of growth. However, Lebanon’s export performance has been weak. Despite its open economy, Lebanon is about average in terms of competitiveness. Examination of the composition of its exports reveals an increasing concentration of higher-technology products, comparable to the situation observable in the case of Turkey or Tunisia. But the most ominous feature of Lebanon’s export performance is the low ratio of its exports of goods to GDP—only 4.5 per cent in 1998, compared with 25 per cent in Turkey. However, these figures do not take account of exports of services, a sector which is of great importance in Lebanon.

Lebanon may have to position itself in the globalized world without delay if it is to gain from the export opportunities being opened up by globalization.

1. Overall export performance

Despite the fact that its economy is more open than those of most developing countries, Lebanon is at best average in terms of competitiveness. Its ratio of manufacturing exports to total exports—a good indicator of a country’s technological progress and production diversification—was close to 70 per cent in 1997, just above the 65 per cent average for developing countries, but lower than the nearly 80 per cent average for Asian countries (table 3). Per capita exports, an indicator of competitiveness, are much lower for Lebanon ($207 in 1997) than the average for developing countries ($381) or any other country of the region.

TABLE 3. OPENNESS AND COMPETITIVENESS INDICATORS

Trade/GDP average, Manufacturing exports/total Per capita exports 1991-1995 exports, 1997 US$, 1997 Lebanon 104 73 207 Jordan 127 50 656 Egypt 72 42 246 Tunisia 87 -- 868 Israel 77 -- 5 114 Developing countries 55 65 381 Asia 72 78 362 Latin America 29 -- 420 Source: International Monetary Fund (IMF), World Economic Outlook, International Financial Statistics (IFS). Note: Manufacturing export and per capita export figures for developing countries, Asia and Latin America are from 1995.

Lebanon is lagging behind in terms of exports as a percentage of GDP. Exports accounted for only 4.5 per cent of Lebanon’s GDP in 1998, an extremely low figure by comparison with other countries in the region, and by far the weakest indicator of its export performance (figure 6). Tunisia’s exports accounted for

over 40 per cent of its GDP, for example, while the corresponding figure for Malaysia was 92 per cent just before the recent financial crisis. Strive as it may to enhance its competitiveness and the composition of its exports, Lebanon must increase its exports as a percentage of GDP if exports are to make any significant contribution to the country’s growth.

Figure 6. Lebanon’s exports as a percentage of GDP

Export/GDP

60 50

40 30

Percentage 20 10

0 Jordan Tunisia Israel Turkey Morocco Egypt Lebanon

Source: IMF, IFS, 2000.

2. Export diversification and technological composition

Product diversification is better in Lebanon than in other MENA countries. Export performance underlines the importance of product diversification in weathering external shocks. Lebanon’s export diversification index6—which varies over a range extending from 0 (more diversified) to 1 (less diversified)—is comparable to that of Turkey, which has the most diversified exports of any country in the region (figure 7). The top 30 products (identified by 6-digit HS code) which account for the highest percentage of exports reflect that diversification. They vary from jewelry (the 6-digit product with the highest export share) to metal products and food products (table 4). Despite a higher export diversification than other MENA countries, nearly two thirds of Lebanon’s exports are concentrated in these top 30 products, and more than half of its exports are concentrated in no more than10 products. Further diversification would thus be desirable.

6 The Herfindahl index of concentration has been used. This index is the ratio of the squared 3-digit SITC figure for commodity exports to total exports. It varies over a range extending between 0 and 1: the smaller the index, the more diversified the exports.

Figure 7. Export diversification in MENA countries

Export diversification index

Turkey Lebanon Morocco Jordan Tunisia Egypt United Arab Emirates Bahrain Syria Arab Republic Algeria Oman

0 0.2 0.4 0.6 0.8

Source: UNCOMTRADE and Lebanese Customs. Note: The index is for 1999 in the case of Lebanon and the mid-1990s in the case of the other countries.

TABLE 4. LEBANON’S TOP 30 EXPORTS IN TERMS OF EXPORT SHARE, 1999

6-digit HS code Product Export share (%) 6-digit HS code Product Export share (%) 711319 Jewellery 7.49 340111 Soap 0.99 710812 Gold 5.98 080510 Citrus fruit 0.96 760429 Aluminum bars 4.66 740400 Copper waste 0.93 280920 Phosphorus 4.23 720410 Ferrous waste 0.91 240110 Tobacco 3.66 620343 Men’s suits 0.90 310310 Fertilizers 2.60 490110 Books 0.83 490199 Books 2.54 220421 Wine 0.79 070190 Potatoes 1.83 151550 Vegetable oils 0.75 080810 Apples, pears 1.68 392190 Plastic products 0.72 252310 Cement 1.43 482010 Paper registers 0.60 340290 Cosmetics 1.26 300490 Medicines 0.58 210690 Food products 1.17 940360 Furniture 0.57 854460 Wire, cables 1.06 701093 Glass containers 0.57 480300 Paper towels 1.02 080610 Grapes 0.57 760200 Aluminum waste 1.02 170490 Sugar confectionery 0.56 Source: Lebanese Customs.

Has Lebanon been able to move up the technology ladder? Lebanon has gradually shifted along the technology ladder, moving away from primary products toward more technologically advanced exports. Its exports are concentrated in resource-based manufactures (such as food products) and in low- and medium- technology manufactures (figure 8). Lebanon compares well with the more advanced countries of the region, such as Turkey and Tunisia. It has a higher share of exports in medium-technology manufactures than most MENA countries (21 per cent, compared with 18 per cent for Turkey). It also has a burgeoning share in high technology, higher than any other MENA country except Jordan. Technological upgrading of exports is crucial for a country with Lebanon’s characteristics (small size and a relatively highly skilled labour force);

it is even more essential in a global market where the technological composition of world exports is advancing rapidly, even among developing countries.

Figure 8. Technological composition of exports, Lebanon and the region (1997)

90 80 70 Primary 60 products 50 Resource based manufactures 40 Low technology 30 manufactures 20 Medium technology manufactures

Percent share in exports 10

0 High technology manufactures a t co lic si rdan oc rates Other banon ub i Egyp Jo or Tuni Turkey Le M transactions rab Rep rab Em A n A ia Syr United

Source: ESCWA computations based on UNCOMTRADE data and Lebanese Customs.

3. Diversification of export markets

Geographic diversification is important, since factors specific to foreign markets may affect import demand there, however competitive the imported products. On the one hand, developed countries offer markets that are stable and wealthy, but also highly competitive; on the other hand, developing countries are more likely to be subject to economic shocks, but their markets may be characterized by less ferocious competition. Trade between countries of the ESCWA region and their traditional partners may also be affected by the growing tendency for the latter to form regional trade arrangements (including EU enlargement, the Euro-Mediterranean Partnership, NAFTA, APEC and so on). In order to avoid possible negative repercussions from export markets, it is important to expand exports geographically, while at the same time diversifying the range of exported products. This was demonstrated during the East Asia crisis, when major oil-exporting countries of the region found themselves deprived of an important market for which they were unable to compensate.

Regional markets are important for Lebanese exports. Over 50 per cent of Lebanon’s export trade is conducted with 10 partners, of which the most important are Saudi Arabia, the UAE, France, Switzerland, the USA and Syria (table 5). Overall, about 45 per cent of Lebanon’s exports go to the region and 34 per cent to the industrialized countries, mainly Europe. For Lebanon and other Middle Eastern non-oil producers, the ESCWA region constitutes an important export market: in 1997, exports to the region accounted for 45 per cent of total exports in the case of Lebanon, 47 per cent in the case of Jordan and 20 per cent in the case of Syria (table 6). For oil-exporting countries, intra-regional trade accounted for only a small proportion of their total trade: for Saudi Arabia, for example, exports to the region represented only 8 per cent of its total exports and imports from the region only 6 per cent of its imports in 1997. This suggests that these may be potentially lucrative export markets for Lebanon.

TABLE 5. LEBANON’S MAJOR EXPORT PARTNERS IN 1999

Number of products Export Number of products Export Country exported to country share (%) Country exported to country share (%) Saudi Arabia 1 865 10.48 Holland 1 379 2.26 United Arab Emirates 1 674 7.97 Egypt 924 2.26 France 3 151 7.70 India 871 2.18 Switzerland 1 241 6.58 Turkey 1 239 2.13 USA 2 930 6.20 Spain 1 640 1.80 Syria 1 316 4.77 Libya 211 1.66 Kuwait 1 166 4.48 Greece 790 1.64 Jordan 1 087 3.98 Belgium 1 495 1.61 Germany 2 887 3.62 Bahrain 336 1.31 Great Britain 2 636 3.59 Cyprus 631 1.10 Iraq 5 3.21 Malta 107 1.01 Italy 3 211 2.81 Canada 1 224 1.00 Source: Lebanese Customs.

TABLE 6. INTRA-REGIONAL TRADE AMONG ESCWA MEMBER COUNTRIES, 1997

Intra-regional exports Intra-regional imports Share in Share in Share in own total Share in own total Value region exports Value region imports ($ million) (%) (%) ($ million) (%) (%) ESCWA region 10 465 100.0 8.6 11 122 100.0 10.8 GCC countries 8 291 79.1 7.6 8 251 69.2 8.5 Bahrain 516 4.2 10.2 2 147 3.8 8.9 Kuwait 391 3.8 2.7 1 067 11.4 12.9 Oman 762 7.3 10.2 1 473 15.8 29.3 Qatar 354 3.4 8.6 523 5.6 14.5 Saudi Arabia 4 381 42.2 8.3 1 638 17.5 6.0 United Arab Emirates 1 887 18.2 7.5 1 403 15.0 5.0 More diversified countries 2 174 20.9 17.7 2 871 30.8 9.3 Egypt 374 3.6 9.6 564 6.0 4.3 Jordan 714 6.9 47.5 918 9.8 22.4 Lebanon 289 2.8 45.0 619 6.6 8.3 Syria 785 7.5 20.0 269 2.9 6.7 Yemen 39 0.4 1.7 501 5.4 24.6 Source: ESCWA, Survey of Economic and Social Developments in the ESCWA Region, 1999.

4. Toward an export strategy of enhancing competitiveness

While the competitiveness and technological composition of Lebanon’s exports are relatively adequate, given the country’s present circumstances, the export sector as a whole plays only a minimal role in the Lebanese economy. In the age of globalization, this trend must be reversed. An export-oriented strategy would enable the country to overcome the constraints related to its size and provide an impetus for long-term, sustainable growth. Lebanon can no longer afford to lag behind in an increasingly competitive world. It must increase the proportion of its GDP that is accounted for by exports, and it must also move toward an export strategy of enhancing its competitiveness and using its comparative advantages more effectively.

The rising intensity of global competition means that Lebanon must focus its resources for maximum effect. Food products and high-technology products are examples of exports in which Lebanon seems to have a comparative advantage. Import policies should not be allowed to bias resource allocation away from such export-oriented sectors. Moreover, further export diversification is needed to shield Lebanon against increasingly ferocious competition from all parts of the world—from China and India, for example, in the case of low-skill, labour-intensive products such as garments, or from Eastern Europe and Latin America in the case of medium-skill-intensive products such as electric machinery, or from East Asia in the case of high-skill-intensive products such as electronics, which Lebanon is beginning to export successfully. Export diversification might be based on high-value-added products requiring locally available resources, such as agricultural products. Moreover, diversification will necessarily entail an upgrading of technology, labour skills and productivity. As a country that is short of labour, Lebanon may find a niche in the area of products which require highly skilled labour and constitute a rapidly growing segment of the world’s export trade, such as electronics.

In order for Lebanon to achieve higher export competitiveness and diversification, which in turn would help exports to account for a higher proportion of its GDP, there are a number of policies that it should implement. First, it should adopt domestic policies, including macroeconomic stability, that are designed to attract foreign direct investment into export sectors, in order to enhance the potential for technology transfer that Lebanon needs. The Euro-Mediterranean Partnership provides an opportunity here, in view of its specific provisions for technology transfer. Second, trade barriers should be sharply lowered to encourage fuller and less vulnerable trade integration with the rest of the world. The new government has recently taken action in this connection. Moreover, the WTO provides a well-established framework for trade liberalization and for the credibility of such programmes; Lebanon, which has observer status, must move more quickly toward membership. Finally, the government should continue to invest in education, especially secondary education, and labour upgrading in order to upgrade the competitiveness of the country’s labour force.

II. ASSESSMENT OF LEBANON’S FOREIGN TRADE REGIME FOR CONFORMITY WITH WTO REQUIREMENTS

Acceding to the WTO is a complex, challenging and lengthy process for any country. The acceding country must implement extensive reforms to its policy, legal, regulatory and institutional base to conform fully, prior to accession, to all WTO mandatory agreements and understandings (box 1). It must also sit down with those of its trading partners that are WTO members and negotiate market access for goods and services and the reduction or elimination of agricultural and industrial subsidies.

Depending on the acceding country’s foreign trade regime, WTO-related reform may require extensive policy changes (in such areas as trade, foreign exchange, payment system, investment, competition, tax system and pricing) and laws and legal acts7 in various fields: intellectual property, customs, trade in goods (including import licensing, anti-dumping and countervailing measures, safeguards, standards, sanitary and phytosanitary measures, agriculture, trade-related investment measures and subsidies), trade in services, and government procurement.8 The acceding country must also establish a legal framework characterized by transparency and effective administrative and judicial procedures and criminal/civil procedures and penalties.

An assessment of Lebanon’s foreign trade regime indicates that further significant reform is required in order to adjust the country’s policy, legal, and institutional framework to WTO requirements. This section examines Lebanon’s foreign trade regime—more specifically trade in goods, trade in intellectual property rights, trade in services, and institutional requirements—and offers recommendations for bringing Lebanon’s foreign trade regime into full conformity with the WTO Agreements.

Box 1. WTO mandatory agreements and understandings

General Agreement on Tariffs and Trade 1994, Agreement on Agriculture, Agreement on the Application of Sanitary and Phytosanitary Measures, Agreement on Textiles and Clothing, Agreement on Technical Barriers to Trade, Agreement on Trade-Related Investment Measures, Agreement on Implementation of Article VI of the GATT 1994 (Agreement on Anti- Dumping), Agreement on Implementation of Article VII of the GATT 1994 (Agreement on Customs Valuation), Agreement on Preshipment Inspection, Agreement on Rules of Origin, Agreement on Import Licensing Procedures, Agreement on Subsidies and Countervailing Measures, Agreement on Safeguards, General Agreement on Trade in Services, and Agreement on Trade-Related Aspects of Intellectual Property Rights.

Understanding on the Interpretation of Article II:1(b) of the GATT 1994 (Other Duties and Charges), Understanding on the Interpretation of Article XVII of the GATT 1994 (state trading), Understanding on Balance-of-Payments Provisions of then GATT 1994, Understanding on the Interpretation of Article XXIV of the GATT 1994 (free trade and customs unions), Understanding in Respect of Waivers of Obligations under the GATT 1994, Understanding on the Interpretation of Article XXVIII of the GATT 1994 (modification and withdrawal of a concession), and Understanding on Rules and Procedures Governing the Settlement of Disputes. ______Source: WTO Web site.

A. LEBANON’S PREPARATIONS FOR WTO ACCESSION

Lebanon was one of the original contracting parties that founded GATT in 1947, but it left GATT in 1951. In February 1999, Lebanon applied for full membership of the WTO.9 Following a meeting of the

7 Legal acts include regulations, decrees, decree-laws, decisions, instructions and orders. 8 Although optional in principle, committing to accede to the WTO Government Procurement Agreement is becoming a de facto requirement for WTO accession. In addition, the next round of multilateral negotiations is likely to lead to a new agreement on transparency in government procurement where the primary focus will be on government procurement methods. 9 The WTO is the successor to GATT. There are 141 member countries in the WTO and 33 countries in the process of accession.

WTO General Council in April 1999, Lebanon was granted WTO observer status, and a working party, chaired by the head of the French mission to the WTO, was set up to examine Lebanon’s accession to the WTO. Membership of the working party is open to all WTO members.

In May 1999, the Government of Lebanon issued a decision of the Council of Ministers establishing a National Committee on WTO Accession. The National Committee is chaired by the Minister of Economy and Trade and consists of the heads of relevant ministries and state bodies, including the Ministry of Finance, the Ministry of Economy and Trade, the Ministry of Agriculture, the Ministry of Public Health, the Banque du Liban, the Ministry of Transport, the Ministry of Tourism, the Ministry of Post and Telecommunications and the Higher Customs Council. The National Committee is currently in the process of setting up a WTO Unit, to be staffed by qualified personnel responsible for handling day-to-day technical and administrative matters, providing co-ordination in preparation for accession, preparing accession documents and leading the forthcoming negotiations.

The Government of Lebanon (GOL) has made WTO accession its second priority, after the conclusion of negotiations on the Euro-Mediterranean Partnership, thereby pushing back by several months the initial target date of November 2002 for the completion of negotiations on its accession to the WTO.10 Not only will WTO membership integrate Lebanon fully into the world economy and the multilateral trading system, it is essential to attract the investment needed to bring about economic recovery and productive growth in the Lebanese economy. WTO membership will significantly reduce the currently high risk level associated with commercial investment in Lebanon, thereby offsetting the high political risk level. WTO membership will send a signal to the international investment community that (1) Lebanon has a stable, predictable, transparent and non-discriminatory trade and investment environment, (2) Lebanese goods and services have access to the markets of the 141 WTO countries (soon to be at least 170 countries), and (3) Lebanon provides adequate legal protection for investments, especially protection for intellectual property rights. Such protection is crucial for the transfer of modern technology and know-how to Lebanon, which in turn is essential if production is to be improved, competitiveness enhanced and goods and services delivered in accordance with international safety and quality standards and requirements.

If Lebanon is to enjoy the rights and opportunities associated with WTO membership and benefit from the liberalized market access adopted by WTO members during and after the Uruguay Round, it will have to implement, prior to its accession, a major policy and legal reform programme to bring its foreign trade regime fully11 into line with WTO requirements and provide market access to specific foreign goods and services originating in WTO countries. This may involve protracted negotiations with WTO members interested in trading with Lebanon; however, the most probable outcome is that Lebanon will find itself on a level playing field with most other developing countries while still maintaining advantages with respect to access to the markets of developed countries.

10 This was the target date specified in Lebanon’s Accession Master Plan, which was prepared during the summer of 2000, with the assistance of USAID, and adopted by the GOL in September of that year. 11 It is important to note that none of the countries currently in the process of acceding to the WTO or the countries that have recently acceded to it has been granted any transitional arrangements for implementing WTO legal requirements.

Regardless of Lebanon’s prospective access to the WTO, modernization of its legal regime is long overdue. Most Lebanese laws date back more than 40 years, and laws or relevance for many areas within the purview of international trade are altogether absent from Lebanon’s legal regime. Modernization would not only meet WTO requirements, it would also be greatly beneficial to Lebanese businesses. Furthermore, it would strengthen the rule of law in Lebanon, simplify and streamline business procedures, ensure greater transparency, ensure accountability and curtail discretionary authority and corrupt practices.

On the other hand, a number of other initiatives currently under way appear to contradict WTO principles and are likely to cause concerns during the accession process. These include the introduction of export subsidies on agricultural commodities and new import prohibitions. However, given Lebanon’s insignificant level of support for the agriculture sector, such subsidies may be useful as a means of boosting exports of agricultural products temporarily, and it is better to introduce them prior to WTO negotiations, since it will no longer be possible to do so after accession. Finally, a proposed law designed to encourage investment fails to provide foreign investors with any legal guarantees or protection and contains some provisions that may be inconsistent with WTO requirements relating to transparency and non-discriminatory treatment.

Judging from this evaluation of Lebanon’s foreign trade regime, its current accession status and the experience of other acceding countries, Lebanon’s accession to the WTO is technically feasible and is likely to occur toward mid-2003, provided Lebanon (i) implements policy and legal reforms before the end of 2002 to bring its foreign trade regime into full conformity with the WTO agreements, and (ii) actively pursues bilateral negotiations with the aim of concluding them before the end of 2002.

B. TRADE IN GOODS

The Lebanese legal regime governing trade in goods is not in full conformity with WTO requirements. Trade policy measures are set primarily by ministerial decisions and, in a few cases, by decrees or decisions of the Council of Ministers. Consequently, the foreign trade policy regime governing trade in goods lacks stability and predictability. To rectify this deficiency, Lebanon must enact a law articulating a framework for the adoption and enforcement of international trade policy. An effort in this direction is under way: a draft law has been prepared by the Ministry of Economy and Trade and is awaiting approval by the Government for subsequent submission to the Parliament. The draft law is in full conformity with relevant WTO agreements, specifically the 1994 version of GATT and the Agreement on Import Licensing.

A detailed examination of key aspects of Lebanon’s current trade policy regime governing trade in goods will be found below, together with recommendations, where applicable, for conformity with WTO agreements relating to trade in goods in the following areas:

1. Import and export duties. 2. Most-favoured-nation (Article I of GATT 1994). 3. National treatment (Article III of GATT 1994).

4. Import and export licensing. 5. Import and export prohibitions. 6. Import and export quotas. 7. Customs regime. 8. Trade-related fees. 9. Anti-dumping measures. 10. Countervailing measures. 11. Safeguard measures. 12. Industrial subsidies. 13. Agricultural subsidies. 14. Technical barriers to trade. 15. Sanitary and phytosanitary measures. 16. Environmental regulations. 17. Trade-related investment measures.

1. Import and export duties

Lebanon’s current tariff policy is liberal, as we have seen. Lebanon does not apply any export duties, a measure that is not contradictory to WTO rules. Furthermore, Lebanon does not currently maintain any tariff quota system. In order to accede to the WTO, Lebanon will have to bind12 its customs duties in the framework of lengthy and complicated bilateral negotiations on market access for goods. It has not yet submitted its initial offer for negotiating bound rates with countries interested in exporting their goods into Lebanon. Bilateral negotiations on market access may take a minimum of one year after the submission of Lebanon’s initial offer. It is difficult to predict the outcome of those negotiations at this stage. However, given the current tariff rates, it is likely that the average weighted bound rate of duties will not be significantly different from the current rate after the negotiations. Lebanon will also be expected to adhere to many, if not all, zero-for-zero sector agreements (table 7) and the information technology arrangements, which require the staged elimination of customs duties among signatories to the agreements on information technology products.

TABLE 7. ORIGINAL SIGNATORIES TO THE ZERO-FOR-ZERO SECTOR AGREEMENTS

Sector Staging (years) Participants Agricultural equipment 5 Canada, EU, Hong Kong, Iceland, Japan, Korea, Norway, Singapore, Switzerland, US Beer 8 Australia, Canada, EU, Hong Kong, Japan, US Chemical harmonization 5-15 Canada, Czech Republic, EU, Japan, Korea, Norway, Singapore, Slovak Republic, Switzerland, US Construction equipment 5 Canada, EU, Hong Kong, Japan, Korea, Norway, Singapore, Switzerland, US Distilled spirits (brown) 10 Canada, EU, Hong Kong, Iceland, Japan, Norway, US Furniture 5 Canada, EU, Hong Kong Japan, Korea, Norway, Singapore, Switzerland, US Medical equipment 5 Canada, EU, Hong Kong, Iceland, Japan, Norway, Singapore, Switzerland, US Paper 10 Canada, EU, Hong Kong, Japan, Korea, New Zealand, Singapore, US Pharmaceuticals Immediate (some exceptions) Canada, Czech Republic, EU, Iceland, Japan, New Zealand, Norway, Slovak Rep., Switzerland, US Steel 10 Canada, EU, Hong Kong, Japan, Korea, Norway, Singapore, US Toys 10 Canada, EU, Finland, Japan, Korea, US Source: WTO Web site.

12 I.e., place a ceiling on import duties that the country may not exceed after acceding to the WTO, except for a limited period of time under special circumstances, including balance-of-payments and safeguarding of domestic production in accordance with the WTO Agreement on Safeguards.

2. Most-favoured-nation (Article I of GATT 1994)13

None of Lebanon’s laws or legal acts makes provision for preference based on the origin of goods or discriminates among imported goods on the basis of their origin,14 apart from a few products (cotton and horses) originating in Syria and the Arab countries respectively and some products that are subject to sanitary/phytosanitary measures.

Most of Lebanon’s trade preferences are granted in the context of bilateral or regional trade agreements. Lebanon is a signatory to at least 30 trade and economic agreements with many countries, including Algeria, Armenia, Australia, Azerbaijan, Bulgaria, Cameroon, Chili, China, Cuba, the Czech Republic, Egypt, France, Greece, Iran, Iraq, Italy, Jordan, Kuwait, Malaysia, Morocco, Nigeria, Poland, Romania, Russia, Saudi Arabia, Senegal, Spain, Sudan, Syria, Tunisia, Turkey, Ukraine, the United Arab Emirates, Uruguay and Yemen. These agreements are concerned primarily with trade in goods. Most of them provide for MFN treatment for trade in goods, with some exceptions.

Those exceptions include, inter alia, the following:

(a) Privileges and advantages granted to neighbouring countries to facilitate trade; (b) Members of customs union or free trade areas; (c) Countries that are members of the League of Arab States; (d) Developing countries in accordance with international agreements.

Under the above-mentioned agreements, Lebanon grants preferential treatment to products originating from Jordan, Iraq, Saudi Arabia and Sudan. It is important to note that Lebanon’s agreements with these four countries do not constitute free trade. Only agreements with Egypt, Kuwait, and Syria have been officially acknowledged by Lebanon as constituting free trade, or contain provisions for eventual free trade. According to Lebanese Government sources, a free trade agreement with the United Arab Emirates is awaiting ratification by Lebanon’s Parliament, and three additional bilateral free trade agreements are being negotiated with Jordan, Bahrain and Saudi Arabia. Lebanon is a signatory to the taysir agreement (Agreement for Facilitating and Developing Trade Exchanges among Arab Countries) of 22 February 1981, which it ratified on 1 April 1985. All the Arab countries except Algeria, Djibouti and the Comoros are signatories to the taysir agreement. Lebanon committed to the 18 February 1977 Announcement regarding the Implementation Programme establishing a Greater Arab Free Trade Area (GAFTA). Mauritania, the Palestinian Authority, Somalia, the Sudan and Yemen have not yet taken any measures to implement GAFTA. GAFTA calls for a programme to establish a free trade area among the parties by 2007.

Lebanon has had a co-operation agreement with the European Union since 3 May 1977. A partnership arrangement with the European Union is being negotiated under the Euro-Mediterranean Partnership initiative, which will lead eventually (within twelve years from the date of ratification) to a free trade area with the European Union. The Euro-Mediterranean Partnership Agreement is expected to be signed before the end of 2001. Finally, Lebanon is not a member of any customs union.

In order to accede to the WTO, Lebanon needs to comply with Articles III and XXIV of the 1994 version of GATT. It must also review all its trade agreements and take any necessary measures to ensure conformity with GATT 1994. In the event of non-conformity, Lebanon will have to proceed on a case-by- case basis to (i) renegotiate various aspects of its existing agreements, (ii) extend any preferences to other

13 MFN: With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, any advantage, favour, privilege or immunity granted by any Member Government to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other Member Countries. (Slightly abbreviated version of Article I:1 of GATT) 14 A general exception is goods made in Israel or produced by companies with Israeli investment.

WTO members, or (iii) take other appropriate measures (such as ensuring that duties and restrictions are eliminated on substantially all trade with countries with which Lebanon has trade arrangements).

A preliminary evaluation of Lebanon’s trade agreements indicates that most of Lebanon’s trade agreements do not qualify as free trade agreements under the WTO’s 1994 GATT agreement.

(a) Under its current trade agreements (other than the free trade agreements), Lebanon is giving a number of WTO countries MFN treatment with exceptions. Some of those exceptions (relating to free trade areas or customs unions, for example) are acceptable under the 1994 version of GATT. Other exceptions, such as privileges or advantages to neighbouring countries and countries that are members of the League of Arab States are not justifiable under GATT 1994 rules;

(b) Close analysis of the prospective Greater Arab Free Trade Area (GAFTA) suggests that it does not qualify as a free trade area, given the number of exceptions to free trade specified under various implementation protocols;

(c) Lebanon’s agreements with Syria and Egypt and their implementation protocols, although officially declared by the Lebanese government to constitute free trade, contain many provisions exempting various categories of goods from free trade.

Furthermore, Lebanon will have to address preferences granted to Jordan, Iraq, Saudi Arabia and Sudan under bilateral trade agreements, which are not free trade.

WTO member countries will expect Lebanon, like other acceding countries, to comply fully with the requirements of Article I of the 1994 version of GATT prior to its accession. In addition to rectifying issues connected with trade agreements, Lebanon will have to review its sanitary and phytosanitary measures prohibiting the importing of certain goods (such as meat) from certain countries, to ensure that those measures are not applied in a discriminatory manner between countries where identical or similar conditions prevail.

3. National treatment (Article III of GATT 1994)15

The legal regime that governs Lebanon’s foreign trade is largely silent on the treatment of foreign products. In practice, foreign products generally enjoy national treatment, although WTO members are likely to have object to Lebanon’s current policies in a few cases. Policies that may be regarded as questionable under Article I include (i) the application of customs duties to goods manufactured in bonded plants when imported into Lebanon, (ii) the imposition of excise taxes on certain imported goods but not on the corresponding domestic goods (tobacco and tobacco products, fuel and fuel products, and cars16), (iii) shelf-life requirements on imported goods, (iv) a transport licence requirement for imported cement, (v) discretionary authority in assessing the cost of imports in order to apply profitability control, (vi) priority in the registration of domestic pharmaceutical products with the Ministry of Public Health, (vii) taxes imposed on foreign parcels and documents delivered by courier services, (viii) price controls on pharmaceutical products and (ix) certain sanitary and phytosanitary measures.17

15 WTO Member Governments recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production. (Article III:1 of GATT 1994). 16 Lebanon does not currently produce motor vehicles. 17 Under WTO rules, these measures may not be applied in a discriminatory manner between countries where identical or similar conditions prevail, including Lebanon.

WTO member countries will expect Lebanon, like other acceding countries, to comply fully with the requirements of Article III of the 1994 version of GATT prior to its accession. Existing instances of non- conformity with Article III will have to be eliminated, and in addition, Lebanon’s laws on trade in goods will have to be amended to include provisions ensuring national treatment.

4. Import and export licensing (Article XI of the GATT 1994-General Elimination of Quantitative Restrictions)

Lebanon maintains a very large number of non-tariff barriers to trade in the form of licences. With regard to import licensing, Lebanon maintains measures (licences, advance licences, permits, advance permits, approvals, post approvals) that have effects similar to those of import licensing on more than 260 tariff groups (primarily at 4- and 6-digit levels). Licences are issued by a number of ministries, including the Ministry of Economy and Trade, the Ministry of Agriculture, the Ministry of Public Health, the Ministry of Environment and the Ministry of Energy and Water. Importers do not need to apply to more than one ministry in order to obtain a specific licence. In general, the Lebanese legal regime does not define import licences or licensing requirements18 or prescribe a unified process for obtaining licences. Furthermore, the legal regime includes no provisions under which the Import Licensing Agreement could be implemented, such as time limits for issuing licences, eligibility requirements, criteria for denying licences, administrative or judicial appeal procedures or licence validity. The same type of legal regime applies to exports. However, licensing measures on exports are slightly different. There are more than 170 tariff groups (primarily at 4- and 6-digit levels) that are subject to export licensing or other measures having similar effects (licence, advance licence, passage licence, permit, advance permit, private permit, transport permit). Goods subject to import licensing include agricultural goods, animal products, veterinary drugs and vaccines, seeds and seedlings, pesticides and fertilizers, medical apparatus, explosives and military equipment, wheat and derivative products, sugar and derivative products, fuel, cement and silk. Goods subject to export licensing include raw silk, paper waste, gas cylinders, dangerous substances (such as narcotics) that are hazardous to human health but are medically useful, and explosives and military equipment.

Although most goods that are subject to import and export licensing relate to health, security, or environmental protection, some of them are likely to be questioned by members of the WTO Working Party on the grounds that they are unjustifiable under WTO rules. Lebanon will have to review its existing measures on import and export licensing and eliminate those that are not justifiable under Article XI, XX, and XXI of the 1994 version of GATT. The remaining measures should be published, with reference to the exact name and code of Lebanon’s tariff nomenclature.19 To ensure transparency, Lebanon will probably be requested to make its list of measures on import and export licensing available to the general public.

5. Import and export prohibitions (Article XI of GATT 1994)

Lebanon maintains a very large number of non-tariff barriers to trade in the form of prohibitions. It prohibits the importing of some 320 tariff groups (primarily at the 4- and 6-digit levels). The list includes dangerous substances (such as narcotics) that are hazardous to human health and are not medically useful, banned pesticides, banned veterinary vaccines and drugs, dangerous waste, chemical improvers, used medical apparatus, motor vehicles more than five years old and fireworks. The right to import other goods, such as casino equipment, cement and used inner tubes, is restricted to State trading agencies. Some goods are unconditionally prohibited; other goods are prohibited if imported from specific countries, by parcel post, by road transport, or under other conditions. Some of these prohibitions are based on health considerations,

18 Except for certain medical and pharmaceutical products, veterinary drugs, pesticides, fertilizers, weapons, explosives, arms, ammunition and plastic. 19 Much of Lebanon’s legislation governing trade measures lacks transparency in the sense that goods are not referred to appropriately, with the result that a broad category of goods becomes subject to control when the intended set of goods is much narrower.

others on safety or environmental considerations. In addition, there are a number of legislative measures that regulate the importing of drugs and stipulate that certain drugs may be imported only if they may lawfully be sold and used in the country of origin, and, in certain cases, if they are sold in developed countries. Finally, the importing of used medical equipment, including medical equipment containing radioactive materials, for commercial purposes is generally prohibited, except in very specific cases where it is deemed to be in the public interest. However, physicians may import such equipment for their own use.

As regards exports, Lebanon prohibits the export of 76 tariff groups (primarily at the 4- and 6-digit levels). The list includes animal and animal products, dangerous substances (such as narcotics) that are hazardous to human health and are not medically useful, and tobacco products.

Some of the goods that are subject to import and export prohibitions are likely to be questioned by members of the WTO Working Party on the grounds that they are unjustifiable under WTO rules. Lebanon will have to review its existing measures on import and export prohibitions and eliminate those that are not justifiable under Article XI, XX and XXI of the 1994 version of GATT. The remaining measures should be published, with reference to the exact name and code of Lebanon’s tariff nomenclature. To ensure transparency, Lebanon will probably be requested to make an updated list of measures on import and export prohibitions available to the general public.

6. Import and export quotas (Article XI of GATT 1994)

Lebanon does not currently have import quotas on any items except seed potatoes. Nor does it have export quotas on any items except forage concentrates (HS 2308 and HS 2309). In general, quotas are prohibited under WTO rules; they may be imposed only as a safeguard measure, in accordance with the WTO Agreement on Safeguards and Article XIX of GATT 1994, and in accordance with Articles XII and XVIII of GATT 1994, the Understanding on Restrictions for Balance-of-Payments Purposes. The current quota restrictions on imports of seed potatoes will be difficult to justify under WTO rules, and Lebanon will undoubtedly be required to eliminate them before its accession.

7. Customs

Lebanon has been gradually reforming its customs regime since 1995. The Harmonized System (HS 96) now constitutes the basis (up to the sixth digit) of Lebanon’s tariff nomenclature. The Single Administrative Form has also been adopted as Lebanon’s customs declaration, and Lebanon has implemented and expanded the basic ASYCUDA customs automation system initially developed by UNCTAD.

Late in 2000, Lebanon implemented a major legal reform of its customs regime by enacting a Decree- Law on Customs, replacing the 1954 Law on Customs. The Decree-Law on Customs of 2000, which came into force in April 2001, lays down the legal infrastructure for a modern customs service in Lebanon. The Decree-Law is based primarily on best international practices, and conforms fully to the WTO Agreement on Customs Valuation and the WTO Agreement on Rules of Origin. However, the Decree-Law still needs some fine tuning in a number of areas, including customs fees and border protection of intellectual property rights, and major changes relating to access to a prompt and independent judiciary.

Access to arbitration and the judiciary, in fact, is the key problem with the new law. The Decree-Law on Customs does not fully comply with the WTO’s requirements for access to an independent judiciary, nor does it provide importers with a fair mechanism for challenging decisions of the Customs authority. In the first place, the Arbitration Committee established by the law is not fully neutral and independent from the Customs authority. In the second place, the right of appeal to the courts is not guaranteed. For both these reasons, the new law is likely to prove ineffectual, and consequently importers cannot feel confident that their rights will be adequately protected under the Lebanese customs regime.

The new Decree-Law on Customs is an initial step in the long process of reforming Lebanon’s customs regime. In an effort to ensure that the Decree-Law is adequately implemented, the Higher Customs Council has issued a number of decisions setting forth procedural aspects. Although these decisions are superficially comprehensive, they are not sufficiently detailed to ensure transparency in certain areas. For example, the Council’s decisions implementing the customs valuation aspects of the Decree-Law do not conform closely to the WTO’s Customs Valuation Interpretative Notes. Furthermore, regulations on the treatment of interest charges on the customs value of imported goods and the valuation of carrier media bearing software for data processing equipment have not yet been adopted. Lebanon must also adopt implementing regulations designed to provide border protection for intellectual property rights.

Lebanon’s legislation on rules of origin is closely patterned after the WTO Agreement on Rules of Origin. Upon accession, Lebanon, like all other WTO members, will be required to adhere to the harmonized rules of origin, once these have been adopted by the WTO/WCO. Under the harmonized rules, the origin of goods is expected to be the country of the last substantial transformation (tariff-shift criterion). In all probability, the rules will finalized before 2005. Lebanon would then be expected to adopt legislation to implement them.

8. Trade-related fees

In Lebanon, there are many fees that apply to trade-related transactions, including the following:

(a) A stamp (LBP 1,000) charged on every application submitted by any person to any public administration and judiciary body in Lebanon;

(b) Fees for the issue of permits (including advance permits);

(c) An annual fee of LBP 500,000 is charged for the registration of any commercial representation or exclusive agency contract at the Ministry of Economy and Trade;

(d) Fees charged by Chambers of Commerce. These include fees for the certification of signatures, dates or guarantees, the certification of copies of documents, changes to documents, inspector transport fees, certificates of origin and the certification of bills and prices;

(e) Fees charged by two of the three authorized testing labouratories, namely the Industrial Research Institute Labouratories and the Agricultural Research Institute of Lebanon (the fees cover the cost of materials used for testing). The Ministry of Public Health Labouratory does not charge any fees;

(f) Fees charged by the Ministry of Public Health for the services of sanitary engineers who inspect imported bottled water and imported house insecticides, pesticides and rodent poisons;

(g) Fees charged by Customs and other customs clearance fees, including the customs stamp on import, export, transit and storage fees.

Lebanon currently charges no fees for import/export licensing, approvals or visas. All the fees referred to above are fixed, except fees for permits (ad valorem) and some of the fees charged by Chambers of Commerce (ad valorem with a floor and ceiling).

In order to comply with Article VIII of GATT 1994, Lebanon will have to:

(a) Eliminate all fees that are not set for specific services;

(b) Eliminate ad valorem fees and replace them with fixed fees, or amend them by adding a floor and a ceiling;

(c) Conduct a detailed financial and cost analysis in order to determine whether or not applied fees reflect the approximate cost of services. If not, the fees must be changed to bring them into line with Article VIII of GATT 1994.

WTO members will expect all charges on imports, other than customs duties and fees for services rendered, to be bound to zero. Consequently, all fees that are not charged for the purpose of services should be identified and eliminated, or else integrated into the regular customs duties.

9. Anti-dumping measures

The Law on Fraud and Dumping, Law No. 31 of 5 August 1967, is Lebanon’s only legal instrument that deals with dumping. The law is less than one page long20 and does not conform to the WTO’s Agreement on Anti-Dumping. The law lacks a number of WTO-required elements, including appropriate definition of dumping, determination of normal value, determination of export price, determination of dumping margin, duty assessment, determination of material injury, demonstration of causal link, investigation rules, and aspects connected with collection of duties.

WTO members will expect Lebanon to have in place, prior to its accession, anti-dumping legislation that reflects all provisions of the Agreement on Anti-Dumping. Otherwise, Lebanon will be requested to make a commitment not to apply any such measures pending its enactment of legislation that is in full conformity with the WTO Agreement on Anti-Dumping.

Early in 2000, Lebanon initiated the process of developing a draft Law on Anti-Dumping. A first draft has been finalized and submitted to the Council of Ministers. The draft law is based on the WTO model law on anti-dumping, and appears to incorporate all aspects of the WTO Agreement on Anti-Dumping.

10. Countervailing measures

Lebanon has no laws or legal acts on countervailing measures. Accordingly, it should draft and enact legislation to implement the Agreement on Subsidies and Countervailing Measures. The legislation should cover, inter alia, investigation procedures, determination of material injury, establishing causal links, record- keeping, determination of level of subsidies and collection of countervailing duties.

WTO members will expect Lebanon to have in place, prior to its accession, legislation on countervailing measures that reflects the provisions of the Agreement on Subsidies and Countervailing Measures. Otherwise, Lebanon will be requested to make a commitment not to apply any such measures pending its enactment of legislation that is in full conformity with the WTO Agreement on Subsidies and Countervailing Measures.

11. Safeguard measures

Lebanon has no laws or legal acts dealing with safeguard measures. Accordingly, it should draft and enact legislation to implement the Agreement on Safeguards. The legislation should cover, inter alia, investigation procedures, determination of serious injury, establishing causal links, record-keeping and the imposition and administration of safeguards measures.

WTO members will expect Lebanon to have in place, prior to its accession, legislation on safeguard measures that reflects the provisions of the Agreement on Safeguards. Otherwise, Lebanon will be requested to make a commitment not to apply any such measures pending its enactment of legislation that is in full conformity with the WTO Agreement on Safeguards.

20 The model anti-dumping law recommended by the WTO Secretariat is some 40 pages in length.

12. Industrial subsidies

Lebanon grants some industrial subsidies, including the following:

(a) Tax exemptions to encourage rural development, including (i) a ten-year tax holiday for new enterprises in order to encourage industrial investments with the aim of developing rural areas and manufacturing new products not currently made in Lebanon and (ii) a six-year tax holiday for the first factory opening in a village or relocating from the coastal region to a village in one of a number of designated rural areas;

(b) Interest rate subsidies for loans provided by banks, financial institutions and leasing companies to industrial establishments, craft establishments and information technology manufacturing industries;

(c) Ten-year income tax exemptions for new industrial establishments producing new products in certain areas in South Lebanon, Nabatiyeh and the Bekaa region. Factories relocating from the coast to these areas are entitled to six years of exemption from income tax;

(d) Advantageous loans provided through banks from external financing sources such as grants, concessionary loans and various forms of credit provided by donor countries and international and regional organizations;

(e) Subsidies provided to Électricité du Liban;

(f) Loan guarantees provided by Kafalat21 to small and medium-sized enterprises to finance projects in the industrial and craft sectors.

None of the existing industrial subsidies in Lebanon falls under the definition of prohibited subsidies22 (Article 3 of the Safeguard and Countervailing Measures Agreement). WTO members, however, are likely to question the specificity of certain industrial subsidies and their potential adverse impact on the producers of other members.

13. Agricultural subsidies

The main objection to policies that support domestic prices or subsidize production in some other way is that they encourage overproduction. This squeezes out imports or leads to export subsidies and low-priced dumping on world markets. The Agriculture Agreement distinguishes between support programmes that stimulate production directly and those that are deemed to have no direct effects. The Agreement sets forth new rules and commitments for domestic support for agriculture (box 2).

21 Kafalat s.a.l. was established in July 1999 as a Lebanese financial institution with a capital of LBP 20 billion. It is owned by the National Institute for Guarantee of Deposits, which holds a majority share, and banks operating in Lebanon. It offers guarantees for loans granted by banks operating in Lebanon to small and medium-sized enterprises in the agriculture, industry, tourism and high technology sectors. 22 Subsidies contingent upon export performance and import substitution (the use of domestic goods instead of imported goods).

Box 2. Domestic support—some you can, some you can’t

Domestic policies that have a direct effect on production and trade have to be cut back. WTO members have calculated how much support of this kind they were providing for the agricultural sector per year in the base years of 1986-88. Developed countries have agreed to reduce these figures by 20 per cent over six years starting in 1995. Developing countries are making 13 per cent cuts over 10 years. Least developed countries do not need to make any cuts.

Measures with minimal impact on trade can be used freely—they are in a “green box” (green as in traffic lights). They include government services such as research, disease control, infrastructure and food security. They also include payments made directly to farmers that do not stimulate production, such as certain forms of direct income support, assistance to help farmers restructure agriculture, and direct payments under environmental and regional assistance programmes.

Also permitted are certain direct payments to farmers where the farmers are required to limit production (sometimes called “blue box” measures), certain government assistance programmes to encourage agricultural and rural development in developing countries, and other support on a small scale when compared with the total value of the product or products supported (50 per cent or less in the case of developed countries and 10 per cent or less for developing countries).

______Source: WTO Web site.

Lebanon is in the process of preparing an ACC/4 document (Information on Domestic Support and Export Subsidies in Agriculture), which will provide details of all the country’s agricultural subsidies. As yet there is no comprehensive final survey of those subsidies. However, preliminary evaluation and discussions with various sources within the Government suggest that:

(a) Most agricultural subsidies fall in the “green box” category and are permitted under the WTO Agreement on Agriculture;

(b) There are no “blue box” subsidies;

Lebanon provides a number of other agricultural subsidies as well, including the following:

(a) Advantageous interest rates on loans made available by banks, financial institutions and leasing companies to agricultural establishments;

(b) Loan guarantees provided by Kafalat to small and medium-sized enterprises (fewer than 20 employees) to finance projects in the agriculture sector.

Lebanon should complete its ACC/4 as soon as possible in order to identify and tabulate all export and domestic support subsidies in the agriculture sector, using statistics from the past three years. Its Aggregate Measure Support (AMS)24 and Total25 AMS must also be computed. The ACC/4 will be used as a basis for the plurilateral negotiations which are usually held with interested countries (the Cairns group, the EU and the US) with the aim of negotiating ceilings for export subsidies and “amber” subsidies, and eliminating (or

23 Lebanon recently discontinued similar subsidies for sugar. 24 AMS means the annual level of support, expressed in monetary terms, provided for an agricultural product in favour of the producers of the basic agricultural product or non-product-specific support provided in favour of agricultural producers in general, other than support provided under programmes that qualify as exempt from reduction under Annex 2 of the WTO Agreement on Agriculture. 25 Total AMS means the sum of all domestic support provided in favour of agricultural producers, calculated as the sum of all aggregate measurements of support for basic agricultural products, all non-product-specific aggregate measurements of support and all equivalent measurements of support for agricultural products.

reducing, perhaps gradually) subsidies that exceed the agreed ceilings. Preliminary evaluation suggests that the level of domestic support subsidies in Lebanon is low, well below any ceiling likely to be agreed upon as result of negotiations. Consequently, no reductions in domestic subsidies are anticipated.

14. Technical barriers to trade

In Lebanon, the issue of voluntary standards and mandatory standards (“technical regulations”) is governed primarily by the 1962 Decree-Law on Lebanese Standards, which provides that technical regulations in Lebanon shall be issued to protect safety, health, the environment and national interests and to protect consumers against deceptive practices. Under this Decree-Law, the agency known as Libnor was established as the sole national authority in charge of issuing, publishing and amending Lebanese standards. The standard preparation process begins with the appointment of specialized technical committees on which all concerned public and private sector parties and the academic milieu are represented. Libnor relies largely on international standards in the relevant fields, such as the International Organization for Standardization (ISO), the International Electrotechnical Commission (IEC) and the Codex Alimentarius. Conformity assessment procedures are also in line with international standards and are incorporated in Libnor’s standards or technical regulations.

Technical regulations are promulgated in the form of decrees issued by the Council of Ministers, either in response to a request from Libnor to have a standard converted into technical regulations or in response to a request from a Ministry for the enactment of specific technical regulations. Ministers may also issue ministerial decisions that are tantamount to technical regulations. The Ministry of Telecommunications, the Ministry of Energy and Water, the Ministry of Industry, the Ministry of Public Health, the Ministry of Environment, the Ministry of Agriculture, the Ministry of Economy and Trade and the Ministry of Transport and Public Works issue technical regulations dealing with goods. Furthermore, specific government procurement contracts (at the national and sub-national levels) may, in tender or contract documents, (i) require specific international standards and technical regulations or (ii) require their own technical specifications as prepared by consulting engineers. The labeling of containers and packages, with indication of the size, weight or quantity of the goods contained therein, is regulated by the Ministry of Economy and Trade.

Libnor has issued 188 national standards, 22 of which have been made mandatory by decrees of the Council of Ministers. There are no official figures on the numbers and types of technical regulations issued by the various ministries. Imported products may not clear customs unless they conform to the appropriate technical regulations and standards; visas are issued by the relevant ministries to certify such conformity. Border testing is required for all food products.

Certificates of quality or conformity with standards and purchase requirements are issued by the Industrial Research Institute. Certificates of conformity or quality issued by international companies such as SGS and Veritas are also honoured in Lebanon. In addition, the Ministry of Agriculture issues certificates of conformity for exported agricultural products, the Ministry of Economy and Trade issues certificates of conformity and export certificates, and the Ministry of Public Health issues export health certificates.

Lastly, Lebanon maintains shelf-life requirements on many imported goods. The importing of food products with a remaining shelf-life of two months or less is prohibited. The importing of certain goods (milk, canned food, cheeses, chocolate, pastry, baking powders, butter and mixtures containing eggs) is prohibited if one year has elapsed since the date of production. The importing of other goods (fat-free milk, liquid milk sweetened with natural sugar and sealed containers of cheese) is prohibited if two years have elapsed since the date of production. The Government is currently in the process of amending the current regime to establish half-shelf-life requirements on imported food products.

Lebanon’s current policy, legal and institutional framework governing the issue and administration of standards and technical regulations is not fully in line with the TBT Agreement. The following is a summary of some of the most important features of the current regime that do not conform to WTO requirements:

(a) The legal regime does not clearly define some key terms, as required by Annex 1 of the TBT Agreement, including standards, technical regulations, conformity assessment procedures, definition of various bodies (international body/system, regional body/system, central government body, local government body, and non-government body);

(b) The legal regime does not specify the criteria by which technical regulations may exceed international norms and standards, nor does it specify the term of validity of technical regulations;

(c) The legal regime does not require the establishment of a notification or enquiry point for standards and technical regulations, as required by the TBT Agreement;

(d) Annex C (Code of Good Practice for the Preparation, Adoption, and Application of Standards) of the TBT Agreement is not implemented under the current legal regime;

(e) The Decree-Law does not adequately assert national treatment with respect to the application of standards and technical regulations;

(f) The legal regime lacks provisions on equivalency as required by with the TBT Agreement;

(g) The legal regime does not reference the use of international guides for conformity assessment procedures and certifications, such as ISO/IEC guidelines.

In order to comply with the WTO’s TBT requirements and meet the expectations of working party members, Lebanon, prior to its accession, must:

(a) Draft and enact a new law on standardization to replace the existing Decree-law, taking the TBT Agreement fully into account. It is important to note that Lebanon, with the assistance of USAID, has already initiated that process. A draft law on standardization that takes all the above-mentioned issues into account has been prepared by the Board of Libnor;

(b) Survey all technical regulations and establish programmes to review them in order to ensure conformity with the WTO. Technical regulations must be eliminated if the circumstances or objectives giving rise to their adoption no longer exist, or if those objectives can be addressed in a less restrictive manner. Technical regulations affording higher levels of protection must be brought into line with international standards, except where the latter are deemed to be ineffective or inappropriate as means of attaining the legitimate objectives in view, because of such factors as climatic or geographical factors or fundamental technological problems;

(c) Eliminate shelf-life requirements and establish other mechanisms to ensure food safety based on WTO agreements (which specify less restrictive practices, such as the “best if used by” wording found in the Codex Alimentarius);

(d) Introduce sound risk assessment and scientific sampling methods. Control, testing, and inspection should be in line with best international practices.

15. Sanitary and Phytosanitary Measures

Sanitary measures are usually promulgated in the form of decrees issued by the Council of Ministers or decisions of the Ministry of Public Health. Lebanon generally follows international guidelines such as the Codex Alimentarius in adopting sanitary measures. Inspectors (physicians or chemists) accredited by Customs or the Ministry of Public Health have the right to inspect all food and drug products at ports of entry, and in case of doubt, samples may be taken and sent to labouratories to be tested for conformity. Goods may not clear Customs without a visa issued by the Ministry of Public Health certifying conformity.

Phytosanitary measures, veterinary measures, and certain sanitary measures (concerning livestock and livestock products) are usually promulgated in the form of decrees issued by the Council of Ministers or decisions of the Ministry of Agriculture. Lebanon follows international guidelines such as those contained in the Codex Alimentarius, the International Plant Protection Convention (IPPC) and the International Office of Epizootics (OIE) in preparing sanitary and phytosanitary measures. At border crossing points, Ministry of Agriculture inspectors (i) subject all imported food products of plant origin to macroscopic morphological inspection and (ii) examine all imported, exported or transited livestock or products of animal origin. Inspectors issue certificates based on (i) certificates provided by importers, (ii) an inspector’s physical examination, or (iii) testing results at the border.

The legal regime that governs Lebanon’s sanitary, phytosanitary and veterinary measures is not fully in compliance with WTO requirements. Specifically, that regime does not address the following key requirements under the WTO Sanitary and Phyto-Sanitary (SPS) Agreement:

(a) Definition, rules and criteria for adopting SPS measures; (b) Types of measures; (c) Harmonization and use of international standards; (d) Equivalence; (e) Risk assessment and determination of appropriate level of protection; (f) Transparency: publication of measures, enquiry and notification points; (g) Adaptation to regional conditions; (h) Control, inspection, and approval in accordance with Annex C of the SPS Agreement.

In order to comply with the WTO’s SPS requirements and meet the expectations of working party members, Lebanon, prior to its accession, must:

(a) Enact a new law on sanitary measures, a new law on phytosanitary measures, and a new law on veterinary measures taking the WTO’s SPS Agreement fully into account;

(b) Review all its sanitary, phytosanitary, and veterinary measures, and establish programmes to revise them to bring them into conformity with WTO requirements. Measures must be eliminated if the circumstances or objectives giving rise to their adoption no longer exist, or if those objectives can be addressed in a less restrictive manner. Furthermore, Lebanon should aim at harmonizing its measures with international standards, regulations, and recommendations:

(ii) Animal health measures (veterinary measures) should be brought into line with international standards, guidelines or recommendations such as those developed by the International Office of Epizootics. Higher levels of protection may be maintained on the basis of sound scientific evidence and specific economic factors;

(iii) Phytosanitary measures must be based on international standards, guidelines or recommendations such as those developed by relevant international and regional organizations operating within the framework of the International Plant Protection Convention. Higher levels of protection may be maintained on the basis of sound scientific evidence and specific economic factors;

(d) Adopt control, inspection and approval procedures in accordance with Annex C of the SPS Agreement;

(e) Revise its current control infrastructure to eliminate jurisdictional redundancies and overlap between the Ministry of Public Health, the Ministry of Agriculture and the Ministry of Economy and Trade.

16. Environmental Regulations

The exporting of goods from Lebanon is not currently subject to any environmental restrictions. As regards imported goods, Lebanon has controls on the importing of waste. The Lebanese legal regime prohibits the import of:

(a) Nuclear waste and residues; (b) Waste and residues contaminated by nuclear radiation; (c) Waste and residues containing toxic chemical compounds; and (d) Waste and residues that constitute a public health hazard.

The Ministry of Environment maintains a full list of goods that are prohibited and goods for which import licenses and visas are required. Lebanon’s environmental controls on goods appear to be largely in accordance with the Basel Convention. In general, the restrictions applied are those stipulated in international conventions ratified by the Lebanese Republic.

17. Trade-related investment measures

Lebanon has no trade-related investment measures (TRIMs) that are inconsistent with the WTO’s TRIMS Agreement (box 3). However, the imposition of such measures should be explicitly prohibited by legislation for the sake of transparency, stability and predictability.

Box 3. The WTO Agreement on Trade Related Investment Measures

The Agreement on Trade Related Investment Measures (TRIMs) covers measures which are imposed on investments and are related to trade in goods. It prohibits measures related to investment which are in conflict with Articles III.4 and XI.1 of GATT 1994. The Agreement on TRIMs prescribes procedures for monitoring WTO obligations as follows:

¾ The obligation of national treatment, i.e., the obligation of non-discrimination between an imported product and a like domestic product. Article III.4 of GATT 1994, in particular, prescribes that the treatment accorded to an imported product must not be less favourable than that accorded to a like domestic product in respect of laws and regulations affecting sale, purchase, transportation, distribution, or use. For example, the use of a domestic product may not have preference over the use of a like imported product for a particular purpose.

¾ The prohibition of non-tariff restrictions on the import or export of goods. In particular, no prohibitions or restrictions other than those of the nature of tariffs may be applied by any Member on the export or import of goods or on the sale for export of goods through quotas, licenses, or other measures.

Measures identified in the TRIMs Agreement as violating Article III.4 of GATT 1994 include:

(a) Measures specifying that particular products of domestic origin must be purchased or used by an enterprise;

(b) Measures specifying that particular volume or value of some products of domestic origin must be purchased or used by an enterprise;

(c) Measures specifying that an enterprise must purchase or use domestic products at least up to a particular proportion of the volume or value of the local production of the enterprise;

Box 3 (continued)

(d) Measures restricting the purchase or use of an imported product by an enterprise to an amount related to the export of the enterprise’s local production.

Measures identified in the TRIMs Agreement as being inconsistent with Article XI.1 of GATT 1994 include:

(a) Measures imposing a general restriction on the import of inputs by an enterprise or restricting the import of inputs to an amount related to the export of its local production;

(b) Measures restricting the foreign exchange for the import of inputs by an enterprise to an amount related to the foreign exchange inflow attributable to the enterprise;

(c) Measures restricting the export by an enterprise by specifying the products so restricted, or the volume or value of products so restricted, or the proportion of its local production so restricted.

A developing country Member is temporarily excused from for these obligations in so far as its legislation is covered by the flexibility provided under Article XVIIIB of GATT 1994 as clarified and elabourated by the provisions of the Understanding on the Balance of Payment. ______Source: M. Helal, Trade and Investment: Future Treatment of Investment in WTO, unpublished paper presented at the Arab Planning Institute Workshop on Foreign Direct Investment and the Arab World, Kuwait, March 2000.

C. TRADE IN INTELLECTUAL PROPERTY RIGHTS

As a prospective member of the WTO, Lebanon, prior to accession, must harmonize its intellectual property laws with the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS Agreement”), as well as portions of earlier treaties which the TRIPS Agreement incorporates by reference. These treaties include the Paris Convention, the Berne Convention and the Washington Treaty, as well as the International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (1961) (“Rome Convention”) and the Geneva Convention. The TRIPS Agreement, which came into force on January 1, 1995, establishes protection standards in seven substantive areas: copyright and related rights, trademarks, geographical indications, industrial designs, patents, layout designs of integrated circuits, and undisclosed information, and it requires specific enforcement measures and dispute resolution procedures.

In addition to being a member of the World Intellectual Property Organization (WIPO), Lebanon is a member of the following conventions:

(a) The Convention Establishing WIPO; (b) The Paris Convention for the Protection of Industrial Property (London Act of 1934); (c) The Berne Convention for the Protection of Literary and Artistic Works (Rome Revision of 1928); (d) The Madrid Agreement For the Repression of False or Deceptive Indications of Source on Goods (London Text); (e) The Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks; (f) The Geneva Convention for the Protection of Literary and Artistic Works (1952); (g) The Rome Convention for the Protection of Performers, Producers of Phonograms, and Broadcasting Organizations (1961).

The following Lebanese authorities have relevant roles in the development and enforcement of intellectual property rights in Lebanon:

(a) The Ministry of Economy and Trade is responsible for overseeing the review and revision of laws, and is involved in the development of new intellectual property laws;

(b) The Intellectual Property Protection Office, under the Ministry of Economy and Trade, is the agency empowered by law to protect intellectual property in matters relating to the rights of authors and industrial property;

Until recent years, the main provisions of Lebanon’s intellectual property protection regime were contained in the 1924 Laws and Systems of Commercial and Industrial Property (“1924 Law”), which covered patents, industrial designs, trademarks, copyright and unfair competition. The 1924 Law is rudimentary and based on early twentieth century legal principles. In 1999, a Copyright Law was enacted, superseding the copyright provisions of the 1924 Law. In addition, a Patent Law was enacted in 2000, superseding the patent-related provisions of the 1924 Law. Both laws have brought Lebanon’s legal regime governing copyright and patents aspect into closer conformity with the WTO’s TRIPS agreement. Nevertheless, both laws fall short of the requirements of the TRIPS agreement in certain respects.

1. Copyright Law of 1999

This law does not adequately define the subject matter of protection or the criteria of eligibility for protection (points of attachment). Nor does it fully protect all rights of copyright, performers’ rights and broadcasters’ rights. The law’s provisions on the lending and unauthorized copying of computer software violate the TRIPS Agreement. Protection periods for cinematographic works are not clearly defined. Compilations and collective works as well as authors’ rights in their original works of art and original manuscripts are not protected as required under the Berne Convention. The law fails to define fair use and other exceptions applicable to neighbouring rights (i.e., the rights of performers, phonogram producers and broadcasting organizations). Lastly, the law does not meet all the enforcement obligations required under the TRIPS Agreement.

2. Patent Law of 2000 covering patents, trade secrets, variety protection and layout designs

The 2000 Patent Law does not require the appropriate level of disclosure at the patent application stage. Inventors’ rights and exclusive rights in patented processes are inadequate under the Paris Convention and the TRIPS Agreement. The Law’s compulsory licensing provisions fail to limit assignability of such licences to the extent required under the TRIPS Agreement. The infringement and enforcement sections should include many important measures required under that agreement.

The Patent Law of 2000 covers other areas besides patents, including trade secrets, variety protection and layout designs. The provisions covering these areas are inadequate and misplaced in the patent law:

(a) The provisions on the protection of integrated circuits do not define basic terms and establish exclusive rights in compliance with the TRIPS Agreement. The Washington Treaty (the substantive provisions of which are incorporated in the TRIPS Agreement) generally permits the protection of layout designs through patent regimes, but the Patent Law does not provide the requisite level of protection for this kind of intellectual property. It is unclear whether the law’s provisions on enforcement and compulsory licensing apply to layout designs;

(b) The Patent Law of 2000 provides only superficial coverage of plant varieties. It does not reflect all the provisions of UPOV 91, to which WTO members expect all acceding countries to adhere. The law does not address many other areas, including registration requirements, the denomination of new varieties and the testing of varieties in the context of examination;

(c) Provisions dealing with trade secrets are incomplete, do not adequately define trade secrets and do not prohibit wrongful acquisition. The enforcement measures contemplated in the law do not appear to be adequate to cover matters relating to trade secrets.

3. Industrial Property Law of 1924

The 1924 Industrial Property Law continues to cover three aspects of intellectual property rights: trademarks, industrial designs and unfair competition.

(a) The law does not protect mark holders and consumers to the full extent required under the TRIPS Agreement and the Paris Convention. Well-known trademarks or mark holders’ rights are not protected as required by the Paris Convention and the TRIPS Agreement. Enforcement mechanisms do not meet TRIPS Agreement standards. Finally, there are many matters that are not covered in detail by the trademark provisions, such as collective marks, licensing and registration amendments;

(b) The provisions of the 1924 Law dealing with industrial designs do not fully comply with the Paris Convention and the TRIPS Agreement, omit many required concepts, do not establish all basic rights stipulated under TRIPS, contain burdensome registration procedures. Temporary protection and maintenance provisions are also inadequate. Areas such as amendment, abandonment and extensions are absent from the 1924 Law. Lastly, the law’s enforcement provisions fall short of TRIPS requirements;

(c) The unfair competition standards set out in the 1924 Industrial Property Law require updating in the light of contemporary practice.

Last but not least, the legal regime lacks adequate provisions for the protection of geographical indications and the border protection of intellectual property rights.

In order to conform fully to the WTO’s TRIPS Agreement, Lebanon must repeal the 1924 Law and enact other legislation to replace it, as follows:

(a) Amendments to the Copyrights Law of 1999; (b) Amendments to the Patents Law of 2000; (c) New law on trademarks and geographical indications;26 (d) New law on industrial designs; (e) New law on trade secrets; (f) New law on integrated circuits topography; (g) New law on plant variety protection; (h) New law on unfair competition.

In addition to these harmonization measures, Lebanon should ensure that intellectual property laws are properly and effectively enforced. The current enforcement of intellectual property laws in Lebanon is not adequate, especially in the areas of copyright protection (software and motion pictures) and patent protection (pharmaceuticals). The members of the WTO working party will question the efficacy of enforcement and will take the matter into account as Lebanon is negotiating its accession to the WTO.

26 Lebanon has initiated the process of drafting a new law covering these two areas.

D. TRADE IN SERVICES

The service sector in Lebanon (including trade and construction) accounts for approximately 70 per cent of the country’s GDP and employs some 76 per cent of its labour force, according to recent statistics. Trade, construction, tourism, telecommunications and financial services are the most prominent service sectors in Lebanon.

Like all WTO members, Lebanon will have to observe GATS unconditional obligations for all services and GATS conditional obligations for services in its Schedule of Specific Commitments on Services. In addition, depending on the outcome of negotiations with regard to market access limitations and national treatment, Lebanon may have to amend its existing horizontal27 and sector-specific laws connected with services, or enact new ones. Lastly, acceding countries are expected to have transparent laws and legal acts with effective enforcement mechanisms.

The main focus of bilateral negotiations on services will be on national treatment and market access under four different modes of supply: cross-border supply, consumption abroad, commercial presence and presence of natural persons. Measures that limit market access horizontally or to any specific service sector will also be subject to negotiations. Among the limitations that will be subject to negotiations are number of service suppliers, total value of service transactions or assets, total number of service operations, total quantity of service output, total number of natural persons in a specific service sector, restrictions on/requirements of the specific type of legal entity and limitations on foreign capital participation-value or share. Lebanon currently maintains some limitations in all the above categories (except the total number of natural persons that may be employed in a particular sector) for a number of service sectors. Any measures that present an indirect trade barrier restricting market access will also be subject to negotiations.

To initiate bilateral negotiations, Lebanon will have to submit an ACC/5 (current measures related to market access, national treatment28 and MFN treatment29) and an initial market access offer on services. Lebanon is currently preparing its ACC/5. Work on preparation of the initial offer on services has not yet begun. Accordingly, it is difficult to predict the outcome of bilateral negotiations at this stage. Judging from the experience of recently acceding countries, financial services, transport, telecommunications, audio-visual media and tourism are likely to be the main focus of negotiations. Lebanon may be requested to eliminate limitations and barriers to market entry and ensure MFN treatment30 for all sectors and national treatment for most sectors.

In order to implement the commitments made in its Schedule of Specific Commitments on Services, Lebanon may have to amend its existing laws relating to services, or enact new ones. These may include horizontal laws in the area of services (such as laws dealing with taxation, enterprises, registration of legal entities, land ownership, contracts, labour, bankruptcy, competition, foreign investment and foreign exchange) and sector-specific laws (such as laws dealing with transport, tourism, banking, audio-visual media, insurance, telecommunications and professional services, including pharmacy, medicine, law, accounting, auditing and engineering). Like all other acceding countries, Lebanon will be expected to eliminate any market restrictions in the areas of banking and insurance, and to comply with the Reference

27 Laws that affect more than one service sector. 28 In the sectors inscribed in its Schedule and subject to any conditions and specifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of service treatment no less favourable than that it accords to its own like services and service suppliers (Article XVII:1 of GATS). 29 With respect to any measure covered by the General Agreement on Trade in Services, each Member shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country (Article II:1 of GATS). 30 Exceptions to MFN are authorized only until 2005 and if they are provided in the context of an economic integration agreement in accordance with the conditions specified in the GATS agreement.

Paper on Telecommunications, which requires transparent and open interconnection and the appointment of independent regulators. The elimination of telecommunications monopolies (including basic telecommunications and mobile duopoly) is another area to which acceding countries commit in their Service Schedules.

The following discussion covers the reforms that Lebanon must implement in order to comply with its conditional and unconditional obligations under the GATS agreement, and the reforms required to bring the foreign investment environment in its service sector into line with best international practices and WTO expectations.

1. Unconditional obligations

Unconditional obligations under GATS include conformity with the most-favoured-nation (MFN) principle, the publication of service-related laws, notification on service, the establishment of an inquiry point on GATS, the establishment of a contact point, the protection of confidential information, mutual recognition of qualification requirements31 and the institution of rules governing monopolies and exclusive service suppliers.

(a) MFN:32 Lebanon, through its legislation and bilateral agreements, grants a wide range of preferences to service suppliers of many countries which it does not grant to those of other countries. Most notable among these are the preferences enjoyed by Arab nationals in the tourism sector, the manufacture and sale of optical instruments and eyeglasses, and qualification requirements for professional service providers (pharmacists, engineers, topographers and denturists). Lebanon also gives preference to Syrian citizens with respect to work permits, freedom of movement and residency, as well as specific preferences and market access in a number of services (including shipping, tourist buses and fishing). Nationals of a number of countries, including Brazil, the Czech Republic, France, Germany, Greece, Iraq, Italy, Morocco, the Slovak Republic, Switzerland, the United Kingdom and the USA, are exempt from work permit fees under bilateral agreements. In addition, nationals from a few countries (Belgium, France, Italy and the United Kingdom) are entitled to Lebanese social security benefits. The reciprocity treatment provided under Lebanese legislation may raise concerns during negotiations in view of the fact that service suppliers who are nationals of certain countries may enjoy more favourable treatment than their counterparts who are nationals of WTO countries. Lastly, in its investment protection and promotion agreements with approximately 20 countries, Lebanon provides MFN and/or national treatment and guarantees (relating to profit repatriation, expropriation and access to dispute settlement bodies) which are not provided under its national legislation. Lebanon should compile a list of preferences in the service sector, and should be prepared to implement all legal measures needed to ensure compliance with the GATS agreement in the light of bilateral negotiations and the results of ongoing and future rounds of multilateral trade negotiations;

(b) Transparency: Under Lebanon’s legal regime, laws and decrees must be published within 15 days after having been signed by the President. However, there are no analogous requirements for the publication of decisions, orders, instructions, circulars and memorandums issued by ministers or decrees and decisions issued by the Council of Ministers. Nor does the legal regime provide adequate protection for confidential information, especially trade secrets. Lastly, compliance with GATS requirements will mean that Lebanon must provide notification of its enquiry point on GATS33 and establish notification procedures on service-related matters;

31 No specific commitment needs to be made other than the articulation of a general policy on entering into bilateral or plurilateral agreements for mutual recognition of qualification requirements and applying, in so far as possible, internationally recognized standards in this area. 32 Deviation from MFN for services may be permitted up to 2005. 33 Lebanon’s Investment Development Authority might serve in that capacity.

(c) Rules governing monopolies and exclusive service suppliers: Lebanon’s legislation on competition policy is inadequate. Some WTO member countries are likely to take the view that the legal regime is lacking in guarantees of fair competition and thus indirectly keeps foreign service suppliers out of the market. A sound competition policy environment calls for (i) the enactment of laws on competition and the adoption of implementing regulations addressing the issue of abuse of dominant position, including excessive pricing (or restriction of output), predatory pricing (or expansion of output), vertical constraints,34 horizontal constraints,35 demonopolization and mergers, and (ii) the establishment of a independent36 competition agency to administer and enforce the law.37 The law on competition should apply equally to State bodies and prohibit them from adopting anti-competitive measures. It should also take into account Lebanon’s commitments under the Euro-Mediterranean Partnership agreement;

(d) Regulations of natural monopolies: Lebanon has no specific legislation on the regulation of natural monopolies. Rates are set by sectoral ministries following ad hoc internal procedures and subject to sociopolitical influence. The lack of adequate legislation governing natural monopolies (especially utilities) may confront investors with major barriers. The uncertainty and unpredictability associated with electricity and telecommunications rates and the like raise the perceived risk level and discourage investment. Some investors may be interested in investing in natural monopolies; all, however, will be users (or consumers) of the services provided by natural monopolies. Transparent legislation on natural monopolies establishing sound tariff-setting methods and an independent regulatory body are essential. A sound regime should ensure (i) open, equitable and non-discriminatory access to natural monopoly services and (ii) tariff rates that are reasonable and applied equally to all consumers of natural monopoly services and balance the interests of consumers and investors.

2. Conditional obligations

Conditional obligations under GATS include the establishment of reasonable, impartial and objective administration of domestic regulations, appeal procedures and tribunals for reviewing administrative decisions, and a time frame for licenses and similar measures. GATS permits regulations designed to achieve legitimate objectives and not to act as unnecessary barriers to trade in services. Lastly, no restrictions on international transfers or payments (including both current account and capital account) may be instituted except in cases involving BOP difficulties.

As part of Lebanon’s preparation of its Memorandum on the Foreign Trade Regime, it has conducted a detailed survey of all existing service regulations (licenses, permits, approvals, certificates, qualification requirements and technical standards) with a bearing on services. The next step should be an analysis aimed at identifying and eliminating regulations that do not conform to GATS. Lebanon should revise its administration infrastructure governing trade in services to ensure that regulations are administered in a reasonable, impartial and objective manner.

Lebanon’s foreign exchange and payment system is not restrictive and is in line with GATS requirements.

34 A vertical restraint is any practice that inhibits or constrains the actions of buyer and seller (such as exclusive dealing, refusal to deal, resale price maintenance, territorial restraint, price discrimination, premium offers, predatory pricing, expansion of output, tying, full line forcing and abuse of negotiating position). 35 A horizontal restraint is any unilateral or collective action that weakens or restrains competition among firms in the same market (such as price fixing, conscious parallelism, restraint of output, exclusionary practices, market division, predation and restraint on entry). 36 Not subject to political influence, not affiliated to any Ministry or the Council of Ministers, and accountable to the Parliament. 37 Competition policy is equally important in the context of trade in goods and intellectual property rights. Practices such as import and distribution cartels, obstruction of parallel imports, exclusive licensing for import and export, vertical market restraint in distributing and reselling products all should be subject to competition policy.

3. Foreign investment reform

Lebanon recently (August 2001) enacted a law on the promotion of investment. The new law is aimed at encouraging local and foreign investment in a number of economic sectors (agriculture, industry, tourism, information technology, communications and information) by providing various incentives. The level of incentives varies, depending on the geographic location of the project involved; for that purpose, Lebanon is divided into three development areas. The existing foreign investment regime, however, may be perceived by WTO member nations as an indirect barrier to market access. An adequate foreign investment regime should provide foreign investors with unequivocal guarantees with respect to expropriation,38 repatriation of profits,39 national treatment, non-application of trade-related investment measures (such as performance requirements) and access to international arbitration and dispute settlement forums.40 To establish an adequate investment environment, Lebanon should extend the above-mentioned legal guarantees in the same way as it has done in the case of its bilateral agreements on investment promotion and protection.

E. SUMMARY AND CONCLUSION

The status of Lebanon’s foreign trade regime allows Lebanon to move rapidly into accession. The remaining key reform measures that would bring the country’s foreign trade regime into full conformity with the WTO are summarized in Table 8. In addition, a number of WTO agreements require the establishment of institutions for the purpose of implementing certain aspects of WTO agreements. Table 9 below indicates the status of Lebanon’s conformity with key WTO institutional requirements. As will be seen, most of the required institutions are not yet in place in Lebanon. Lastly, Lebanon should establish an independent agency to administer and enforce the provisions of its laws on competition and natural monopolies.

TABLE 8. REMAINING KEY REFORM MEASURES REQUIRED TO BRING LEBANON’S FOREIGN TRADE REGIME INTO FULL CONFORMITY WITH THE WTO AND ALLOW ACCESSION

Key reform measures WTO rationale A. Trade in goods A.1. Enact a law on international trade in goods Compliance with GATT 1994 and the Agreement on Import Licensing A.2. Eliminate all measures inconsistent with Article I of GATT Compliance with GATT 1994 1994 (Most-Favoured-Nation) A.3. Eliminate all measures inconsistent with Article III of GATT Compliance with GATT 1994 1994 (National Treatment) A.4. Repeal all legislation requiring import/export licensing in Compliance with GATT 1994 violation of Article XI A.5. Repeal all legislation requiring import/export prohibition in Compliance with GATT 1994 violation of Article XI A.6. Repeal all legislation requiring import/export quotas in violation Compliance with GATT 1994 of Article XI A.7. Amend the 2000 Decree-Law on Customs Compliance with GATT 1994, Customs Valuation and Rules of Origin

38 For example, Article 37 of the Law on Ownership (29 May 1991) does not provide adequate compensation; Article 2 of the same law does not clearly specify the purpose of expropriation. 39 Although in practice Lebanon allows profit repatriation, there are no laws providing foreign investors with any such guarantee. 40 For example, disputes connected with commercial representation contracts may only be resolved in Lebanese courts, notwithstanding any clause to the contrary in the contract itself.

TABLE 8 (continued)

Key reform measures WTO rationale A.8. Adopt implementing regulations on customs valuation Compliance with Customs Valuation A.9. Adopt implementing regulations on border enforcement of Compliance with TRIPS intellectual property rights A.10. Assess all trade-related fees and amend to reflect the Compliance with GATT 1994 approximate cost of services A.11. Enact law on anti-dumping measures and adopt implementing Compliance with Agreement on Anti- regulations Dumping A.12. Enact law on countervailing measures and adopt implementing Compliance with Agreement on Subsidies regulations and Countervailing Duties A.13. Enact law on safeguard measures and adopt implementing Compliance with Agreement on regulations Safeguards A.14. Enact law on standards and metrology Compliance with Technical Barriers to Trade A.15. Enact law on sanitary measures Compliance with Sanitary/Phytosanitary Measures A.16. Enact law on phytosanitary measures Compliance with Sanitary/Phytosanitary Measures A.17. Enact law on veterinary measures Compliance with Sanitary/Phytosanitary Measures A.18. Review all technical regulations and eliminate any that are Compliance with Technical Barriers to unwarranted Trade A.19. Review all sanitary measures, phytosanitary measures and Compliance with Sanitary/Phytosanitary veterinary measures and eliminate any that are unwarranted Measures A.20. Enact a law on agriculture Compliance with agreement on agriculture B. Trade in intellectual property rights B.1. Amend the 1999 Law on Copyright Compliance with TRIPS B.2. Amend the 2000 Law on Patents Compliance with TRIPS B.3. Enact law on trademarks and geographical indications Compliance with TRIPS B.4. Enact law on industrial designs Compliance with TRIPS B.5. Enact law on variety protection Compliance with TRIPS B.6. Enact law on commercial secrets Compliance with TRIPS B.7. Enact law on integrated circuits Compliance with TRIPS B.8. Enact law on unfair competition Compliance with TRIPS B.9. Repeal the 1924 Law on Industrial Property Compliance with TRIPS B.10. Enact implementing regulations and establish an enforcement Compliance with TRIPS infrastructure for all above laws C. Trade in services C.1. Amend law on foreign investment Compliance with general principles of GATS C.2. Enact a law on competition policy Compliance with general principles of GATS C.3. Enact a law regulating natural monopolies Compliance with general principles of GATS C.4. Ensure gradual compliance with MFN Compliance with GATS C.5. Review all regulations governing services and revise them to Compliance with GATS conform to conditional obligations under GATS C.6. Legislative measures to comply with commitments made during Compliance with Schedule of Specific bilateral negotiations on services Commitments on Services D. Institutional requirements See table 9 below.

TABLE 9. STATUS OF CONFORMITY WITH WTO INSTITUTIONAL REQUIREMENTS

Agreement Institutional requirement Lebanon 1. GATT 1994 Judicial, arbitral, or administrative tribunals or 2000 Decree-Law on Customs procedures for the prompt review and correction of (partial conformity) – Amendments administrative action relating to customs matters are required 2. TBT a. Central government standardizing body a. LIBNOR b. Inquiry point for providing information related to b. Not in place standards c. Not in place c. Notification point 3. SPS a. Inquiry point for providing information related to Not in place sanitary standards (could be the same as above) b. Notification point 4. AD a. Investigating authority Not in place b. Judicial, arbitral, or administrative tribunals or procedures for prompt review of administrative actions relating to final determinations and review of determinations. 5. CVD a. Investigating authority Not in place b. Judicial, arbitral, or administrative tribunals or procedures for prompt review of administrative actions relating to final determinations and review of determinations 6. SG a. Competent authorities for investigations Not in place 7. GATS a. Inquiry point for information on laws and legal acts a. Not in place connected with trade in services b. Not in place b. Notification point c. Not in place c. Contact point d. General administrative laws d. Judicial, arbitral, or administrative tribunals or procedures for the prompt review of and appropriate remedies for administrative decisions affecting trade in services 8. TRIPS a. Civil judicial procedures concerning the enforcement a. and b. Present in some of existing of any intellectual property right covered by the IP laws, but improvements agreement needed b. Criminal procedures and penalties to be applied in cases of willful trademark counterfeiting or copyright piracy

III. STRATEGIES FOR NEGOTIATIONS: SELECTED ISSUES

A. WTO ACCESSION NEGOTIATIONS ON TARIFFS41

1. Tariff negotiations as part of the WTO accession process

As an acceding country, Lebanon will be confronted with three negotiation tracks:

(a) Multilateral negotiations in the Working Party. These negotiation focus mainly on the acceding country’s economic system and trade regime and are based on its Memorandum on the Foreign Trade Regime (Memorandum), national trade-related legislation and a subsequent exercise with written questions and answers;

(b) Bilateral negotiations focusing on concessions on tariffs and commitments on agricultural subsidies42 (called “negotiations on market access in goods”);

(c) Bilateral negotiations focusing on commitments on trade in services (called “negotiations on market access in services”).

In negotiations on market access in goods, an acceding country is required to submit tariff offers in the form of a concession schedule (for details of the format of the schedule, see Section III below). The timing of the submission of the first offer is variable, but as a rule the acceding country waits until its trade regime has become more or less clear to WTO members following discussions based on its answers to questions concerning the Memorandum. These bilateral negotiations are usually conducted on a demand and offer basis. In order to expedite the accession process, it is advisable for a country to submit an offer first and wait for specific demands referring to particular products of the negotiating countries. After examining those demands and its own national interests, the acceding country may submit a revised offer. The negotiating countries may then submit a second round of demands. This process will continue until both sides agree.

Bilateral negotiations are conducted on a confidential basis between an acceding country and a WTO member. Consequently, offers to WTO members during negotiations may differ, depending on the interests of the negotiating members with respect to different products. Once agreement has been reached on all products, the concessions that have been agreed on are consolidated into a single Concession Schedule and submitted to the Working Party for multilateral review. Eventually, the acceding country must apply the agreed tariff concessions to all WTO members on an MFN (most-favoured-nation) basis.

In the negotiations, it is very important to know which products are of most concern to negotiating countries. The WTO members are likely to begin by demanding deep tariff cuts on a very broad range of products. An acceding country is required to evaluate those demands in terms of its interests and seek mutually acceptable agreement through formal and informal negotiations and consultations with individual WTO members. In the case of Lebanon, given its very low tariff rates (80 per cent of its tariff lines are already rated at zero or 5 per cent), demands from WTO members will focus on the remaining 20 per cent of its tariff lines. Most of these are agricultural produce, agro-food products, clothing and other locally produced goods. If Lebanon wishes to maintain high tariffs on these products, it must prepare justifications. In the case of agricultural produce, Lebanon, in contrast to most developed and developing countries, does not have many subsidies, direct or indirect, and consequently high tariff rates, including a specific duty, are the only way to protect the agriculture sector. The agro-food sector, for its part, is an infant industry which has attracted a good deal of investment recently and needs to be protected, at least temporarily. In the case

41 This section is drawn from Victor Ognivtsev and Tokio Yamaoka, WTO Accession Negotiations on Tariffs, UNCTAD, UNCTAD Web site. 42 In some cases, discussion and negotiations on commitments on agricultural subsidies are conducted on a plurilateral basis.

of clothing and other domestically produced goods, higher bound rates can be justified on the grounds of the substantial employment that those industries sustain, and on the grounds that the industries in question were neglected during the war and must now be upgraded before they can hope to sell their products in world markets.

In addition, recent accession negotiations have been characterized by a growing trend for WTO members to press acceding countries to participate in the so-called sectoral tariff initiatives, namely, the zero-for-zero initiatives, the Information Technology Agreement (ITA) and the chemical harmonization initiative.43 There is no legal requirement to accept these, but some major WTO members have been insisting that acceding countries should make these additional concessions in order to ensure the commercial viability of their terms of accession. The Kyrgyz Republic, Latvia, Estonia and Georgia are examples of recently acceded countries that have agreed to participate in most zero-for-zero initiatives, the ITA and the chemical harmonization initiative. For Lebanon, zero-for-zero initiatives will be difficult in the case of such products as beer, furniture, paper and the like where domestic production requires temporary protection. In the case of most other products, such as construction, agricultural and medical equipment and information technology, Lebanon’s tariff rates are already at zero. Zero-for-zero initiatives in those products will not be beneficial for Lebanon, since it does not produce them.

To defend its interests, Lebanon should be aware of the relevant articles of GATT 1994. Article XXXVI:8 in Part VI (Trade and Development) of the 1994 version of the General Agreement on Tariffs and Trade stipulates that “the developed contracting parties do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of less-developed contracting parties,” which is applicable to accession negotiations as well as tariff negotiations.44 According to Ad Article XXXVI of the Notes and Supplementary Provisions, it is understood that the phrase “do not expect reciprocity” means that the less-developed contracting parties should not be expected, in the course of trade negotiations, to make contributions which are inconsistent with their individual development, financial and trade needs, taking into consideration past trade developments. In the Uruguay Round, this provision was recognized and consequently reflected in the tariff concessions of developing countries, which are less stringent than those of developed countries in terms of tariff rates, binding coverage and implementation period. In the case of agricultural products, there is no obligation for LDC members to make commitments to tariff reductions under Article 15 of the Agreement on Agriculture.45 Greater flexibility may be expected in the case of industrial goods as well.

2. The preparation of tariff offers: basic elements

(a) Tariff policy

First and foremost, national interests should be clearly identified before entering negotiations. The Government that took office in November 2000 has clearly outlined its priorities, as follows: promotion of industrial production in areas where Lebanon has comparative advantage by reducing tariffs on inputs and

43 In the Uruguay Round, tariff elimination initiatives (known as zero for zero) and a tariff harmonization initiative for chemical products were agreed among the Quad countries (the US, the EU, Japan and Canada). Products subject to mutual tariff elimination are beer, distilled spirits, pulp, paper, furniture, pharmaceuticals, steel, construction equipment, medical equipment and agricultural equipment. The Information Technology Agreement (ITA) involves the elimination of tariffs on a wide range of information technology products by the year 2000, as agreed in the Ministerial Declaration on Trade in Information Technology Products, which was adopted at the First WTO Ministerial Conference held in Singapore in December 1996. Further negotiations are being conducted in the Committee on the Expansion of Trade in Information Technology Products to examine the expansion of product coverage and the number of participants in the ITA (called ITA II). At present, the number of signatories to the ITA is 31, including one acceding country (Chinese Taipei) (WTO, 22 April 1999, G/IT/Rev.9). 44 Ad Article XXXVI of Notes and Supplementary Provisions. In this quotation, “less-developed contracting parties” may be read “developing country Members.” 45 All agricultural products must be bound.

gradually reducing tariffs on output; protection of agriculture; maintenance of tariffs in the case of products that are important for revenue generation; removal of duties on computers and accessories in order to promote the spread of information technology.

There are several elements that should be considered in the formulation of offers:

Protection. The need to protect some domestic sectors and develop infant industries and strategic sectors should be examined. It should be emphasized that under WTO/GATT, tariffs are the only fully legitimate instrument that may be used to protect domestic producers. The motor vehicle sector, for example, is a sensitive industry requiring protection in the view of many developing countries, and consequently they have maintained fairly high tariffs, which some have undertaken to reduce by degrees. Egypt has bound its tariff rate on passenger vehicles (1600-2000cc) at 135 per cent, Indonesia at 40 per cent. Malaysia has not bound its rates on such vehicles at all. For Lebanon, a promising infant industry is the agro-food sector. In 1999, that sector accounted for 40 per cent of industrial investment and 25 per cent of industrial value added, and employed 23 per cent of the industrial workforce (Ministry of Industry, Industrial Strategy Report, 2000). It has also been the largest contributor to export growth in recent years, a fact which confirms its potential for competitiveness in international markets. However, the agro-food sector may need initial protection in view of the fact that it is still in its infancy and has attracted investment only recently.

Influence on domestic economy. The influence of tariff reductions on the domestic macro-economy, including GDP, the balance of payments and the labour market, should be taken into account. Tariff reductions may boost the economy in the long run through a more efficient allocation of resources, but in the short term, sectors that are subjected to tariff cuts may be confronted with severe competition from foreign- made products, possibly resulting in factory closings and unemployment. In the case of Lebanon, this is especially true of the clothing sector, which accounts for about 10 per cent of total industrial employment. Lebanon’s labour costs are high compared to those of countries like China or India, which have strong comparative advantage in the clothing industry. Reducing protection in that sector will almost certainly lead to its being overwhelmed by a flood of imported products, with resultant major social implications due to layoffs of workers. At the same time, the clothing sector might be competitive in a niche market, but this would require some adjustment. Accordingly, temporary protection of that sector may be justifiable on these grounds.

Reduction in government revenue. Customs duties are usually an important component of total government tax revenue, particularly in developing countries, whose tax systems may not afford efficient alternatives. In fiscal 1996/97, for example, customs and excise revenue represented approximately 17 per cent of South Africa’s total tax revenue, and 32 per cent of India’s.

For Lebanon, customs duties are by far the Government’s most important source of revenue, accounting for 47 per cent of total revenue in 1999 (Ministry of Finance). Although the Lebanese government has already announced a plan to introduce a value-added tax in order gradually to reduce its reliance on international trade taxes, it is likely to be some time before the new system is solidly in place. Reliance on tariff revenue will thus inevitably continue for some years. Moreover, given the huge fiscal deficit that the government is facing—one of the highest in the world, at nearly 30 per cent of GDP in 1997—the government cannot afford to take the risk of reducing its revenue at this time. Resistance to cuts in tariffs that generate large revenues is thus eminently justifiable on the grounds of fiscal and macroeconomic stability. The most important products in terms of revenue generation from tariffs and excise taxes are cars, petroleum products and ceramic products.

It thus appears that the most direct effect of tariff reduction would be a fall in governmental revenue. If bound tariff rates were set below the present applied tariff rates,46 the reduction in governmental revenue would be substantial. Thailand, for example, introduced tariff reforms under which the average applied tariff rate was reduced from approximately 30 per cent in 1994 to 17 per cent in 1997; as a result, Thailand’s import duties declined from 19 per cent of government revenues in fiscal 1994 to 13 per cent in fiscal 1997. This is an issue that should be carefully handled in countries that rely on customs duties for a substantial part of their revenue.

Article XXVIII bis 3 (b) of GATT 1994 recognizes that developing countries may need to maintain tariffs for revenue purposes. On the other hand, it is important to note that in the course of economic reform, many countries have moved away from heavy reliance on customs duties to other forms of revenue such as income tax, turnover tax and value-added tax (VAT). Such a shift may require full restructuring of a country’s tax system and tax administration.

(b) Tariff bindings

If an acceding country has offered a bound tariff rate, it can withdraw the offer or raise the rate above the bound rate only through the modification procedure provided in the Article XXVIII of GATT (see box 4), which requires the country in question to provide affected WTO members with compensation.

Box 4. The modification procedure prescribed in Article XXVIII of GATT

Article XXVIII requires that a country wishing to modify or withdraw the tariff concession of a product must (a) negotiate and agree with a country that has an Initial Negotiating Right (referred to as I.N.R. country) and (a country determined by the contracting parties to have) a principal supplying interest (a country that holds the largest import share of the product; referred to as P country) and (b) consult with countries (determined by the contracting parties) to have a substantial interest (basically, countries that hold the second- or third-largest import share of the product and account for more than 10 per cent of imports of the products concerned; referred to as S country). In addition, the member country that has the highest ratio of exports of a specific product in its total exports can also be regarded as P country according to the Understanding on the interpretation of Article XXVIII, which was negotiated in the Uruguay Round.

The negotiation and consultation would be conducted to seek compensation equivalent to the value of the modification or withdrawal so that the general level of concessions is not less than that provided before. If an agreement could not be reached with the I.N.R. country and P country, the applying country is free to modify or withdraw the concession. In turn, I.N.R. country, P country and S country may withdraw concessions substantially equivalent to the value of the modification or withdrawal made by the applying country, provided that thirty days’ prior notification thereon is made within six months after the action by the applying country. ______Source: UNCTAD Web site.

In the case of agricultural products, the Agreement on Agriculture requires acceding countries to bind tariffs on all covered products, with the exception provided for in Annex 5 of the Agreement.47 In the case of other products (i.e., industrial products), however, an acceding country has the option not to offer binding of all tariff lines. In practice, the WTO’s developing country members have kept many products unbound: only 61 per cent (trade weighted percentage) of their industrial products are bound after implementation of all their concessions. Even developed countries such as the United States, Japan, Canada and Australia48 have

46 Applied rates are the legal tariff rates in force in a country. They are sometimes referred to as autonomous tariffs, in the sense that a rate can be set unilaterally by the country in question, whereas the change of a WTO/GATT rate is subject to negotiation with members. 47 Annex 5 of the Agreement on Agriculture allows a WTO member to retain certain non-tariff measures (NTMs) which meet the criteria provided for therein. For example, Japan and Korea have retained import quotas on rice. 48 Examples of unbound items include crude petroleum in the case of the US, fish products, paper products and petroleum in the case of Japan, and petroleum and minerals in the case of Canada.

not bound all their tariff lines. Negotiating countries have traditionally demanded that an acceding country should bind all its products, and in fact, recently acceding countries have been obliged to do exactly that. None the less, Lebanon could make an attempt to leave a number of important products unbound, at least for tactical purposes at an initial negotiating stage.

Average tariff rate. There are no guidelines in the WTO Agreements for the determination of the average tariff rates (simple or trade-weighted) of concessions for individual acceding countries. However, the average levels of other WTO members whose economic development and social conditions are similar may be used for reference. Tariff rates will depend on tariff negotiations between an acceding country and WTO members, and the latter are likely to make substantial demands. For example, Mongolia and Kyrgyz, whose economic development is comparable to those of LDCs, bound their industrial products at about 20 per cent and 6.7 per cent respectively on a simple average basis, whereas overall tariff rates on industrial products in most developing countries are in the 20 to 40 per cent range.

Individual tariff rates. In offering individual tariff rates, an acceding country has three options, as follows:

Option 1. To bind a tariff rate at the same level as the applied rate; Option 2. To bind a tariff rate at a lower level than the applied rate; Option 3. To bind a tariff rate at a higher level than the applied rate (ceiling binding).

Negotiating countries are likely to press an acceding country to choose Options 1 and 2. However, it should be noted that once tariffs are bound, WTO members cannot increase them without negotiation, and consequently it is important to leave some margin for the sake of future flexibility in tariff policy. In this context, where an acceding country would like to adopt ceiling bindings under Option 3, it must be prepared to explain why the rates should be bound at those levels. Many a developing country is applying some low- tariff scheme recommended by international financial institutions; in such cases, to bind at the current level may not reflect the country’s actual protection level. In point of fact, parity between bound rate and applied rate is the rule among the WTO’s developing country members as well as its developed country members. However, some countries are arguing, in the context of preparation for the forthcoming round of trade talks, that such parity may discourage market access predictability and should therefore be eliminated.

Lebanon has very low tariff rates on most products compared to other developing countries. Moreover, Lebanon unilaterally introduced drastic tariff cuts in November 2000, slashing its average rate by half to approximately 6 per cent. This effort to achieve forced-draft liberalization, which was prompted mainly by the country’s special circumstances—a deep recession calling for shock therapy—will probably not be penalized by WTO members. Consequently, Lebanon is likely to be allowed to select Option 3 for sensitive products, i.e. those so designated for the protection of domestic production or for revenue purposes. In order to defend other sensitive products, it might be advisable to select Option 2 in the case of certain products (such as products that are not produced and are unlikely to be produced in Lebanon, but are of special interest to its trading partners).

WTO members are likely to demand significant cuts to Lebanon’s peak tariffs; however, it should be noted that even the Quad countries have many tariff peaks that are more than 100 per cent.49 Most of these peaks are the result of the tariffication of agricultural products in the Uruguay Round.

In any case, it is essential to note that under GATT/WTO rules, tariffs are the only fully legitimate means of protecting domestic producers. Consequently, it is entirely appropriate for acceding countries to leave a certain margin of flexibility in their offers, in order to allow for potential future increases in tariff

49 For details, see UNCTAD, The Post-Uruguay Round Tariff Environment for Developing Country Exports: Tariff Peaks and Tariff Escalation, TD/B/COM.1/14/Rev.1, 14 September 1999.

rates. However, the offered tariff rates will have to be justified, regardless of which of the three options is selected.

(d) Other considerations

Other possibilities that should be examined are staging and non ad valorem duties such as specific duty, combined duty, tariff quota and the like for specific purposes.

Staging. Staging is an important measure which enables an acceding country to reduce its tariffs step by step (“step approach”) over a period of several years. This provides the acceding country with a transition period for tariff reduction, and thus enables domestic producers to prepare for tariff cuts. Lebanon might adopt staging for some sensitive products, although the outcome will depend on negotiations. Bulgaria, for example, adopted staging for most of the products in its concession schedule over periods of 5, 10 or 15 years. Panama negotiated a maximum of 14 years for implementation, and Jordan a maximum of 10 years. In some cases, however, acceding countries have not been allowed to adopt staging and have had to eliminate their tariffs or reduce them to the agreed level on the date of their accession. Examples include Ecuador for industrial products, Mongolia for all products and Kyrgyz for agricultural products.

Use of specific duty.50 A specific duty imposed on a unit quantity basis or a combined/mixed duty consisting of both an ad valorem duty and a specific duty might be appropriate for some products. The specific duty has a stronger preventive effect on low-priced imports, because the lower the price of a product, the higher the ad valorem equivalent. However, the protective effect of the duty becomes weaker in the event of inflation in the import price. Since it is difficult to estimate the protective effect of a specific duty, an acceding country may be required to provide information on the ad valorem equivalents of the duties and related statistics. Among acceded countries, Bulgaria submitted a concession schedule containing many specific duties or combined duties on agricultural products. The schedules of the Kyrgyz Republic and Jordan also include specific duties or compound duties on some products. While there is no limitation on the use of forms of duties other than ad valorem, in the context of preparations for the forthcoming round of trade talks, some countries are arguing that the use of specific duties should be avoided, since they are not transparent.

Some countries have applied seasonal tariffs to protect their domestic production of fruits and other agricultural products. Jordan, for example, uses seasonal duties for fruits such as bananas, grapes and apples. It is important to note that developed countries also use specific duties and seasonal tariffs on agricultural products. This is particularly true of the European Union, which has a very complex system of specific and seasonal duties. Accordingly, Lebanon would be in a strong position to justify the maintenance of its specific duties on sensitive agricultural products and other sensitive products such as low-quality clothing. Another reason why Lebanon would be well placed to justify the maintenance of specific duties of this kind is that, in contrast to most developed and developing countries, Lebanon does not subsidize its agricultural sector, relying exclusively on high tariffs and specific duties to protect it.

Tariff Rate Quota (TRQ). TRQ is a measure that uses two levels of tariff rates, a primary duty on a certain amount (the quota) and a secondary duty that may be higher than the primary duty for amounts in excess of the quota. The quota is calculated by subtracting domestic production from domestic demand. TRQ, although difficult to administer, might be a means of reconciling the interests of consumers who want the cheap imported product and producers who need protection. In the Uruguay Round, TRQ was adopted to ensure minimum/current access once non-tariff measures had been converted to their tariff equivalents (tariffication) in accordance with Article 4 of the Agreement on Agriculture. Quotas, then, were treated as a means of enforcing minimum/current access requirements.

50 Specific duty is expressed as a monetary amount per quantitative unit of a product (such as $15 per litre), whereas ad valorem duty is expressed as a percentage of the value of a product (such as 5%).

However, no acceded country has been allowed to use “tariffication” to convert its non-tariff measures under Article 4 of the Agreement, as some WTO members have insisted that tariffication is a right available only to the original members. Moreover, issues relating to the administration of TRQ, such as quota allocation and the under-fill problem, are being discussed in the Committee on Agreement on Agriculture and will be issues in the forthcoming round of trade negotiations.

Lebanon does not have a tariff rate quota, nor should it have one, given the difficulty of administering the system and its potential for corruption and abuse.

Other duties and charges. “Other duties and charges” are defined as those other than ordinary customs duties, and are imposed only on imports (Article II: 2(b) of GATT).51 In practice, these are additional customs duties. The European Community, for example, formerly had variable levies that were equivalent to the difference between the reference price in the EC region and the international price in addition to customs duties.52 Japan formerly levied additional charges other than customs duties on sugar products.53 Many of the WTO’s developing country members also have “other duties and charges” in their concession schedules.

According to paragraph 1 of the Understanding on the Interpretation of Article II:1(b), those duties and charges should be described in the schedule, and paragraph 4 prohibits the raising of “other duties and charges” in excess of those imposed “on the date of the Agreement”.54 This aims to secure the binding of tariffs. If an acceding country has other duties and charges, it must bind them in the schedule in order to retain them. An acceding country may also incorporate such duties and charges into tariffs and bind them together. In the schedules of all countries that have acceded to date, other duties and charges are bound at zero, which means that the countries in question are committed not to introduce other duties and charges in the future.

3. Format of a concession schedule (Section IA and II)

In its negotiations on market access in goods, an acceding country must submit a four-part concession schedule: Part I (most-favoured-nation tariffs), Part II (preferential tariff), Part III (non-tariff concessions) and Part IV (agricultural products: commitments limiting subsidization). Only Part I concerns tariff negotiations.

The “schedule of concessions and commitments on goods” is structured as follows:

Part I (most-favoured-nation tariffs) Section I (agricultural products) A (tariffs) B (tariff quotas)

Section II (other products)

Part II (preferential tariff)

Part III (non-tariff concessions)

Part IV (agricultural products: commitments limiting subsidization) Section I (domestic support: total AMS commitments)

51 They are different from internal tax, anti-dumping duty or countervailing duty and fees or other charges commensurate with the cost of services rendered, all of which a member country may impose at any time in accordance with the relevant articles. 52 The variable levies were tariffied pursuant to the Agreement on Agriculture during the Uruguay Round. 53 Those charges were incorporated into Japan’s tariff concessions in the course of the Uruguay Round. 54 At each negotiation of a new concession, the applicable date for the tariff item in question becomes the date of the incorporation of the new concession into the appropriate schedule. For acceding countries, this date is deemed to be the date of its accession.

Section II (export subsidies: budgetary outlay and quantity reduction commitments) Section III (limiting the scope of export subsidies)

Section I of Part 1 contains agricultural products.55 Section IA is for tariffs, and Section I B is for tariff rate quotas. Section IB was originally created to describe concessions on tariff quotas to secure minimum/current access of agricultural products whose non-tariff measures have been converted to tariffs. Section II of Part 1 contains products other than agricultural products.

The specific format of the schedule for accession may be identical to the one agreed in the Uruguay Round. However, the essence of it is the eight items in Box 5 below. The “SSG” column is for agricultural products only, and consequently need not be included for Section II. The columns are to some extent variable.56

Box 5. Explanations of column items of a concession schedule

(1) Tariff item number: Products should be arranged in the same order as the HS (Harmonized System) tariff nomenclature because most members of the WTO have adopted the nomenclature (HS tariff nomenclature is annexed to the International Convention on the Harmonized Commodity Description and Coding System, which was implemented from 1988 under the auspices of the CCC, called WCO: World Customs Organization; the HS nomenclature contains 4-digit level headings and 6-digit level sub-headings).

(2) Description of products: This column should be completed in accordance with the description of the HS nomenclature. It is possible to make detailed tariff lines beyond the 6 digits of the HS.

(3) Bound rate of duty: Bound rates to be implemented on accession should be described in this column.

(4) Final bound rate of duty: Bound rates after the implementation of staging should be described in this column.

(5) Implementation period: When an acceding country offers staging, the separate column may show the period of implementation (e.g. 1999-2004) or the final year of implementation (e.g. 2004).

(6) SSG: Special Safeguards (SSG) prescribed in Article 5 of the Agreement on Agriculture are measures to ease the sudden surge in imported products where non-tariff measures have been converted to tariff measures in accordance with Article IV:2 of the Agreement on Agriculture. A member country cannot have recourse to this measure unless the SSG mark is described in the concession schedule per tariff line. Among acceded countries, Ecuador, Bulgaria and Panama have reserved the right to recourse to the SSG measures for specific products.

(7) I.N.R.s on the concession: The name of the country with which a concession was first negotiated (that country is said to have the Initial Negotiating Right) should be entered in this column. In accession negotiations, it will be usually the country that has the principal supplying interest (e.g. the country that has the largest import share) in respect of the product. However, countries that are not the principal supplier of the product concerned may also seek “initial negotiating rights” which entitle them to compensation as well, even though they may be minor suppliers of the product affected by the tariff increase. As a result, in recent cases of accession, the INR column includes several countries. This implies that when the country would like to raise the tariff in future, it must negotiate with those countries under the Article XXVIII procedure (see Box 4 above).

(8) Other duties and charges: Specific descriptions of “other duties and charges” imposed on tariff items should be written either in the column per tariff line (see paragraph 1 of the Understanding on the Interpretation of Article II:1(b)) or in the introductory notes to the schedule, including the types of measures and the rates applied. However, if the tariff rate for a product is not bound, there is no need to describe “other duties and charges” for the product in the schedule. If nothing is entered in the column, it means that “other duties and charges” are bound at zero. ______Source: WTO Web site.

55 Annex I of the Agreement on Agriculture makes provision for the coverage of agricultural products. 56 For example, in some cases, implementation periods are indicated in the footnotes, not in the column. Panama has a column for SSG, while Ecuador and Bulgaria do not. Also, in some cases, columns such as “present concession established in”, “concession first incorporated in the schedule” and “earlier INRs” have been included, but those columns are not subject to negotiations on accession.

B. WTO ACCESSION NEGOTIATIONS ON AGRICULTURE57

In negotiations on accession, agriculture is an area that tends to take up a large part of bilateral negotiations with WTO members. This is because of the complex nature of the commitments made under the Agreement on Agriculture (AG), which involve market access commitments on tariffs and tariff rate quotas and commitments to the reduction of agricultural subsidies. Moreover, the rules used during the Uruguay Round on agricultural commitments are not automatically applicable to acceding countries, nor is there any agreed parameter in accession negotiations as to the level of commitments that is “commercially viable” and “appropriate to the level of economic development”. Consequently, commitments on agriculture in past accession cases have varied from one country to another, and have contained “WTO-plus” or “WTO- minus” elements (see annex 1), largely as a result of negotiating pressures brought to bear by powerful WTO members.

Nevertheless, the level of the Uruguay Round commitments and the record of implementation of those commitments may be used by acceding countries as a basis for identifying what might reasonably be deemed to be an “appropriate” level of commitments. Another factor to which acceding countries should pay close attention is developments in the second round of WTO negotiations on agriculture, which was formally launched at the meeting of the Committee on Agriculture on 23 March 2000. An understanding of the negotiating agenda will help an acceding country to map out a degree of commitments that is consistent with the probable outcome of those negotiations. Acceding countries are allowed to participate in the negotiations, although they will not be involved in any decision-making processes.

1. Starting-point of negotiations

Under the AG, an acceding country must negotiate its concessions in three areas:

(a) Market access (tariff binding, market access opportunities and so on) for agricultural products; (b) Level of trade-distorting domestic support (or so-called “amber box” domestic support); (c) Level of export subsidies.

Agricultural market access is negotiated along with market access concessions on other products during bilateral negotiations on goods. Commitments on domestic support and export subsidies are negotiated bilaterally on the basis of information provided by the acceding country in its Memorandum on the Foreign Trade Regime and in a supporting table prepared in accordance with a technical note entitled “Information to be Provided on Domestic Support and Export Subsidies in Agriculture”, which is commonly known as the WT/ACC/4, from its document code.

In most accession negotiations in the past, the supporting tables have been reviewed and revised at plurilateral meetings with interested members. The outcome of the market access negotiations is stipulated in the schedule, Part I, Section I (agricultural products), Part A (tariffs) and Part B (tariff quotas), and the acceding country’s commitments on domestic support and export subsidies are stipulated in Part IV, Section I (Domestic support: Total AMS commitments), Section II (Export subsidies: budgetary outlay and quantity reduction commitments) and Section III (Limiting the scope of export subsidies).

(a) Base period

For all three areas of the acceding country’s commitments, the starting-point of the negotiations is the selection of a base period. For market access concessions, WTO members expect that the current applied rate will be set as the base rate from which further tariff reductions may be made (WTO, 1999). The use of the applied rates for all the base rates is a “WTO-minus” commitment. In WTO members’ UR

57 This section is based on Miho Shirotori, WTO Accession Negotiations on Agriculture, UNCTAD, UNCTAD Web site.

commitments, bound base-period rates were often set at higher levels than the applied tariff rates in the corresponding year. An acceding country should note, however, that elimination of the gap between bound and applied rates is being suggested by several WTO members as a negotiating agenda item for the second round of agriculture negotiations.

For domestic support and export subsidies, an acceding country is required to provide WTO members with details of expenditures, forgone revenues and other relevant data on those measures in the three most recent years as shown in the supporting table, which is the period that is most likely to be taken as the base period for the country’s reduction commitments. That is to say, the structure of the acceding country’s agricultural policies in the current period will determine its future policy options. This may cause difficulties for some acceding countries which are currently in a process of economic transformation or facing policy constraints under Structural Adjustment Programmes, as in such cases their current policy measures are “transitory” and do not represent their long-term agricultural policy objectives. In addition, WTO members had a transition period of almost ten years between the base period (1986/1988) and the year when the implementation of commitments began (1995), and thus had plenty of time to adjust their own domestic policy structures. In past cases of accession to the WTO, only Latvia was allowed a transitory period for its domestic support commitments.

(b) Developing country status

Another issue that should be taken into consideration before negotiations is whether to request developing country status in order to become eligible for the special and differential (S&D) treatment to which developing countries are entitled. While the S&D provisions in many WTO Agreements do not offer much more than a “best endeavour” clause, those of the AG are clearly stipulated and quantified. The most relevant of all the S&D provisions in the AG are likely to be those relating to the domestic support commitments, which entitle a developing country to the “de minimis” limit of 10 per cent, instead of 5 per cent, of the value of its annual production of the products concerned. However, persuading WTO members to grant developing country status to an acceding country has proved to be a difficult task. In the WTO framework, there are no agreed criteria for developing country status, and in most cases that status has been self-declaratory. Given the absence of criteria, no acceding country to date has succeeded in securing all the special and differential provisions included in the AG. Instead, S&D provisions have been allowed on a case-by-case basis as deemed appropriate for individual acceding countries.

In addition to the S&D provisions for developing countries, least-developed countries (LDCs) are exempted from making reduction commitments on market access, domestic support and export subsidies. Lebanon, with its per capita income of about $2000, has no chance of obtaining least-developed-country status, nor would it be in any way advantageous even to request it, as the move would be viewed in a negative light. Lebanon will, however, be able to point to the declining trend in its economy, which is having an adverse impact on its standard of living and purchasing power, mainly as a result of the post-war situation.

2. Market access commitments

(a) Tariffication

Two of the most noteworthy market access commitments made under the AG were the conversion of all non-tariff measures (NTMs) to tariffs (tariffication), and the prohibition of NTMs in the future.58 An acceding country is expected to comply fully with this rule as of its accession date, and there is no special and differential provision applicable to this commitment. The question is how tariffication is to be

58 NTMs to be eliminated include quantitative import restrictions (such as quotas and prohibitions), variable import levies, minimum import prices, discretionary import licensing, voluntary export restraints and the like. Certain products may be exempted from tariffication provided the conditions set forth in Annex 5 (A) (special treatment) are met.

implemented. During the Uruguay Round, WTO Members “tariffied” their NTMs according to an agreed tariffication formula, which calculated ad-valorem equivalents to NTMs from the gap between the administrative price (i.e. the domestic market price under NTM protection) and the c.i.f. import price of each of the products concerned. Developing countries had the option of using “ceiling binding” instead of the tariffication formula, i.e. setting maximum bound rates, which could be above the current applied rates, for products on which tariffs had previously been unbound. The ceiling rates were set in a range extending between 30 per cent and over 200 per cent.59 Once the tariffication process was complete, countries had no obligation to verify whether their newly converted tariffs correctly represented the level of protection formerly provided by NTMs.

These approaches to tariffication are not stipulated in the AG; they are found in an informal document containing agreed rules on the agricultural market access commitments made in the Uruguay Round and is commonly known as the “Document on Modalities”.60 Some WTO members have taken the view that those approaches, including the tariffication formula and the ceiling binding option, were adopted only for the purposes of the UR negotiations and are not applicable to acceding countries.61 This implies that increases in an acceding country’s current applied tariff rates to accommodate the effect of NTM elimination are not automatically justified, and will probably have to be negotiated on a case-by-case basis. An acceding country may be asked to demonstrate to WTO members that the conversion of its NTMs will be accompanied by actual trade liberalization action, such as reducing the rates of those tariffs more rapidly than other bound tariffs.

(b) Tariff concessions

Applied rate as bound rate? An acceding country is requested to provide data on its current applied rates, together with its Memorandum on the Foreign Trade Regime, before the first meeting of the Working Party. Those data are normally taken as the base rate for tariff concessions to be followed in bilateral negotiations with WTO members. Should some of the bound tariffs in the offer exceed the current applied rates, possibly as a result of tariffication as discussed above, an acceding country will be asked to provide an adequate explanation, and perhaps tariff concessions on other products in exchange. This may be regarded as an element of “WTO-minus”, as in many instances the previously unbound rates, especially those of developing countries, were bound at a higher level than the applied rates.

Would it be of any benefit to an acceding country to have bound rates that were higher than its applied rates? In the international trading environment, the gap between bound and applied rates may mean diminished transparency and predictability in trade policies, especially where the gap is fairly wide, as applied rates can be increased whenever the need arises. On the other hand, many developing countries, especially those with large agrarian populations, argue that the gap may be necessary for them as a means of securing a measure of policy flexibility in meeting external or internal shocks to their vulnerable agriculture productions. Some developing country members have also suggested, in the course of discussions on a possible agenda for the forthcoming second round of multilateral negotiations, that the gap might count as “credits” in future tariff concessions, as the difference between the bound and applied rates had often been the result of unilateral trade liberalization action taken by developing countries in recent years.

Appropriate tariff level. Tariff concessions offered by an acceding country are expected to be “commercially viable”, “meaningful in trade terms” or “appropriate to the level of economic development”

59 It should be noted, however, that the applied tariff rates of most developing countries fall well below their bound rates. 60 MTN.GNG/MA/W/24, 20 December 1993. 61 The reservation on the part of WTO members to the use of the tariffication formula may be warranted, as the use of the formula generally resulted in high ad-valorem equivalents, largely caused by the discretionary choice of the base figures in the formula (such as a low c.i.f. import price). Indeed, many members’ bound tariffs for the base period exceeded their estimated tariff equivalents for the same period. See Hathaway and Ingco 1996.

(WTO 1999). However, there are no quantified benchmarks for such criteria, and in reality the level of “appropriateness” is determined on a case-by-case basis in bilateral negotiations. The average tariff level achieved at the Uruguay Round, and the level agreed to by recently acceded countries, may be used as a broad reference to what WTO Members appear to consider an “appropriate” tariff level.

WTO members’ own post-UR agricultural bound tariffs remain as high as, if not higher than, their pre- UR level, largely as a result of the tariffication process.62 The trade-weighted average of post-UR bound agricultural tariffs is estimated at 32.4 per cent, compared to 5.7 per cent on industrial products and 6.5 per cent on all merchandised products (Finger, Ingco and Reincke 1996). At an individual tariff line level, products that are considered sensitive by an importing country are often subjected to excessively high tariffs, many of which form tariff peaks. A joint UNCTAD/WTO study has shown that more than half the peak tariffs applied by developed countries are found in the agricultural sector (including the food industry) and the fisheries sector. Major export products of developing countries such as sugar, tobacco and cotton, and those of potential export interest such as processed food items, are frequently subjected to some of the highest peak rates (in excess of 100 per cent in some instances). With respect to the tariff commitments of recently acceded countries, the simple average of bound rates ranges from 11.7 per cent (Kyrgyz Republic) to 34.9 per cent (Bulgaria). The maximum tariff rates of those countries are seldom above 50 per cent. In the case of Lebanon, the maximum tariff rate of 70 per cent applies mainly to agriculture.

In preparing for its tariff concessions, an acceding country should also bear in mind that the second round of negotiations on agriculture is certain to lead to further tariff reductions, down from the level accepted at the time of its accession. The scope of tariff reductions in the second round has not yet been agreed. In the preparatory process for the new negotiations, which took place in 1998-1999, many WTO members called for deep cuts to tariffs, with particular emphasis on curtailing tariff peaks and eliminating tariff escalation. Some members suggested the application of a tariff reduction formula such as the so-called “Swiss Formula”, which directly targets tariff peaks, in the new rules on agriculture. However, several countries were reluctant to adopt a formula approach, on the grounds that differences in tariff levels had been established through a series of negotiations and reflected particular domestic production/trade pattern and non-trade concerns.

Non-ad-valorem tariffs.63 Although the use of non-ad-valorem (NAV) rates is legitimate, an acceding country may be requested to refrain from the use of NAVs whenever possible. This is because NAVs are associated with non-transparency of measures in cases where the calculation of ad-valorem equivalents is difficult, a complex tariff structure is likely to deter importers, or discrimination against cheap imports is evident.64 In the agricultural tariff profiles of WTO members, especially developed country members, NAVs are frequently used. An informal UNCTAD study revealed that the majority of NAV rates were associated with high ad-valorem equivalents of more than 100 per cent.65 Calculations of tariff equivalents of the non- ad-valorem duties applied by the European Community to processed agricultural products show that they also may reach very high levels.

62 In fact, a recent OECD study reveals that the production-weighted average of boarder protection at the applied rate level was higher in 1996 compared to 1993 in majority of OECD countries. 63 Specific rates are expressed as a fixed monetary amount per physical unit of the imported product (e.g. $20 per kilogram). Other types of non-ad-valorem rates include compound rates (a combination of ad-valorem and specific rates) and mixed rates (ad- valorem rate or specific rate, whichever is higher). 64 NAV rates may discriminate against cheaper imports, i.e. the degree of restrictiveness varies inversely with the unit import price. To illustrate: a NAV tariff of $2.00/kg has an ad valorem equivalent of 10 per cent when the unit import price is $20.00/kg. If the unit import price falls to $15.00, the ad-valorem equivalent increases to 13 per cent, and if the import price falls to $10.00, it becomes 20 per cent. 65 A Computation of Ad-Valorem Equivalents of Specific Tariffs, UNCTAD informal study, 1998.

“Market access opportunities” are commitments to encourage imports of products previously protected under NTMs by the application of a system of tariff rate quotas (TRQs). An acceding country engaged in bilateral negotiations should expect WTO members with export interests to demand country-specific TRQ allocations, if they have been historical exporters, as “current” market access opportunities. Bilateral quota allocations have been the focus of bilateral negotiations in several accession cases in the past. Some members may demand not only a share in quotas but also increases in their quotas over time, although under the AG, current access quantities are not required to rise throughout the implementation period. An acceding country should also expect demands for bilateral quota allocations for products that fall within “minimum” access opportunities.66 It should be noted that, in theory at least, quotas under minimum access opportunities are global quotas, i.e. they are available to all exporting countries without discrimination.

Other TRQ-related demands may include low within-quota tariff rates and transparency in TRQ administration. Such demands directly reflect issues that have been discussed among WTO members, during the AG implementation review process, as the primary reason why approximately one third of quota quantities, on average, were not imported.67 Many members acknowledge that these TRQ issues point to areas in which fresh liberalization commitments should be agreed in the new round of negotiations on agriculture. As mentioned above, tariff quotas would not be advisable in Lebanon’s case, in view of the difficulty in administering them and their potential for abuse.

Within-quota rates. Within-quota tariff rates are expected to be sufficiently far below the MFN (i.e. above-quota) tariff rates to encourage import flows, but no ceiling was placed on the level of within-quota rates during the Uruguay Round. As a result, some within-quota rates were set at nominally high levels (over 30 per cent in some instances), although they were considerably lower than the corresponding MFN rates.

TRQ administration methods. TRQ administration refers mainly to domestic regulations regarding the allocation of quotas among importers. After several years of experience with implementation, WTO members realized that certain administration methods could effectively block TRQ imports without violating WTO rules, as there is no agreement on the choice of TRQ administration under the current AG. The TRQ methods in question are ones which do not reflect market demand on import purchase decisions, such as discretionary import licensing, the involvement of State trading enterprises in the purchase or sale of quota imports, or import licences conditional on the concurrent purchase of domestic products. On the basis of that experience, WTO members tend to encourage acceding countries to adopt open, market-oriented administration methods, such as automatic import licensing or first-come-first-served.

(d) Special safeguard provisions

The special safeguard (SSG) provisions were included in the AG with a view to mitigating undesired quantitative or price effects of the elimination of NTMs upon domestic producers. The SSG provisions allow members to levy, temporarily, additional duties (up to 33 per cent of the corresponding MFN rate) on products annual imported quantities of which exceed the agreed level (defined as a certain percentage of domestic consumption), or the c.i.f. price of which falls below a specified critical level.

66 Minimum access opportunities are applicable to products of which pre-UR imports were less than 3 per cent of annual domestic consumption in the relevant years. 67 Empirical statistics suggest that the simple average fill-rates (i.e. imports actually brought in under a TRQ as a percentage of the quota quantity agreed in members’ schedules) were 65 per cent in 1995, 63 per cent in 1996 and 46 per cent in 1997. These numbers are taken from an informal document prepared by the WTO Secretariat for the Analysis and Information Exchange Process, which is an informal consultation under the aegis of the Committee on Agriculture.

Judging from past cases, an acceding country should not assume that it will automatically be granted the right to take SSG actions, as the inclusion of the provisions into the AG was initially linked to the tariffication process, which does not apply to acceding countries, as we have seen. However, an acceding country may negotiate for that right if it can provide relevant data, information and a rationale that justify the use of SSGs to the satisfaction of WTO members.68 This is sometimes regarded as a “WTO-minus” commitment in view of the fact that 38 WTO members which reserved the right to avail themselves of the SSG provisions only had to specify the products that would be subject to SSG measures in their schedules, without being required to justify their use.

Acceding countries should note that termination of the SSG provisions, or at least limitation on their use, has been suggested by some WTO members on the grounds that SSGs, especially price-based SSGs, in effect act exactly like prohibited NTMs,69 and that continuation of the SSG provisions serves to keep the agriculture sector outside GATT rules and disciplines.70 Some Members, on the other hand, consider that the SSG clause enables countries to resort to measures that are minimally costly to both importers and exporters without having frequent recourse to more disruptive action under the General Safeguard Clause.

3. Domestic support and export subsidies commitments

In the areas of domestic support and export subsidies, an acceding country is required to provide WTO members with factual information on its domestic support and export support measures in the most recent three years (commonly known as the “supporting table”), using the same format as is used by WTO members for their periodic notifications of current measures to the WTO Committee, as explained in the technical note prepared by the WTO Secretariat (WT/ACC/4).

The quality of the initial supporting table significantly affects the process and outcome of the negotiations on domestic support and export subsidy commitments. This is because a major part of negotiations on domestic support or export subsidies is taken up by a close examination of measures in the supporting table by WTO members, in an effort to judge whether those measures actually match the relevant criteria set out in the AG. Failure to provide comprehensive information at this stage may cost the acceding country bargaining leverage in the subsequent negotiations, as any negotiating argument based on dubious facts would lack credibility. The supporting table is then discussed in informal plurilateral meetings between the acceding country and interested WTO members. The outcome of those meetings is a revised supporting table, which is then taken as the base period for the acceding country’s reduction commitments. That is to say, the substantive part of the negotiations takes place in these informal meetings, as the final commitment levels of domestic support and export subsidies are technically determined by the agreed base-period values for those support measures.

68 Bulgaria reserved the right to have recourse to the SSG measures for 21 items at HS 6- and 8-digit levels, and Panama for 6 items at HS 8-digit level. 69 Product coverage for volume-based SSGs is sometimes so broad as to contain a number of tariff lines that are regarded as similar products. Price-based SSGs are closely similar to variable levies, as the size of an additional duty depends on (but is not equal to) the difference between the import price and the trigger (reference) price. 70 For instance, under the SSG provisions, WTO members have no obligation to investigate and determine serious injury to domestic producers caused or threatened to be caused by imports. Instead, Article 5 establishes the “trigger level”, an import quantity or price which is automatically recognized as possible cause for domestic injury and allows a member to apply an SSG action. While the Agreement on Safeguards requires members not to discriminate among exporting countries in applying a safeguard measure, the application of price-based SSGs effectively discriminates against competitive exporters (i.e. exporters whose prices are below the trigger level) by comparison with other exporters. In addition, SSG action does not require an applying country to provide exporting countries with compensation for its safeguard action, nor does it provide exporting countries with any right of recourse against such measures.

(a) Domestic support commitments

Domestic support policies in the agricultural sector were the main reason for the frequent use of trade- distorting measures before the Uruguay Round. Quantitative import control, for instance, was necessary to guard high domestic prices against cheap imports, so as to ensure the effectiveness of support measures provided to domestic agriculture producers (e.g. market price support or income support). In some cases, export subsidies were also used to maintain domestic price levels while excess production was dumped outside the country. Consequently, the application of multilateral disciplines to domestic support measures was regarded as a major achievement of the Uruguay Round.

The AG does not restrict all types of domestic support measures: reduction commitments are required only in respect of measures that are trade-distorting, i.e. measures that cause the domestic price level to deviate from the world price level. Accordingly, the first step in preparing the supporting table for the acceding country’s domestic support commitment is to divide its current support measures for agricultural producers into two categories, one containing measures that are exempt from the reduction commitments, and the other containing measures that are subject to those commitments. Exempt measures are then classified in four groups: “Green Box” measures, “Blue Box” measures, “development programmes”, and measures that fall within the de minimis limit. Measures that do not fall into any of the above four groups are included in the “Amber Box”, and should be quantified in terms of the base-period total aggregate measurement of support (AMS). The annual bound ceiling on expenditure for Amber Box measures is calculated from the base-period AMS. A country is prohibited from exceeding the annual bound limit in any year. A detailed classification of these various measures will be found in Annex 2.

Considerations that developing countries should bear in mind when preparing for domestic support commitments include the following:

Amber Box measures. During the Uruguay Round, many developing countries deliberately under- reported their base-period AMS. The same tendency has been observable among countries engaged in accession negotiations. Many of them have reported in their Memorandum on Foreign Trade Regime that Amber Box types of domestic support have already been eliminated, or are in the process of being eliminated over the next few years. As a result, out of nine countries that have acceded to the WTO, only two, Bulgaria and Jordan, have included AMS commitments in their final schedules.

Why should the level of AMS commitments on the part of developing countries be generally lower than the corresponding level on the part of developed countries, not only nominally but also as a percentage of their agricultural GDP?71 One major reason is the acute budgetary constraints that many developing countries face. Domestic support measures are expensive policy tools, and the governments of most developing countries cannot afford to make large budget allocations for Amber Box measures. Hence many developing countries, regardless of whether they are WTO members, set their base-period AMS at zero. The implication of this is total surrender of their right to use Amber Box measures above the de minimis limit in the future.

There is a view that this WTO-induced restriction on domestic support measures is beneficial for developing countries in the long run, as it helps them resist domestic political pressures to resort to protectionist measures. It has also been argued, however, that it creates an undesirable imbalance between rich and poor countries in terms of rights and obligations under the AG, as rich developed countries continue to use, or at least have the legal right to use, substantial levels of trade-distorting domestic support, while poor countries have no recourse to such measures other than those within the de minimis limit. The gap in the value of the available AMS between developed countries and developing countries is sizable: in 1996,

71 The base-period AMS of a majority of developing countries was below 15 per cent of their respective agricultural GDP. The corresponding figure for thirteen developed countries (out of seventeen that made AMS commitments) was in excess of 20 per cent, and in excess of 50 per cent in the case of eight of them.

the sum of the current total AMS of 10 developed countries accounted for 95 per cent (of which the European Community accounted for 56 per cent and Japan 28 per cent) of the total US$ 103.7 billion notified by 24 countries.

Another reason why developing countries tend to under-report their base-period AMS, or not to report it at all, may be an unwarranted belief that a low base AMS will mean a low level of obligations in the future. This belief originates primarily in an imperfect understanding of the technicalities of their commitments.72 As regards acceding countries, it appears that in many instances, WTO members have demanded that they refrain from the use of Amber Box measures. The domestic support commitments made by recently acceded developing countries and countries in transition are, in general, stricter than the corresponding commitments that were made by developing countries during the Uruguay Round in terms of length of implementation period, non-application of S&D provisions and percentage reduction of AMS (if any).

We may recall at this point that while Amber Box measures within AMS commitments are trade- distorting, they are consistent with WTO rules. If an acceding country utilizes Amber Box measures above the de minimis limit in the reporting period, there is no reason why it should not incorporate them into its AMS commitments. While countries are expected progressively to reduce their use of Amber Box measures, AMS commitments may lend flexibility to domestic agricultural policy, and do not necessarily constitute a constraint on the government’s budget, as a country does not have to spend the entire amount calculated as the annual bound ceiling for its AMS. In a majority of cases, in fact, the current total AMS was less than 80 per cent of the annual bound level, according to notifications received from WTO members as of May 1999.

Green Box measures. The long-term objective of the domestic support commitments is that governments should move gradually from the use of trade-distorting domestic support measures to Green Box measures, which are defined as measures “…(having) no, or at most minimal, trade-distortion effects or effects on production”. However, there is one issue of concern with respect to the relevance of Green Box measures for agricultural conditions in developing countries and countries with economies in transition.

The Green Box criteria given in Annex II of the AG are based on the agricultural policy measures used primarily in developed countries. For instance, two out of the twelve types of government services programmes listed in Annex II are linked to production-limiting schemes (such as producer or resource retirement programmes). Those measures, as well as Blue Box measures, are designed to reduce oversupply in agricultural production, a matter which has little relevance for the majority of developing countries. On the contrary, developing countries’ policies generally focus on enhancing their agricultural production, with a view, inter alia, to sustaining agricultural GDP and agricultural employment, which account for a substantial part of their economies, and/or guaranteeing food security for a rapidly growing population. Countries in transition are also trying to boost their agricultural production and to use more of their available resources, which to a great extent have been left idle owing to post-reform disruption in the sector (Davidova 2000.) Moreover, some Green Box measures, especially those relating to decoupled payments (such as income support and income insurance schemes), are technically difficult to implement in a WTO-consistent manner, as they require statistics on farm income and other relevant farm records which are either nonexistent or incomplete in developing countries. There are also “definition” problems associated with some Green Box measures, especially when the eligibility of recipients depends on criteria, such as “structural disadvantage” or “disadvantaged region”, that may be differently defined by different governments.

72 During the Uruguay Round, many developing countries also lacked the necessary technical and human capacity to calculate their AMS correctly.

Some WTO members have suggested that the Green Box criteria should be reviewed in the second round of agriculture negotiations with a view to making them more pertinent to the specific needs and conditions of developing countries.

Special and Differential Treatment. In the domestic support commitments category, the provisions of special and differential (S&D) treatment for developing countries are perhaps more substantial and more relevant than those in the market access commitments category. S&D provisions in this area include a favourable reduction commitment threshold (13.3 per cent instead of 20 per cent) and a time derogation (an implementation period of 10 years instead of 6 years) compared to other agreements. Furthermore, measures provided by developing countries with a view to agricultural and rural development may be exempted from their reduction commitments. The “development measures” identified in Article 6.2 are investment subsidies, input subsidies for low-income or resource-poor farmers, and support designed to encourage diversification from illicit narcotic crops. In addition, Annex II (Green Box) includes special provisions for developing countries in paragraphs 3 and 4: developing country governments may purchase and release stocks of foodstuffs at administered prices instead of current world prices, as specified for developed countries in public stockholding programmes (provided the difference between the acquisition price and the market price is included in the country’s AMS calculation) and domestic food aid programmes.

Another element of S&D measures that is vital to developing countries is the allowance of a 10 per cent de minimis limit instead of the 5 per cent applicable to developed countries. That is to say, developing countries are entitled not to include Amber Box measures in their calculation of current total AMS, as long as the value of such support remains under 10 per cent of the value of total production of the product, in the case of a product-specific support, and 10 per cent of the value of total agricultural production, in the case of a non-product-specific support. For many developing countries, as we have seen, the de minimis limit circumscribes the Amber Box measures that they can provide without violating their domestic support commitments. The 10 per cent de minimis limit may provide those countries with a measure of flexibility in their use of support measures.

During the review process and preparations for the second round of agricultural negotiations, many developing country WTO members have argued that developing countries should be allowed greater flexibility in their use of domestic support programmes on the grounds that the basic agricultural conditions in developing countries are significantly different from those in developed countries. They have pointed out that in developing countries:

(a) Agriculture is a major source of employment and livelihood; (b) The majority of agricultural producers are subsistence farmers whose production has little impact on international trade; (c) Food security is an acute problem for developing countries, as their chronic shortage of foreign exchange makes it impossible for them to rely extensively on food imports, and furthermore they have relatively high population growth rates; (d) Agricultural exports account for more than half of some developing countries’ total export earnings.

Proposals for discussion in this connection in the new agricultural negotiations include a possible increase in the de minimis level from the current 10 per cent for measures related to food security, and the creation of a “development box” which might include measures such as domestic support and transparent import controls for the protection of domestic production; protection for small and household farmers; input and investment subsidies; food security; and measures in favour of net food-importing developing countries. How these proposals will fare in the new negotiations, or indeed whether they will be considered at all, remains to be seen.

(b) Export subsidies commitments

In contrast to industrial goods, on which all WTO members are required to eliminate export subsidies altogether (see Article 3 of the Subsidies and Countervailing Agreement), the agriculture sector was made subject to a process of gradual export subsidy reduction in the Uruguay Round, as the table below shows.

SCHEDULE OF WTO-RELATED COMMITMENTS BY DEVELOPING AND DEVELOPED COUNTRIES

Commitments Developing countries Developed countries 1. Reduction in agricultural export subsidy 24% over 10-year period 36% over 6-year period expenditures 2. Reduction in volume of subsidized 14% over 10-year period 21% over 6-year period agricultural exports

In the case of acceding countries that are not members of GATT, export subsidies are subject to negotiation. Some WTO members, however, are demanding that export subsidies be bound at zero for agricultural goods as a condition of accession to the WTO, especially in the case of countries that do not have such subsidies in the first place. All non-GATT countries that did not have agricultural export subsidies in place on the date of their accession have been required to bind them at zero. Some of the countries that did apply such subsidies have managed to negotiate a reduction schedule. Lebanon recently introduced export subsidies for agricultural goods.

PART II. SAUDI ARABIA

SUMMARY

On 13 June 1993, Saudi Arabia applied for accession to the General Agreement on Tariffs and Trade (GATT 1947), the predecessor of the World Trade Organization (WTO).73 On July 21, 1993, a GATT working party was established to examine Saudi Arabia’s accession to GATT, and Saudi Arabia became an observer to GATT 1947. On 31 January 1995, after the WTO had been established, the GATT 1947 accession working party was transformed into a WTO accession working party, and Saudi Arabia became an observer to the WTO. Membership of the Saudi Arabia Working Party is open to all WTO members. Currently, more than 30 countries are members of the Saudi Arabia Working Party, including Argentina, Australia, Bahrain, Bangladesh, Brazil, Canada, Chile, Colombia, the Czech Republic, Egypt, the European Union, India, Indonesia, Israel, Japan, Korea, Kuwait, Malaysia, Mexico, New Zealand, Norway, Pakistan, Poland, Senegal, Sri Lanka, Switzerland, Thailand, Tunisia, Turkey, the United States of America and Venezuela.

In 1995, Saudi Arabia established an inter-ministerial working group, headed by a representative of the Ministry of Commerce and including representatives of key Ministries in the Kingdom, to develop an accession strategy, prepare all negotiation documents (including the MFTR and market access offers on goods and services), and conduct accession negotiations. On 13 May 1996, Saudi Arabia submitted its Memorandum on the Foreign Trade Regime (MFTR).74 The Saudi Arabia Working Party, which is chaired by H.E. Mr. John Weeks of Canada, has held six meetings to date75,76; the next meeting has not yet been scheduled. In the matter of bilateral negotiations on market access, Saudi Arabia submitted its initial offer on goods and its initial offer on services in 1997, along with key supporting documents such as the ACC/5 (information on services), the ACC/4 (information on agricultural subsidies), and its current tariff schedule. Thus far, more than 25 countries77 have expressed interest in bilateral negotiations with Saudi Arabia on goods and services. Eight rounds of bilateral negotiations have been conducted.78 According to the Government of Saudi Arabia, bilateral negotiations have been concluded with eleven of those countries.

Saudi Arabia’s WTO accession process has been faltering, despite the fact that WTO membership would greatly enhance the Kingdom’s ability to achieve its main economic objectives: economic diversification, growth in exports, the introduction of modern technology and upgrading of the skills of the

73 The WTO is an intergovernmental organization aimed at reducing tariff and non-tariff barriers to international trade in goods, facilitating trade in services, protecting intellectual property rights, harmonizing trade rules and strengthening the rule of law. The WTO was established on 1 January 1995. The Organization currently consists of 142 member nations. In addition, 32 countries are in the process of acceding to it. For a complete list of WTO members and a complete list of countries in the accession process, see Exhibit 1 and Exhibit 2 respectively. 74 The Memorandum on the Foreign Trade Regime (MFTR) is the main document required for the initiation of multilateral negotiations through working party meetings. The MFTR outlines (in accordance with a format set forth in a document designated WT/ACC/1), inter alia, (1) the acceding country’s policy, legal and regulatory environment connected with trade in goods, trade in services, intellectual property, customs, licensing, standards, agriculture, sanitary/phytosanitary measures, State trading, investment measures, government procurement, anti-dumping measures, countervailing measures and safeguards, (2) detailed statistics on trade in goods and services and government procurement, and (3) the acceding country’s existing international trade agreements (including free trade agreements), labour agreements and bilateral/regional agreements. 75 Typically, a timely accession requires no more than six working party meetings in all. 76 Saudi Arabia Working Party meetings were held on 2 and 3 May 1996, 6 and 8 November 1996, 29 and 30 May 1997, 2 and 4 December 1997, 17 and 19 November 1998, and 22 September 1999. 77 No names of countries have been disclosed. It was obvious during discussions, however, that the countries engaged in bilateral negotiations with Saudi Arabia included Australia, Canada, the EU, Switzerland and the United States. No Arab country is conducting bilateral negotiations with Saudi Arabia. 78 Typically, a timely accession requires no more than five rounds of bilateral negotiations with each of the countries concerned.

country’s labour force. Accession delays have been primarily due to the non-conformity of Saudi Arabia’s foreign trade regime with WTO agreements and the Kingdom’s inability to provide market access in a number of sectors (including the importing of alcohol, certain types of meat, audiovisuals, entertainment services and insurance) for religious reasons.

Saudi Arabia is the world’s largest oil producer and one of its largest gas producers. While the petroleum industry continues to be vital for the country’s economy, its medium- and long-term objectives are to diversify its industrial production through the development of value-added petroleum-based products and to improve its services industry. Saudi Arabia recognizes that it cannot develop and sustain industrial growth without significant exports and access to large markets. In addition, Saudi Arabia is aware that enhanced production capacity and the delivery of goods and services that meet international quality and safety standards will require the transfer of technology to the Kingdom. Furthermore, through the transfer of know- how and training, Saudi Arabia will be able to reduce its dependence on foreign labour. The Kingdom’s economic objectives can best be attained through WTO membership, which will yield a number of rights, benefits and opportunities including, but not limited to, the following:

(a) Guaranteed, secure access to the markets of the 142 WTO member countries (soon to be 170 in number). Once Saudi Arabia is a WTO member, its products will enjoy fair and non-discriminatory treatment in those markets in the form of MFN and national treatment, and will not be subject to any arbitrary tariff or non-tariff measures;

(b) Control over unjustifiable export restrictions in WTO member countries. Saudi producers (agricultural and industrial) depend heavily on imported raw materials and equipment, and, in many instances, the service industry also depends on imported goods. Once Saudi Arabia is a member of the WTO, other WTO members will not be able to impose any arbitrary or unjustifiable restrictions on exports to the Kingdom that are critical for the development of its industrial and agricultural production and its service industry;

(c) Establishment of an environment conducive to the development of competitive and efficient production and service sectors. In implementing WTO agreements through national legislation, Saudi Arabia will be establishing a transparent, predictable and stable business environment that will drastically reduce the cost of doing business. Further cost reduction will be achieved through cheaper access to raw materials (lower import costs, fair valuation rules and the elimination of unnecessary formalities and costly artificial trade restrictions), lower utility costs (the appointment of independent regulators) and reasonable transit costs. Furthermore, the elimination of monopolistic practices in certain sectors will result in the provision of goods and services at competitive prices;

(d) Encouragement of quality investment (technology transfer and know-how). Membership of the WTO will send a signal to international investors that Saudi Arabia has a predictable, transparent and stable trade and investment environment, provides investment guarantees and protects intellectual property rights, and thus will encourage investment, not only in the form of capital but also through the transfer of know-how and new technology. Such investment will (i) improve production efficiency and lead to the introduction of modern processes, enabling Saudi goods and services to meet international quality and safety standards, (ii) enhance the ability of Saudi goods to compete internationally, which will also increase exports, and (iii) provide the Kingdom with exposure to modern business and production practices and upgrade the technical capabilities of its human resources.

Not only will WTO membership enhance Saudi Arabia’s prospects of achieving its economic objectives and establishing an environment conducive to long-term economic growth and stability, it will also integrate the Kingdom into the world economy and the multilateral trading system and enable it to establish more stable trade relations and defend its trade interests. Access to the WTO Dispute Settlement Body will afford a means of resolving, fairly, any trade disputes that may arise between the Kingdom and its trading partners. It is highly advantageous to rely on a neutral, independent, international dispute resolution

forum, rather than attempting to resolve disputes on a bilateral basis, especially disputes with powerful trading countries. In addition, as a WTO Member, Saudi Arabia and other WTO countries will be subject to the same rules; this, in turn, will tend to reduce any tensions resulting from foreign trade relations.

Further delays in Saudi Arabia’s accession to the WTO would be likely to have significant negative side effects on the Kingdom’s future economic growth and stability. Nearly all its trading partners are WTO members. While Saudi Arabia is out of the WTO system, producers in WTO member countries are finding niches in international markets and grabbing market share. It will be extremely difficult for Saudi Arabia producers to compete at a later stage with well-established channels dominated by competitors from other countries. In addition, other countries are gaining experience in trading under WTO rules that allow them to safeguard their producers and trading rights more effectively. Furthermore, Saudi Arabia does not have the same opportunity as other countries to play a part in shaping future WTO rules in such a way as to safeguard its trading interests. Last but not least, the requirements (in the form of new agreements and understandings) for WTO membership are constantly increasing, and member countries are becoming increasingly determined to secure deeper and broader access to the markets of acceding countries. Accordingly, it is highly desirable for Saudi Arabia to secure WTO accession in the near future. Membership will enable the Kingdom to play a pivotal role in shaping trade rules.

Trade theory and the experience of countries under the multilateral trading system indicate that the system works; every WTO member is a winner. In order to reap the benefits of WTO membership, Saudi Arabia will have to implement major policy, legal and institutional reforms and undertake negotiations on market access with its trading partners. Access to the Saudi market is subject to negotiations. The most probable outcome, however, is that the Kingdom will find itself on a level playing field with countries whose economic structures are similar to its own, while still retaining advantages with respect to access to the markets of more developed countries, all of which have implemented drastic liberalization during the Uruguay Round. It is important to stress, however, that, as a WTO member, Saudi Arabia will retain its right to safeguard its producers from unfair trade practices.

Reform in the direction of conformity with WTO agreements (which have proved to embody best international practices) should not be viewed negatively or as a concession on the part of Saudi Arabia. It is in the Kingdom’s own interest, regardless of the status of its application for WTO accession, to lose no time in enacting laws based on best international practices in order to attract quality investment, curtail bureaucratic practices and establish a cost-efficient business environment for its producers and service suppliers. Modernization of the country’s legal and institutional framework is essential, and Saudi Arabia needs to speak the same business language as 142 other countries in order to compete in the global economy. Furthermore, WTO rules provide sound discipline for decision-making, introduce the rule of law, reduce corruption, limit discretionary authority, ensure accountability and promote transparency.

Technically, Saudi Arabia’s accession to the WTO could be achieved toward the end of 2002, provided the Kingdom (i) introduces the necessary policy and legal reforms before the end of the summer of that year in order to bring its foreign trade regime into full conformity with WTO agreements, and (ii) aggressively pursues bilateral negotiations with the aim of concluding them before July 2002. The current regime falls far short of compliance with key WTO agreements, as will be seen from the main report. No significant legal reforms in the direction of full compliance with WTO agreements have been introduced in recent years. In certain areas, to be sure, there are good practices in Saudi Arabia that are in accordance with WTO rules. However, like other WTO members and acceding countries, the Kingdom will be expected to enact national legislation implementing the provisions of WTO agreements in order to ensure stability, transparency, predictability and accountability. A summary of the remaining key reform measures required to enable Saudi Arabia’s accession to the WTO will be found in Table 2 below. It is important to recognize that there are still a few bottlenecks (such as market access restrictions primarily due to religious reasons) that must be removed in order for the accession process to be completed. While Saudi Arabia is working with its trading partners on the task of removing these bottlenecks, other reform measures should proceed at

the same time, as reform will not only further the accession process but will also significantly improve the business environment in the Kingdom.

In a nutshell, WTO membership will enable Saudi Arabia to take full advantage of its economic potential, attract quality investment (including modern technology and know-how) and increase its production and exports.79

79 Due to the scope of this study and time constraints, the present summary provides only a brief outline of the probable impact of WTO accession on the Kingdom of Saudi Arabia. Detailed sectoral studies, including sector-specific assessments, will have to be conducted in order to assess the prospective effects on priority sectors of the economy (challenges and opportunities), and quantitative analyses (including econometric modeling with partial/general equilibrium models) performed in order to determine the implications of trade liberalization for tax revenue, trade diversion, balance of payments, input/output, productivity and consumer welfare.

INTRODUCTION

The purpose of this case study is to assess the extent to which the Kingdom of Saudi Arabia’s foreign trade regime conforms to WTO requirements, and to offer recommendations for key reforms that will allow the country to accede to the WTO. An assessment of Saudi Arabia’s foreign trade regime indicates that significant further reforms will be required in order to bring the Kingdom’s policy, legal and institutional framework into line with WTO requirements. The study’s main findings and recommendations are presented in four sections, as follows:

(a) Section I examines trade in goods; (b) Section II examines trade in intellectual property rights; (c) Section III examines trade in services; (d) Section IV examines institutional requirements.

I. TRADE IN GOODS

The Saudi Arabia legal regime governing trade in goods is not fully in conformity with WTO requirements. Trade policy measures are set primarily through Royal Decrees. There is no framework law on international trade setting criteria for the adoption of trade measures in accordance with the various WTO agreements, including in particular the 1994 version of GATT and the Import Licensing Agreement. Consequently, the foreign trade policy regime is lacking in transparency, stability and predictability in respect of trade in goods.

An examination of key aspects of Saudi Arabia’s current policy regime governing trade in goods will be found below, together with recommendations, where applicable, for conformity with WTO agreements relating to trade in goods in the following areas:

1. Import and export duties. 2. Most-favoured-nation (Article I of GATT 1994). 3. National treatment (Article III of GATT 1994). 4. Import and export licensing. 5. Import and export prohibitions. 6. Import and export quotas. 7. Customs regime. 8. Trade-related fees. 9. Trade remedies: anti-dumping, countervailing and safeguard measures. 10. Subsidies. 11. Technical barriers to trade and sanitary and phytosanitary measures. 12. Trade-related investment measures. 13. Foreign exchange and payment system. 14. Preshipment inspection.

1. Import and export duties

Saudi Arabia’s current tariff policy is relatively liberal. Average simple weighted duties are estimated at approximately 15 per cent for all goods and 17 per cent for agricultural goods. The average-weighted import duties rate is not available. Tariff nomenclature is based on HS 96. There are 7562 items, of which approximately 700 are specific (such as poultry and eggs), while the others are ad valorem. Under a tariffication programme implemented in the late 1990s, prohibitions on a number of goods, including wheat, poultry, dates and long-life pasteurized milk in containers larger than 1 litre, were eliminated and replaced by high tariff rates (initially 150 per cent, subsequently reduced to 100 per cent and currently 50 per cent). In a recent liberalization effort, all 12 per cent and 7 per cent rates were converted to 5 per cent. Currently, 92 per cent of all tariff line items are subject to tariff rates of 5 per cent. Essential goods (including rice, sugar, tea, barley, corn, livestock, fresh and frozen meat, barley and unroasted coffee) are not subject to any import duties. A number of types of goods are subject to a 20 per cent customs duty for the purpose of protecting infant industries. In a very few cases, high rates apply (there is a 100 per cent tariff on tobacco).

Saudi Arabia does not have any tariff quota system on imports or exports at present.

Saudi Arabia has export duties on untanned hides and skins. Although export duties are, in general, not inconsistent with WTO rules, some members may view them as trade-distorting and demand their elimination.

In order to accede to the WTO, Saudi Arabia will have to bind80 its customs duties in a framework of lengthy and complicated bilateral negotiations on market access for goods. It has submitted its initial offer for negotiating bound rates with countries interested in exporting their goods into Saudi Arabia, and 28 countries have already expressed interest. After eight rounds of bilateral negotiations, bilateral protocols have been signed with eleven countries. In view of the secrecy of such negotiations, it is difficult to predict the outcome at this stage. However, given the level of current tariff rates, it is likely that the average bound rate of duties will not be significantly different from the current rate after the negotiations, and Saudi Arabia’s tariff policy regime will be brought to a level playing field with those of other countries having a similar economic structure. Saudi Arabia will also be expected to adhere to many, if not all, zero-for-zero sector agreements (see Exhibit 3 in the Attachment), the agreement on trade in civil aircraft, and the information technology arrangement, which requires a staged elimination of customs duties on information technology products. Saudi Arabia has already agreed to sign the information technology agreement and the chemical harmonization agreement, and has initiated implementation. Both agreements are essential, as the two sectors in question enjoy priority in Saudi Arabia in terms of attracting investors and increasing exports.

2. Most-favoured-nation (Article I of GATT 1994)81

In general, Saudi Arabia’s legal regime does not discriminate among imported products on the basis of their origin. Most of the country’s trade preferences are granted in the context of bilateral or regional trade agreements. Saudi Arabia is a signatory to at least 30 trade and economic agreements with many countries, including Algeria, Argentina, Australia, Bangladesh, Belgium, Brazil, Canada, Chinese Taipei, Finland, France, Germany, Greece, Holland, India, Indonesia, Iraq, Ireland, Italy, Japan, Jordan, Lebanon, Malaysia, Morocco, Pakistan, Korea, Yemen, Spain, Syria, Tunisia, Turkey, the United Kingdom and the United States of America. These agreements are concerned primarily with trade in goods. Most of them are general in nature and do not provide import or export preferences. Most of them provide MFN treatment for trade in goods, with certain exceptions, including the following:

Saudi Arabia is a signatory to the taysir agreement (Agreement for Facilitating and Developing Trade Exchanges among Arab Countries) of 22 February 1981, which it ratified on 1 April 1985. All Arab countries (except Algeria, Djibouti and the Comoros) are signatories to the taysir Agreement. Saudi Arabia has also committed to the 18 February 1997 Announcement regarding the Implementation Programme establishing a Greater Arab Free Trade Area (GAFTA). Mauritania, the Palestinian Authority, Somalia, Sudan, and Yemen have not yet taken any measures toward the implementation of GAFTA. GAFTA calls for a programme to establish a free trade area among the parties by 2007. Close analysis of the implementation of GAFTA suggests that it does not qualify as a free trade area in accordance with Article XXIV of the 1994 version of GATT, given the number of exemptions from free trade specified under various implementation protocols.

80 I.e., place a ceiling on import duties that the country may not exceed after acceding to the WTO, except for a limited period of time under special circumstances, including balance-of-payments difficulties and safeguarding of domestic production in accordance with the WTO Agreement on Safeguards. 81 MFN: With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, any advantage, favour, privilege or immunity granted by any Member Government to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other Member Countries. (Slightly abbreviated version of Article I:1 of GATT)

In addition, Saudi Arabia is a signatory to the GCC agreement for the establishment of a free trade area among Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The agreement, which was signed in 1981, calls for the elimination of substantially all duties and trade restrictions, and the harmonization of trade and commercial policies and customs procedures. In December 1999, the States Members of the GCC agreed to establish a customs union. The current trade arrangement among GCC countries is expected to result in a customs union by 2005 at the latest. Three brackets of customs duties (0 per cent, 5.5 per cent and 7.5 per cent) are envisioned for trade with third countries.

In order to accede to the WTO, Saudi Arabia needs to conform to Articles I and XXIV of the 1994 version of GATT. Saudi Arabia must also review all its trade agreements and take any necessary measures to ensure conformity with GATT 1994. In the event of non-conformity, Saudi Arabia will have to proceed on a case-by-case basis to (i) renegotiate various aspects of its existing agreements, (ii) extend any preferences to other WTO members, or (iii) take other appropriate measures (such as ensuring that duties and restrictions are eliminated on substantially all trade with countries with which Saudi Arabia has trade arrangements).

It is important to note that a broad range of goods is subject to trade restrictions (primarily prohibitions) and exempted from free trade among members of the GCC and GAFTA. Many of those prohibitions will be difficult to justify under Article XX and XXI of GATT 1994. This may raise concerns that it may not be the case that substantially all Saudi Arabia’s trade is free trade in accordance with Article XXIV.

WTO member countries expect Saudi Arabia, like other acceding countries, to comply fully, prior to its WTO accession, with the requirements of Article I of the 1994 version of GATT. In addition to rectifying issues connected with trade agreements, Saudi Arabia will have to review its sanitary and phytosanitary measures prohibiting the importing of certain goods (such as meat) from certain countries to ensure that those measures are not applied in a discriminatory manner between countries where identical or similar conditions prevail.

3. National treatment (Article III of GATT 1994)

Saudi Arabia does not impose any internal taxes on imports, not even value-added tax or excise tax. According to Saudi Arabia government sources, imports are treated no less favourably than domestic goods in all respects, including pricing policy, internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions. In addition, the national treatment principle is observed with respect to the application of intellectual property laws.

To judge from infromation provided by the Saudi Arabia Government, it appears that Saudi Arabia complies with Article III of GATT 1994. One exception may be shelf-life requirements (see item 11 below). Although no measures appear to be inconsistent with Article III, Saudi Arabia will have to agree, in its working party report, to abide by Article III and not to introduce in the future any measures contrary to Article III of the 1994 version of GATT.

4. Import and export licensing (Article XI of GATT 1994-General Elimination of Quantitative Restrictions)

The importing of many categories of goods is subject to import licensing or special approval by Saudi authorities. Import licensing measures apply to agricultural seeds, live animals, fresh and frozen meat, milk for industrial use, films, tapes, periodicals, books, chemicals, hazardous materials, pharmaceutical products, high quality photocopiers, burglar and fire alarms, wireless equipment and radio communication apparatus, network equipment, horses, goods containing alcohol (such as perfumes), natural asphalt, petroleum, agricultural machinery and archaeological artifacts.

Products subject to export licensing or permits (having the same effects as licenses) include certain petroleum derivatives, oil, natural gas, wheat, agricultural tools and equipment, non-farm animals and birds, archaeological artifacts and antiques. Furthermore, the importing and exporting of wildlife is subject to licensing.

There is no single central authority in charge of issuing import licenses. Depending on the type of good, the import license may have to be obtained from the Ministry of Commerce, the Ministry of Health, the Ministry of Information, the Ministry of Agriculture, the Ministry of Interior, the Ministry of Education, the Ministry of Post, Telegraph and Telephone, the Ministry of Industry and Electricity, the Public Security Department, the Ministry of Petroleum and Natural Resources, the National Commission for Wildlife Conservation and Development or the Chivalry Club. Some of these entities may seek the approval of other entities before issuing import licenses. Importers, however, have only one State entity to deal with.

In general, Saudi Arabia’s legal regime does not define import licenses and licensing requirements or prescribe a unified process for obtaining licenses. Furthermore, the legal regime includes hardly any provisions under which the Import Licensing Agreement could be implemented, such as time limits for issuing licenses, eligibility requirements, criteria for denying licenses, administrative or judicial appeal procedures or license validity. The same type of legal regime applies to exports. While good practices that are in accordance with the WTO Import Licensing Agreement are observed with respect to some aspects of licensing procedures (for example, licenses are issued within 30 days), WTO members expect acceding countries to enact national legislation implementing the provisions of the Import Licensing Agreement in order to ensure stability, transparency and predictability.

Many of the goods subject to import and export licensing appear to have been singled out for economic reasons. Consequently, these measures may not be deemed justifiable under WTO rules, and will be challenged by WTO members. Saudi Arabia will have to review its existing measures connected with import and export licensing and eliminate those that are not justifiable under Article XI, XX, and XXI of the 1994 version of GATT.82 The remaining measures should be published with reference to the exact tariff description and code as outlined in Saudi Arabia’s tariff schedule. To ensure transparency, Saudi Arabia will probably be requested to make the list of measures connected with import and export licensing available to the general public.

5. Import and Export Prohibitions (Article XI of the GATT 1994)

According to the Government of Saudi Arabia, many categories of goods may not be imported into the country for protective, religious or environmental, reasons having to do with national security, or SPS reasons. At least 50 tariff lines are subject to import prohibitions, including alcohol, pork, pornographic literature and materials, toxic waste and hazardous materials, certain sculptures, distilling equipment and narcotics. In addition, arms and ammunitions may not be imported, except by certain government agencies. Saudi Arabia currently has a temporary ban on the importing of genetically modified food and animal products.

There are export prohibitions on date seedlings, breeding horses, and all goods that are subsidized in Saudi Arabia, including wheat and barley in particular. The exporting of subsidized date palm seedlings, barley, maize and soybeans is conditional upon repayment of domestic support subsidies.

Although many of these prohibitions may be justifiable under WTO rules, others appear to be in place for economic reasons and are questionable under Article XX and XXI of the 1994 version of GATT. Prohibitions imposed by Saudi Arabia will be challenged by the WTO working party on the grounds that they are not justifiable under WTO rules. Saudi Arabia will have to review its existing measures connected

82 For the full text of these articles, see Exhibit 4 in the Attachment.

with import and export prohibitions and eliminate those that are not warranted under Articles XI, XX, and XXI of GATT 1994. The remaining measures should be published with reference to the exact name and code of Saudi Arabia’s tariff nomenclature. To ensure transparency, Saudi Arabia will probably be requested to make an updated list of measures connected with import and export prohibitions available to the general public.

6. Import and export quotas (Article XI of GATT 1994)

Saudi Arabia does not currently have import or export quotas on any items. Nevertheless, it will have to make a commitment in its working party report that quotas will only be imposed as a safeguard measure in accordance with the WTO Agreement on Safeguards and Article XIX of GATT 1994, and in accordance with Article XII and Article XVIII of GATT 1994, the Understanding on Restrictions for Balance-of- Payments purposes. Safeguard legislation will have to be enacted to regulate the imposition of quotas in accordance with the Agreement on Safeguards.

7. Customs

The Saudi Arabia Law on Customs does not fully reflect WTO requirements and Kyoto Convention procedures (best international practices on customs processing). Acceding countries are required to bring their customs regimes into line with a number of areas stipulated under WTO agreements, including WTO valuation rules under the Customs Valuation Agreement (CVA), WTO rules of origin under the Rules of Origin (ROO) Agreement, prompt appeal to an independent arbitral or judicial body under GATT 1994, confidentiality of information under CVA and ROO, transparency under GATT 1994 (publications of laws), fees and formalities under GATT 1994, and border protection of intellectual property rights under TRIPS. WTO members have not granted (and are not likely to grant) any transitional periods to acceding countries for the implementation of customs-related agreements. The Saudi Arabia Law on Customs falls short of WTO requirements in several respects:

(a) The law does not comply with the WTO Agreement on Customs Valuation. The Saudi Arabia valuation system relies primarily on the nearest equivalent value. In general, the customs authority does not honour invoices. The law does not require full compliance with the valuation methods stipulated in the WTO Agreement on Customs Valuation. Furthermore, it does not prevent the customs authority from using prohibited valuation methods under the same agreement. Importers do not appear to understand clearly how their goods are valued. Lastly, minimum prices are used for valuation purposes, a practice contrary to the general principles of the WTO Customs Valuation Agreement;

(b) The current legal regime does not mandate origin for non-preferential trade. However, it lacks provisions implementing the basic principles outlined in the Rules of Origin Agreement that apply to both preferential and non-preferential trade. These include definition of substantial transformation, confidentiality, transparency and advance rulings;

(c) Customs-related disputes, including those connected with customs valuation and rules of origin, are handled by a standing committee within the Customs Department.83 Decisions by standing committees of this kind may be appealed to the head of the ministry or agency concerned (the Ministry of Finance and National Economy in customs cases). Decisions of a head of ministry or agency may be appealed in their turn to the Board of Grievances under Article 8(a) of the Board of Grievances Law of 17 Muharram 1402 AH. Finally, Board of Grievances decisions may be challenged before the Appeal Court (or Scrutiny Commission) within the Board of Grievances. Decisions of the Scrutiny Commission are final and binding. Although the Board of Grievances is an independent tribunal, the current system may raise compliance

83 A similar system has been established at other ministries and agencies to handle all trade disputes, including those dealing with sanitary and phytosanitary measures, licensing, standards and intellectual property rights.

concerns with Article X:3 of GATT 1994 from the standpoint of the prompt resolution of disputes. In the first place, appeals must go through two layers of bureaucracy before reaching an independent body (the Board of Grievances). In the second place, there appear to be no time limits at any of the three stages for resolving disputes and issuing decisions. Article X.3.b of GATT 1994 stipulates judicial, arbitral, or administrative tribunals or procedures for the prompt review and correction of administrative action relating to customs matters. The legal regime should provide importers with the right to appeal any Customs decision promptly, without fear or penalty, to an independent body or the judiciary;

(d) The present customs regime does not provide adequate border enforcement of intellectual property rights in accordance with Articles 51-60 of the TRIPS Agreement. Saudi Arabia must amend its customs regime to include provisions authorizing the customs authority to take all necessary measures to prevent the importing of IPR-infringing products and outlining appropriate procedures that balance the need for protection with the need to process shipments promptly. Border measures are essential to prevent infringing import from being released and circulating freely in the domestic market. Border measures should at least cover counterfeit trademark and pirated copyright goods, and may also be used as a means of protection against parallel imports. There are model instructions on border measures, developed by WCO, which could be used as a basis for developing national provisions that would meet WTO requirements. Article VIII of GATT 1994 requires fees connected with importing and exporting to reflect the approximate cost of services rendered. Accordingly, Saudi Arabia’s customs regime should include a provision stipulating that all customs fees must reflect that cost;

(e) Article VIII of GATT 1994 requires the elimination of unnecessary import and export formalities. The Kyoto Convention procedures developed by the WCO provide a set of streamlined, transparent procedures based on international best practices in such areas as entry formalities, transit, warehousing, urgent consignments, duty drawback, advanced rulings, audit and enforcement. In addition, procedures for pre-arrival declaration and periodic declaration should be conducive to simplification and efficiency. Saudi Arabia should consider incorporating such procedures in its customs regime. Lastly, internal selectivity and risk assessment procedures should be developed in order to speed up customs clearance;

(f) Confidentiality is protected through the Civil Service Law (Royal Decree 49, dated 1397 AH), which requires that government officials do not disclose confidential information obtained in the performance of their duties, even after they have left the civil service. Although this satisfies WTO requirements, it would be preferable for that the customs regime to contain such provisions for the sake of transparency;

(g) The publication of customs legislation is required under Royal Decree No.425, dated 5 Rabia I 1372 AH, which stipulates that laws and other government legal acts shall be published in the official gazette, Um al-Qura. The decree, however, does not state how far in advance laws and legal acts must be published before coming into force.

Besides making necessary amendments to its customs law to bring it into line with WTO requirements, Saudi Arabia should adopt implementing regulations for key aspects of the law, including:

(a) Implementing regulations for the treatment of interest charges in the customs value of imported goods;

(b) Implementing regulations for the valuation of carrier-media-bearing software for data processing equipment;

(d) Legislation for publishing the Interpretative Notes (Annex I of the CVA).

During the accession process, furthermore, Saudi Arabia, like all other WTO members, will be required to accept the harmonized rules of origin, once these have been adopted by the WTO/WCO. Under the harmonized rules, the origin of goods is expected to be the country of the last substantial transformation (tariff-shift criterion). In all probability, the rules will be finalized before 2005. Saudi Arabia would then be expected to adopt legislation for implementing them.

8. Trade-related fees

According to the Government of Saudi Arabia, there are no fees imposed on import licensing. The main trade- and customs -elated fees currently applied in Saudi Arabia are:

(a) Customs processing fees; (b) Loading and unloading; (c) Storage; (d) Fees charged by Chambers of Commerce; (e) Authentication of certificates of origin at a Saudi embassy or consulate; (f) Fees for preshipment inspection under the International Conformity Certification Programme.

In order to comply with Article VIII of GATT 1994, Saudi Arabia must:

(a) Review all fees connected with trade and customs; (b) Eliminate all fees that are not set for specific services; (c) Eliminate ad valorem fees and replace them with fixed fees or amend them by introducing a floor and a ceiling; (d) Conduct a detailed financial and cost analysis in order to determine whether the existing fixed fees reflect the approximate cost of services. If not, the current value must be changed in order to conform to Article VIII of GATT 1994.

Saudi Arabia will be requested to make a commitment in its working party report stating that all charges on imports, other than customs duties and fees for services rendered, will be bound to zero. In brief, all fees that are not charged for the purpose of services should be identified and eliminated.

9. Trade remedies: anti-dumping, countervailing and safeguard measures

Saudi Arabia currently has no adequate legislation governing anti-dumping, countervailing and safeguard measures. WTO members will require Saudi Arabia either (1) to enact laws in line with respective WTO agreements prior to its accession, or (2) to undertake not to apply such measures after its accession until it has enacted legislation that conforms fully to the relevant WTO agreements.

10. Subsidies

None of Saudi Arabia’s existing industrial subsidies is a prohibited subsidy according to the definition contained in Article 3 of the SCM Agreement.84 WTO members, however, are likely to challenge the specificity of certain industrial subsidies on the grounds of their potential adverse impact on the producers of other member countries. These include tax exemptions for foreign investors and interest-free loans provided by the Saudi Industrial Development Fund. Such loans, in so far as they serve to further the modernization of the production process, appear to constitute non-actionable subsidies for purposes of the SCM.

Key agricultural subsidies provided by the Saudi Arabia Agricultural Bank include:

84 Prohibited subsidies are subsidies contingent upon export performance and import substitution.

(a) Interest-free loans to farmers, agricultural projects, fishermen, beekeepers and farm co-operatives;

(b) Subsidies aimed at reducing agricultural production costs, including the acquisition of machinery, irrigation pumps and poultry and dairy production equipment, and payment of the transport costs association with the importing of purebred cows.

None of these subsidies appears to be export-oriented or “blue”; most of them are either “green” or “amber” under domestic support. Other domestic support subsidies include subsidies for wheat and barley and subsidized kerosene for farmers.

The Aggregate Measure of Support for domestic support measures, as computed by the Government of Saudi Arabia, appears to be below the level of the commitments that Saudi Arabia will probably be required to make (binding at 5 per cent or 10 per cent of gross domestic agricultural production).

11. Technical barriers to trade and sanitary/phytosanitary measures

The Saudi Arabian Standards Association (SASO) is the State body in charge of issuing standards and technical regulations (“mandatory standards”) and regulating many aspects of sanitary and phytosanitary measures. Saudi Arabia is a member of key international standardization organizations, including ISO and IEC. It is also a member of the Codex Alimentarius Commission, the International Office of Epizootics and the International Plant Protection Convention.

According to the Government, Saudi Arabia’s standards and sanitary/phytosanitray measures are harmonized to the maximum extent possible with international standards and guidelines. The total number of technical regulations is approximately 1900, some of which, according Saudi Arabia government sources, require higher levels of protection than international instruments. Saudi standards are adopted only in cases where international standards have proved ineffective or inappropriate as means of attaining legitimate objectives. Sanitary/phytosanitary measures not covered under Codex Alimentarius, OIE or IPPC are based on scientific studies or measures applied by other WTO members.

None the less, import requirements appear to be excessively stringent for certain types of goods. For example, all food products without exception are subject to control. Importers of food products must submit the manufacturer’s ingredient certificate, a consumer protection certificate and a price list. In the case of meat, a halal certificate and a health certificate are required. Importers of seeds and grains must provide a certificate of inspection, a phytosanitary certificate, a seed analysis certificate and a certificate of weight. In addition, many other specific certificates are required for different types of goods.

In addition, Saudi Arabia relies on shelf life as an SPS measure for perishable food products and as a TBT measure for shelf-stable food products. Working party members will probably object to these practices and are likely to press Saudi Arabia to adopt a different method for ensuing food stability fitness for human consumption. Furthermore, most of Saudi Arabia’s labeling requirements appear to be unnecessary, and thus constitute a technical barrier to trade.

According to the Government, Saudi Arabia’s legislation on veterinary quarantine and agricultural quarantine conforms to the rules of the International Zoosanitary Code and FAO respectively, but detailed analysis will be required to assess its conformity with the WTO’s SPS Agreement. To judge from the information that was made available for this study, it appears that the regime fails to address a number of key requirements under the WTO’s SPS Agreement:

(a) Definition, rules and criteria for adopting SPS measures; (b) Types of measures; (c) Harmonization and use of international standards; (d) Equivalence;

(e) Risk assessment and determination of appropriate level of protection; (f) Adaptation to regional conditions; (g) Control, inspection and approval in accordance with Annex C of the SPS Agreement.

In order to comply with the WTO’s SPS requirements and meet the expectations of working party members, Saudi Arabia, prior to its accession, must:

(a) Amend the existing legal regime governing sanitary measures, phytosanitary measures and veterinary measures, taking the WTO’s SPS agreement fully into account;

(b) Review all its sanitary, phytosanitary and veterinary measures. Establish programmes to revise sanitary measures, phytosanitary measures and veterinary measures in order to ensure their conformity with the WTO. Measures must be eliminated if the circumstances or objectives giving rise to their adoption no longer exist, or if those objectives can be addressed in a less restrictive manner. Furthermore, Saudi Arabia should aim at harmonizing its measures with international standards, regulations and recommendations:

(i) Sanitary measures should be brought into line with international standards, guidelines or recommendations such as those developed by the Codex Alimentarius Commission and the International Office of Epizootics. Higher levels of protection may be maintained on the basis of sound scientific evidence; (ii) Animal health measures (veterinary measures) should be brought into line with international standards, guidelines or recommendations such as those developed by the International Office of Epizootics. Higher levels of protection may be maintained on the basis of sound scientific evidence and specific economic factors; (iii) Phytosanitary measures must be based on international standards, guidelines or recommendations such as those developed by relevant international and regional organizations operating within the framework of the International Plant Protection Convention. Higher levels of protection may be maintained on the basis of sound scientific evidence and specific economic factors;

(c) Eliminate shelf-life requirements and establish other mechanisms, based on WTO agreements, for regulating perishable food products;

(d) Introduce sound risk assessment and scientific sampling methods;

(e) Adopt control, inspection, and approval procedures in accordance with Annex C of the SPS Agreement.

To judge from the information that was made available for this study, Saudi Arabia’s policy, legal and institutional framework governing the issuance and administration of standards and technical regulations does not appear to be in line with the TBT Agreement. The following is a summary of some of the most important features of the current regime that do not conform to WTO requirements. The legal regime:

(a) Does not clearly define some key terms, as required by Annex 1 of the TBT Agreement, including standards, technical regulations, conformity assessment procedures and various bodies (international body/system, regional body/system, central government body, local government body and non- government body);

(b) Does not specify the criteria by which technical regulations may be allowed to exceed international norms and standards, nor does it specify the term of validity of technical regulations;

(c) Does not fully implement Annex C (Code of Good Practice for the Preparation, Adoption, and Application of Standards) of the TBT Agreement;

(d) Does not adequately assert national treatment with respect to the application of standards and technical regulations;

(e) Lacks provisions on equivalency in accordance with the TBT Agreement;

(f) Does not reference the use of international guides for conformity assessment procedures and certifications, such as ISO/IEC guidelines.

In order to comply with the WTO’s TBT requirements and meet the expectations of working party members, Saudi Arabia, prior to its accession, must:

(a) Amend its legal regime governing standardization, taking the TBT agreement fully into account;

(b) Survey all technical regulations and establish programmes to review them in order to ensure conformity with the WTO. Technical regulations must be eliminated if the circumstances or objectives giving rise to their adoption no longer exist, or if those objectives can be addressed in a less restrictive manner. Technical regulations affording higher levels of protection must be brought into line with international standards, except where the latter are deemed ineffective or inappropriate as means of attaining the legitimate objectives pursued, because of such factors as fundamental climatic or geographical factors or fundamental technological problems;

(c) Eliminate shelf-life requirements and establish other mechanisms, based on WTO agreements and specifying less restrictive practices, to ensure food safety (such as the “best if used by” form of words found in the Codex Alimentarius);

(d) Revise labeling requirements to comply with international standards;

(e) Introduce sound risk assessment and scientific sampling methods. Control, testing, and inspection should be in line with best international practices.

12. Trade-related investment measures

Saudi Arabia does not maintain any trade-related investment measures that are inconsistent with the WTO’s TRIMS Agreement. However, the imposition of such measures should be explicitly prohibited by legislation in the interests of transparency, stability and predictability. Saudi Arabia will have to undertake not to maintain any measures that are inconsistent with TRIMS.

13. Foreign exchange and payment system

Saudi Arabia does not maintain any capital transfer, foreign exchange or payment system restrictions.

14. Pre-shipment inspection

Under Saudi Arabia’s International Conformity Certification Programme, goods must be inspected for quality control prior to shipment to the Kingdom. The current regime appears to delay shipments and increase import costs. Various aspects of that regime may be regarded by some working party members as violating Article VIII of GATT 1994 on the grounds that they introduce unnecessary formalities which act as a barrier to trade.

II. TRADE IN INTELLECTUAL PROPERTY RIGHTS

As a prospective member of the WTO, Saudi Arabia, prior to its accession, must harmonize its intellectual property laws with the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS Agreement”), as well as portions of earlier treaties that have been incorporated by reference in the TRIPS Agreement. Those treaties include the Paris Convention, the Berne Convention and the Washington Treaty, as well as the International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (1961) (“Rome Convention”) and the Geneva Convention. The TRIPS Agreement, which came into force on 1 January 1995, establishes protection standards in seven substantive areas: copyright and related rights, trademarks, geographical indications, industrial designs, patents, layout- designs of integrated circuits, and undisclosed information, and it requires specific enforcement measures and dispute resolution procedures.

In addition to being a member of the World Intellectual Property Organization (WIPO), Saudi Arabia is a member of the Universal Copyright Convention, the Arab Copyright Convention and the GCC Unified Patent Regulations. However, it is not a contracting party to any of the treaties administered by WIPO. It has not yet joined key conventions on intellectual property rights, such as the Berne Convention, the Paris Convention, the Rome Convention, the Geneva Phonograms Convention, the Madrid Convention, the Hague Convention, the Patent Co-operation treaty, the Washington Treaty and UPOV 1991.

The current legal regime in the Saudi Arabia covers primarily patents, trademarks and copyright. It consists of the following laws:

(a) The Trade Marks Law of 1984 (Royal Decree M.5 of 1404 AH);85 (b) The Patents Law of 1989 (Royal Decree M.38 of 1409 AH); (c) The Law for the Protection of Copyrights of 1990 (Royal Decree M.11 of 1410 AH).

None of these laws has been brought into line with the TRIPS Agreement by means of suitable amendments.

In addition to the three laws referred to above, a number of articles (Articles 34 and 132(3)) of the Implementing Rules of the Saudi Customs System contain provisions authorizing the provisional seizure of consignments infringing intellectual property rights, including copyright, by the Customs authorities.

The following Saudi Arabia authorities have relevant roles in the development and enforcement of intellectual property rights in Saudi Arabia:

(a) The Ministry of Commerce is in charge of administering trademarks;

(b) The King Abdulaziz City for Science and Technology is in charge of administering patents and industrial designs;

(d) The Board of Grievances, as an administrative tribunal, is in charge of examining cases and enforcing all intellectual property rights issues;

(e) The Customs Authority and the Ministry of Commerce are jointly responsible for border enforcement of intellectual property rights.

85 This law also includes provisions dealing with geographical indications, but does not protect wine and spirits for religious reasons.

Examination is required for patents and trademarks, and consequently the administration of the two laws governing those matters requires large numbers of personnel. Delays in registering patents and trademarks have been a major bottleneck due to lack of resources.

An examination of the existing regime governing intellectual property in Saudi Arabia indicates that amendments to the Kingdom’s intellectual property laws are required in order to bring them into line with the WTO’s TRIPS requirements. In addition, a number of new laws in the area of intellectual property rights must be enacted in order to bring the whole regime fully into conformity with the TRIPS Agreement. These new laws should cover the following aspects: industrial designs, geographical indications, integrated circuits topography, trade secrets, unfair competition86 and plant variety protection. Furthermore, the legal regime must be adjusted to include proper and effective enforcement mechanisms and remedies. At working party meetings, Saudi Arabia initially requested a five-year transition period for implementing TRIPS, beginning immediately after the country’s accession to the WTO. A subsequent action plan submitted by Saudi Arabia to the working party proposed a shorter transition period, with full compliance with TRIPS by the end of 2002. Saudi Arabia has begun to reform its intellectual property regime along lines designed to ensure full conformity with TRIPS requirements. A draft law on industrial designs is being finalized, and amendments to all three existing laws are being prepared.

It is important to note that none of the 14 countries that have acceded to the WTO since 1995 or the 32 countries that are currently in the process of acceding to the Organization has succeeded in securing a transition period for implementing TRIPS. WTO members insist on full compliance prior to accession. Saudi Arabia, in its reform effort, must therefore:

(a) Amend its Trade Marks Law of 1984 (Royal Decree M.5 of 1404 AH) to provide adequate protection for well-known marks and eliminate potential MFN violations in connection with the registration of trademarks. Full compliance with TRIPS and the Paris Convention on Protection of Industrial Property is essential. The Law should also conform fully to TRIPS requirements relating to geographical indications, including in particular the Madrid Agreement for the Repression of False and Deceptive Indications of Source on Goods (1891) (“Madrid Agreement”), and the Lisbon Agreement for the Protection of Appellations of Origin and their International Registration (1958) (“Lisbon Agreement”);

(b) Amend the Patents Law of 1989 (Royal Decree M.38 of 1409 AH). The Law is generally consistent with Section V of the TRIPS Agreement, but there are a few deficiencies that must be addressed in order to bring it fully into conformity with the Agreement. These include inadequate terms of protection (15 years instead of 20) and compulsory licensing. In amending this law, the Saudi Arabia must observe the requirements of the TRIPS Agreement and the Paris Convention;

(c) Amend the Law for the Protection of Copyrights of 1990 (Royal Decree M.11 of 1410 AH). Although the Law for the Protection of Copyrights of 1990 implements many of the TRIPS copyright requirements, a number of areas are not adequately protected, including sound recordings, broadcast transmissions, satellite transmissions and audiovisual works; explicit protection for computer software is also lacking. In addition, no adequate penalties, including imprisonment and significant fines, are provided to deter violations of the law on copyright. Nor does the Law extend protection to works that were first displayed outside Saudi Arabia, unless the author is a citizen of Saudi Arabia. In amending this law, Saudi Arabia must observe not only the TRIPS Agreement but also the Rome Convention on the Protection of Artist Performers, Phonogram Producers and Radio Broadcasting, the Berne Convention for the Protection of Literary and Artistic Works and the Geneva Convention on the Protection of Phonogram Producers;

86 Some aspects of unfair competition are covered under existing Saudi Arabia legislation, including company law, labour law and bank control law. The coverage, however, does not appear to be comprehensive or consistent.

(d) Enact a law on industrial designs in conformity with TRIPS, taking into account the requirements of the Paris Convention and the Hague Convention on International Deposit of Industrial Designs;

(e) Enact a law on the protection of integrated circuits topography in conformity with TRIPS, taking into account the Treaty on Intellectual Property in respect to Integrated Circuits (the ‘Washington Treaty”);

(f) Enact a law on trade secrets in conformity with TRIPS requirements;

(g) Enact a law on unfair competition87 in conformity with TRIPS and the Paris Convention.

(h) Enact a law on variety protection in conformity with TRIPS, taking into account UPOV 1991 (Union Internationale pour la Protection des Obtentions Végétales—International Union for the Protection of New Varieties of Plants).

In addition to these harmonization measures, Saudi Arabia should ensure that intellectual property laws are properly and effectively enforced. The current enforcement of intellectual property laws in Saudi Arabia is not adequate. Enforcement mechanisms are very weak, and are not fully and clearly defined in legislation. WTO working party members will question the extent of enforcement and will take the matter into account as Saudi Arabia is negotiating its accession. Saudi Arabia must ensure that its legal regime contains provisions aimed at deterring violations of intellectual property rights. The existing legislation makes provision for fines, but does not contemplate the possibility of imprisonment in cases of counterfeiting or copyright piracy. Nor does it afford adequate scope for seizure, forfeiture and destruction in criminal cases. Further, it is doubtful whether the criminal fines contemplated in the legislation will be deemed sufficient to deter counterfeiting, as required under the TRIPS Agreement.

87 This law could be a part of a general law on competition policy.

III. TRADE IN SERVICES

According to the Ministry of Planning, the service sector in Saudi Arabia accounts for approximately 33 per cent of GDP (excluding government services, which account for almost 18 per cent of GDP) and employs approximately 68 per cent of the country’s labour force (excluding government services, which employ approximately 13 per cent of the labour force). The crude oil and natural gas sector, for its part, accounts for 31 per cent of GDP and employs 1.4 per cent of the country’s labour force. Table 10 below contains a breakdown of key services for the year 1999. The Government of Saudi Arabia aims to develop the service sector and moderately increase its contribution to the GDP during the next 5 to10 years.

TABLE 10. BREAKDOWN OF THE SERVICE SECTOR IN SAUDI ARABIA BY CONTRIBUTION TO GDP AND EMPLOYMENT, 1999

Service sector area Contribution to GDP (%) Contribution to employment (%) Trade 7.5 14.4 Construction 10 14.2 Transport and communications 6.8 4.2 Finance and real estate 6.1 4.7 Community and personal 2.7 30.9

Like all WTO members, Saudi Arabia will have to observe GATS unconditional obligations for all services and GATS conditional obligations for services in its Schedule of Specific Commitments on Services. In addition, depending on the outcome of negotiations with respect to market access limitations and national treatment, Saudi Arabia may have to amend its existing horizontal88 and sector-specific laws connected with services, or enact new ones. Lastly, acceding countries are expected to have transparent laws and legal acts with effective enforcement mechanisms.

With respect to market access, Saudi Arabia currently maintains limitations on foreign participation in a number of services, including security underwriting, commodity brokerage services, currency exchange operations, commercial agencies, customs clearance agencies, real estate agencies, land transport, maritime transport, civilian security, audiovisual, insurance, postal and telecommunication services, television and radio broadcasting and many professional services. In addition to specific sector limitations, any measures (or absence thereof) that act as indirect trade barriers restricting market access will also be subject to negotiations. For example, the lack of strong legal guarantees in the new law on foreign investment (Resolution No. 1 dated 5 Muharram 1421 AH) is likely to raise concerns; it may be deemed an indirect barrier to trade with respect to market entry on the part of foreign service suppliers. The law does not include comprehensive, explicit provisions on national treatment, prompt, adequate, and effective expropriation/compensation, profit repatriation and transfer of payment, and unequivocal access to, and investor’s choice of, an international dispute settlement and arbitration body.

Saudi Arabia offers preferences and national treatment to service suppliers of GCC Member States. In addition, reciprocal preferential treatment is provided in certain transport sector services to suppliers from

88 Laws that affect more than one service sector.

Egypt, Jordan, Lebanon, Morocco, Syria, Tunisia and Turkey. With respect to national treatment, there are aspects that may raise concerns, including the taxation system (zakat and profit tax on foreign service suppliers), employment requirements for foreign investors (e.g. five Saudis for every 20 foreigners) and real estate ownership.

Saudi Arabia has submitted an ACC/5 (current measures related to market access, national treatment89 and MFN treatment90) and an initial market access offer on services. Eight rounds of bilateral negotiations on market access have been held. It is difficult to predict the outcome of bilateral negotiations, as they are conducted in private, the outcome being disclosed only when all bilateral protocols have been signed. To judge from the experience of other acceding countries, however, financial services (including banking and insurance), transport, telecommunications, and audio-visuals are likely to be the main focus of negotiations. Saudi Arabia may face demands for the elimination of many of its existing limitations and barriers to market entry, MFN treatment91 for all sectors and national treatment for most sectors.

To implement the commitments made in its Schedule of Specific Commitments on Services, Saudi Arabia may have to amend its existing laws relating to services, or enact new ones. These may include horizontal laws in the area of services (such as laws dealing with taxation, enterprises, the registration of legal entities, land ownership, contracts, labour, bankruptcy, competition, foreign investment and foreign exchange) and sector-specific laws (such as laws dealing with transport, tourism, banking, audio-visual materials, insurance, telecommunications and professional services, including pharmacy, medicine, law, accounting, auditing and engineering). Like all other countries that have recently acceded to the WTO, Saudi Arabia will be expected to eliminate some of its market restrictions in the areas of banking and insurance, and to comply with the Reference Paper on Telecommunications,92 which requires transparent and open interconnection and the appointment of independent regulators. The elimination of telecommunications monopolies is another requirement to which acceding countries have had to agree in their Service Schedules.

The following discussion covers the reforms that Saudi Arabia must implement in order to comply with its conditional and unconditional obligations under the GATS agreement.

1. Unconditional obligations

Unconditional obligations under GATS include compliance with the most-favoured-nation (MFN) principle, the publication of service-related laws, notification on service, the establishment of an enquiry point on GATS, the establishment of a contact point, the protection of confidential information, mutual recognition of qualification requirements,93 and the institution of rules governing monopolies and exclusive service suppliers.

(a) MFN: Saudi Arabia, through its legislation and bilateral agreements, grants preferences to service suppliers in various countries, notably the GCC countries and a number of other Arab States, which it does

89 In the sectors inscribed in its Schedule and subject to any conditions and specifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of service treatment no less favourable than that it accords to its own like services and service suppliers. (Article XVII:1 of GATS). 90 With respect to any measure covered by the General Agreement on Trade in Services, each Member shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country. (Article II:1 of GATS). 91 Exceptions to MFN are authorized only until 2005, and then only in the context of economic integration agreements that conform to the conditions set forth in the GATS agreement. 92 See Exhibit 5 in the Attachment. 93 No specific commitment needs to be made other than the articulation of a general policy on entering into bilateral or plurilateral agreements for mutual recognition of qualification requirements and following, in so far as possible, internationally recognized standards in this domain.

not grant to those of other countries. The reciprocity treatment provided under Saudi Arabia legislation is likely to raise concerns during negotiations on the grounds that certain countries may enjoy more favourable treatment than WTO countries in respect of their service suppliers. Saudi Arabia currently has three bilateral investment agreements, with France, Germany and Italy. These agreements provide MFN and/or national treatment and guarantees (on profit repatriation, expropriation and access to dispute settlement bodies) that are much stronger and more effective than those provided under the Saudi Arabia Law on Foreign Investment. Saudi Arabia should compile a list of preferences in the service sector, and should be prepared to implement all legal measures needed to ensure conformity with the WTO’s GATS agreement (particularly Articles II and V) in the light of bilateral negotiations and the results of ongoing and future rounds of multilateral trade negotiations;

(b) Transparency: Royal Decree No.425, dated 5 Rabia I 1372 AH, states that laws and decrees must be published in the official gazette, Um al-Qura, which appears weekly. There is no comparable requirement for the publication of ministerial decisions, instructions or orders, although in practice most legal acts of that kind are published. Nor is there any prescribed minimum period for the coming into force of legal acts after publication. Lastly, compliance with GATS requirements will mean that Saudi Arabia must establish and provide notification of an enquiry point on GATS94 and establish notification procedures on service-related matters;

(c) Rules governing monopolies and exclusive service suppliers: Saudi Arabia’s legislation on competition policy is inadequate. Some WTO member countries may perceive the legal regime as lacking in guarantees of fair competition and thus indirectly keeping foreign service suppliers out of the market. A sound competition policy environment would require (1) the enactment of a law on competition and the adoption of implementing regulations addressing the issue of abuse of dominant position, including excessive pricing (or restriction of output), predatory pricing (or expansion of output), vertical constraints,95 horizontal constraints,96 demonopolization and mergers, and (2) the establishment of an independent97 competition agency to administer and enforce the law.98 The law on competition should apply equally to State bodies, and should prohibit them from adopting anti-competition measures;

(d) Regulation of natural monopolies: Saudi Arabia has no legislation designed expressly to regulate natural monopolies. The lack of adequate legislation governing natural monopolies (especially utilities and oil/gas pipelines) will be perceived by member countries as a barrier to service sector investors. The uncertainty and unpredictability associated with the rates charged to users (such as electricity, oil and gas pipeline and telecommunications rates) raise the perceived risk level and discourage investment. Some investors may be interested in investing in natural monopolies. All investors, however, will be users (or consumers) of the services provided by natural monopolies. Transparent legislation on natural monopolies establishing sound rate-setting methods and an independent regulatory body is essential. A sound regime would be one that ensured (i) open, equitable and non-discriminatory access to natural monopoly services

94 The General Investment Authority of Saudi Arabia could play that role. 95 A vertical restraint is any practice that inhibits or constrains the actions of buyer and seller (such as exclusive dealing, refusal to deal, resale price maintenance, territorial restraint, price discrimination, premium offers, predatory pricing, expansion of output, tying, full line forcing and abuse of negotiating position). 96 A horizontal restraint is any unilateral or collective action that weakens or restrains competition among firms in the same market (such as price fixing, conscious parallelism, restraint of output, exclusionary practices, market division, predation and restraint on entry). 97 Not subject to political influence, not affiliated with any Ministry or the Council of Ministers, and accountable to the Parliament. 98 Competition policy is equally important in the context of trade in goods and intellectual property rights. Practices such as import and distribution cartels, obstruction of parallel imports, exclusive licensing for import and export, vertical market restraint in distributing and reselling products all should be subject to competition policy.

and (ii) user rates that were reasonable and applied equally to all consumers of natural monopolies services, and balanced the interests of consumers and investors.

2. Conditional obligations

Conditional obligations under GATS include, inter alia, the establishment of a reasonable, impartial and objective administration of domestic regulations, appeal procedures and tribunals for reviewing administrative decisions, and a time frame for licenses and similar measures. GATS permits regulations that are designed to achieve legitimate objectives and not to act as unnecessary barriers to trade in services. Lastly, no restrictions on international transfers or payments (including both current account and capital account) may be instituted except in cases connected with BOP difficulties.

The new Law on Foreign Investment requires licences to be issued within 30 days. Appeal procedures for reviewing administrative decisions are in place. Disputes are usually dealt with by the Board of Grievances (which issues administrative decisions in civil cases) and standing/ad-hoc committees established within ministries and State bodies in charge of issuing licences and other administrative matters connected with trade in services. However, there appear to be no time limits for resolving disputes. Saudi Arabia signed the New York Convention for arbitral awards in 1995.

Saudi Arabia should revise its administration infrastructure governing trade in services to ensure that regulations are administered in a reasonable, impartial and objective manner. To that end, a detailed review of all existing service regulations (licences, permits, approvals, certificates, qualification requirements and technical standards) connected with services should be conducted, followed by analysis to identify and eliminate any that are at variance with WTO rules. At present there are a number of general requirements connected with the establishment of foreign service suppliers in Saudi Arabia, including, inter alia, transfer of technology and know-how, training of local resources, specified number of years of successful experience prior to entering the Saudi market and financial viability. Some of these may be viewed as barriers to market access.

Saudi Arabia’s foreign exchange and payment system is not restrictive and is in line with GATS requirements.

IV. KEY INSTITUTIONAL REQUIREMENTS

A number of WTO agreements require the establishment of a number of institutions for the purpose of implementing certain aspects of WTO agreements.

Table 11 below contains a summary of the remaining key reform measures required before Saudi Arabia will be able to accede to the WTO.

TABLE 11. REMAINING KEY REFORM MEASURES REQUIRED TO BRING SAUDI ARABIA’S FOREIGN TRADE REGIME INTO FULL CONFORMITY WITH THE WTO AND ALLOW ACCESSION

Key reform measures Reference WTO rationale A. Trade in goods A.1 Enact a law on international trade in goods Section A-general Compliance with GATT 1994 and the Agreement on Import Licensing A.2 Eliminate all measures inconsistent with Section A- item 2 Compliance with GATT 1994 Article I of GATT 1994 (most-favoured- nation) A.3 Repeal all legislation requiring import/export Section A-item 4 Compliance with GATT 1994 licensing in violation of Article XI A.4 Repeal all legislation requiring import/export Section A-item 5 Compliance with GATT 1994 prohibition in violation of Article XI A.5 Amend the Law on Customs or enact a new Section A-item 7 Compliance with GATT 1994, Customs one Valuation and Rules of Origin A.6 Adopt implementing regulations on customs Section A-item 7 Compliance with Customs Valuation valuation (valuation of soft-ware, interest charges and interpretive notes) A.7 Adopt implementing regulations on border Section A-item 7 Compliance with TRIPS enforcement of intellectual property rights A.8 Assess all trade-related fees and amend Section A-item 8 Compliance with GATT 1994 relevant legislation to reflect the approximate cost of services A.9 Enact law on anti-dumping measures and Section A-item 9 Compliance with Agreement on Anti- adopt implementing regulations Dumping A.10 Enact law on countervailing measures and Section A-item 9 Compliance with Agreement on adopt implementing regulations Subsidies and Countervailing Duties A.11 Enact law on safeguard measures and adopt Section A-item 9 Compliance with Agreement on implementing regulations Safeguards A.12 Reduce any subsidies that are not in line with Section A-item 10 Compliance with Agreement on Saudi Arabia’s commitments Subsidies and Countervailing Duties and Agreement on Agriculture A.13 Amend standards legislation Section A- item 11 Compliance with Technical Barriers to Trade A.14 Amend legislation on sanitary measures Section A-item 11 Compliance with Sanitary/Phytosanitary Measures A.15 Amend legislation on phytosanitary measures Section A-item 11 Compliance with Sanitary/Phytosanitary Measures A.16 Amend legislation on veterinary measures Section A-item 11 Compliance with Sanitary/Phytosanitary Measures A.17 Review all technical regulations and eliminate Section A-item 11 Compliance with Technical Barriers to any that are unjustifiable Trade A.18 Review all sanitary measures, phytosanitary Section A-item 11 Compliance with measures and veterinary measures and Sanitary/Phytosanitary Measures eliminate any that are unjustifiable A.19 Eliminate shelf life as an SPS measure for Section A-item 11 Compliance with perishable food products and as a TBT Sanitary/Phytosanitary Measures and measure for shelf-stable food products and Technical Barriers to Trade replace with new measures in line with WTO and best international practices.

TABLE 11 (continued)

Key reform measures Reference WTO rationale B. Trade in intellectual property rights B.1 Amend the 1990 Law on Copyright Section B Compliance with TRIPS B.2 Amend the 1989 Law on Patents Section B Compliance with TRIPS B.3 Amend the Law on Trademarks (to include Section B Compliance with TRIPS geographical indications) B.4 Enact law on industrial designs Section B Compliance with TRIPS B.5 Enact law on variety protection Section B Compliance with TRIPS B.6 Enact law on commercial secrets Section B Compliance with TRIPS B.7 Enact law on integrated circuits Section B Compliance with TRIPS B.8 Enact law on unfair competition Section B Compliance with TRIPS B.9 Enact implementing regulations and establish Section B Compliance with TRIPS enforcement infrastructure for all the above- mentioned laws

C. Trade in services C.1 Amend the 2000 Law on Foreign Investment Section C Compliance with general principles of GATS C.2 Enact a law on competition policy Section C Compliance with general principles of GATS C.3 Enact a law regulating natural monopolies Section C Compliance with general principles of GATS C.4 Ensure gradual compliance with the MFN Section C Compliance with GATS principle C.5 Review all regulations governing services and Section C Compliance with GATS revise to conform to GATS conditional obligations C.6 TBD-legal measures to comply with Section C Compliance with Schedule of Specific commitments made during bilateral Commitments on Services negotiations on services

D. Institutional requirements See Table 3 below.

Table 12 below summarizes the status of Saudi Arabia’s conformity with key WTO institutional requirements. As will be seen, most of the necessary institutions are not yet in place.

TABLE 12. STATUS OF CONFORMITY WITH WTO INSTITUTIONAL REQUIREMENTS

Agreement Institutional requirement Saudi Arabia 1. GATT 1994 Judicial, arbitral or administrative tribunals or Partial conformity. See item 7 (“Customs” procedures for the prompt review and correction of under Section A (Trade in Goods”) above. administrative action relating to customs matters. 2. TBT a. Central government standardizing body a. Saudi Arabian Standards Organization b. Inquiry point to provide information relating to b. Not formally in place standards c. Not formally in place c. Notification point 3. SPS a. Inquiry point to provide information relating to Not formally in place sanitary standards (could be the same as above) b. Notification point 4. AD a. Investigating authority Not in place b. Judicial, arbitral, or administrative tribunals or procedures for prompt review of administrative actions relating to final determinations and review of determinations.

TABLE 12 (continued)

Agreement Institutional requirement Saudi Arabia 5. CVD a. Investigating authority Not in place b. Judicial, arbitral, or administrative tribunals or procedures for prompt review of administrative actions relating to final determinations and review of determinations. 6. SG a. Competent authorities for investigations Not in place 7. GATS a. Inquiry point to provide information regarding a. Not in place laws and legal acts connected with trade in b. Not in place services c. Not in place b. Notification point d. General administrative laws (no time limit c. Contact point for dispute resolution) d. Judicial, arbitral or administrative tribunals or procedures for the prompt review of and appropriate remedies for administrative decisions affecting trade in services 8. TRIPS a. Civil judicial procedures concerning the a. and b. Present in some of existing IP laws, enforcement of any intellectual property right but needs improvement covered by the agreement b. Criminal procedures and penalties to be applied in cases of willful trademark counterfeiting or copyright piracy

Lastly, Saudi Arabia should establish an independent agency to administer and enforce provisions of the law on competition and the law on natural monopolies.

Annex I

ARTICLES XI, XX, AND XXI OF GATT

ARTICLE XI*

General Elimination of Quantitative Restrictions

1. No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.

2. The provisions of paragraph 1 of this Article shall not extend to the following:

(a) Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party;

(b) Import and export prohibitions or restrictions necessary to the application of standards or regulations for the classification, grading or marketing of commodities in international trade;

(c) Import restrictions on any agricultural or fisheries product, imported in any form,* necessary to the enforcement of governmental measures which operate:

(i) To restrict the quantities of the like domestic product permitted to be marketed or produced, or, if there is no substantial domestic production of the like product, of a domestic product for which the imported product can be directly substituted;

(ii) To remove a temporary surplus of the like domestic product, or, if there is no substantial domestic production of the like product, of a domestic product for which the imported product can be directly substituted, by making the surplus available to certain groups of domestic consumers free of charge or at prices below the current market level;

(iii) To restrict the quantities permitted to be produced of any animal product the production of which is directly dependent, wholly or mainly, on the imported commodity, if the domestic production of that commodity is relatively negligible.

Any contracting party applying restrictions on the importation of any product pursuant to sub-paragraph (c) of this paragraph shall give public notice of the total quantity or value of the product permitted to be imported during a specified future period and of any change in such quantity or value. Moreover, any restrictions applied under (i) above shall not be such as will reduce the total of imports relative to the total of domestic production, as compared with the proportion which might reasonably be expected to rule between the two in the absence of restrictions. In determining this proportion, the contracting party shall pay due regard to the proportion prevailing during a previous representative period and to any special factors* which may have affected or may be affecting the trade in the product concerned.

ARTICLE XX

General Exceptions

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:

(a) Necessary to protect public morals;

(b) Necessary to protect human, animal or plant life or health;

(d) Necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices;

(e) Relating to the products of prison labour;

(f) Imposed for the protection of national treasures of artistic, historic or archaeological value;

(g) Relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;

(h) Undertaken in pursuance of obligations under any intergovernmental commodity agreement which conforms to criteria submitted to the CONTRACTING PARTIES and not disapproved by them or which is itself so submitted and not so disapproved;*

(i) Involving restrictions on exports of domestic materials necessary to ensure essential quantities of such materials to a domestic processing industry during periods when the domestic price of such materials is held below the world price as part of a governmental stabilization plan; Provided that such restrictions shall not operate to increase the exports of or the protection afforded to such domestic industry, and shall not depart from the provisions of this Agreement relating to non-discrimination;

(j) Essential to the acquisition or distribution of products in general or local short supply; Provided that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, which are inconsistent with the other provisions of the Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist. The CONTRACTING PARTIES shall review the need for this sub-paragraph not later than 30 June 1960.

ARTICLE XXI

Security Exceptions

Nothing in this Agreement shall be construed

(a) To require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests;

(b) To prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests:

(i) Relating to fissionable materials or the materials from which they are derived;

(ii) Relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;

(iii) Taken in time of war or other emergency in international relations;

(c) To prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.

Annex II

WTO-MINUS AND WTO-PLUS

Article XII of the WTO Agreement does not specify the commitments required of acceding countries, nor the scope and extent of the demands that may be made on them. Nor is an acceding country automatically granted developing country or LDC status, even if it clearly falls into one of those categories. This ambiguity means that the accession process depends entirely on negotiations rather than on compliance with rules. Acceding countries find that they must negotiate every aspect of relevance for accession, and they are constantly pressed to accept heavier commitments. In fact, acceded countries and those currently in the process of accession have had to accept commitments far beyond anything accepted by the original WTO members themselves, including (i) non-application of the rights available to members under WTO agreements, such as transition periods and tariffication and special safeguards for agricultural products (this may be defined as “WTO-minus”); (ii) areas not covered by WTO agreements, such as commitments on privatization, investment regime and binding of export tariffs (which we may call “WTO-plus”); and (iii) more far-reaching concessions and commitments on goods and services than were accepted by the participants in the Uruguay Round (UR), such as 100 per cent binding of industrial tariffs, lower tariff concessions and wider coverage of specific commitments on services, and participation in the “Plurilateral” Agreements (which we shall designate “imbalance with WTO members”).

I. WTO-MINUS

The S&D treatment provisions contained in the various WTO agreements take the specific situations of developing countries and/or LDCs and countries in transition into account; they are aimed at balancing those countries’ obligations with their development, financial and trade needs. For developing countries, for example, the Agreements on Sanitary and Phytosanitary Measures (SPS) and Import Licensing provide for a two-year transition period, while the Agreements on Customs Valuation, Trade-Related Investment Measures (TRIMs) and Trade-Related Aspects of Intellectual Property Rights (TRIPS) provide for a five- year period. The S&D provisions are of particular importance to acceding countries, most of which are developing countries and/or LDCs or countries in transition. However, the record of accession negotiations to date shows that it is extremely difficult for acceding countries to take advantage of those provisions. For example, while Ecuador obtained a few transition periods, Panama, Mongolia, Kyrgyz and Jordan were allowed only one, for the elimination of prohibited industrial subsidies, and Bulgaria, Latvia, Estonia and Georgia were not granted any transition periods at all. In all the areas covered by these agreements, transition periods were granted to the original WTO members as S&D treatment. Furthermore, the nine countries referred to above are not allowed to use the “tariffication method” or the special safeguards provided for in the Agreement on Agriculture.

Customs valuation: The Agreement on Customs Valuation contains several S&D provisions: a five- year transition period for implementation of the Agreement, a further three-year delay for application of the computed method, the reservation of an importer’s right to reverse the order of application of Articles 5 and 6, and others. Even the retention of minimum value may be allowed on terms agreed between the country and the members. However, only Ecuador has been allowed the benefit of these S&D provisions (except the reservation concerning minimum value), upon notification. [6]

Technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS): The Agreement on SPS provides a two-year transition period for developing countries; however, none of the nine countries that have recently joined the WTO has been allowed any such transition period. The Agreements on TBT and SPS provide that the Committee of each Agreement may grant, upon request, specified time-limited exceptions, in whole or in part, from countries’ obligations under that agreement; however, Mongolia had to accept a commitment to minimize any recourse to the exceptional provisions of the Agreements on TBT and SPS in so far as possible. This implies that it is likely to be difficult for Mongolia to obtain time-limited exceptions under the relevant articles in future.

Import licensing: The Agreement on Import Licensing provides two-year transition periods for the application of (i) submission of licences prior to the customs clearance of goods and (ii) approval of licences within 10 days; however, none of the nine countries has been allowed these transition periods.

Subsidies and countervailing measures (industrial subsidies): The Agreement on Subsidies and Countervailing Measures prohibits subsidies contingent upon export performance (i.e. export subsidies) and upon the use of domestic products in preference to imported products. Under the S&D provisions, the obligation to eliminate export subsidies does not apply to the twenty countries listed in Annex VII to the Agreement (countries whose GNP per capita is less than US $1,000), while for other developing countries, an eight-year transition period is allowed. For the elimination of subsidies contingent upon the preferential use of domestic products, developing countries are allowed five years. Countries in transition are allowed seven years to eliminate these two kinds of subsidies. In all cases, these transitional periods may be extended. In actual fact, Mongolia, Panama, Kyrgyz and Jordan had to agree to eliminate these prohibited subsidies within six, five, four and two years respectively from their dates of accession. Ecuador, Bulgaria, Latvia, Estonia and Georgia had to agree to eliminate them before their accession to the WTO and not to introduce them again. The commitments which Mongolia and Kyrgyz made on these subsidies are unusually onerous in view of the fact that their GNP per capita is substantially lower than US $1,000. The other countries’ commitments on subsidies are burdensome as well. Under the S&D provisions, those countries would have been entitled to longer transition periods with the possibility of extension if they had been original WTO members.

Trade-related investment measures (TRIMs): The Agreement on TRIMs prohibits trade-related investment measures that are inconsistent with the obligations of Articles III and XI of GATT, namely, national treatment and the prohibition of quantitative restrictions. The measures in question are in effect local content and trade balancing requirements. Upon notification, developing countries may have a five- year transition period to eliminate such measures. Nevertheless, only Ecuador has managed, upon its accession, to secure a transition period of four years in which to comply with the Agreement.

Trade-related aspects of intellectual property rights (TRIPS): The Agreement on TRIPS makes provision for a five-year transition period [8] for developing countries and countries in transition, but only Ecuador has been allowed any transition period at all, and even it was granted only a short period of half a year.

Tariffication and special safeguard measures for agricultural products: None of the nine countries that have recently acceded to the WTO has been allowed to use the “tariffication” technique to convert its non-tariff measures under Article 4 of the Agreement on Agriculture. Some WTO members have insisted that tariffication was a right available only to the original WTO members. Special safeguard measures under Article 5 of the Agreement, which were in principle designed to apply to tariffied products, were permitted in the earlier accession cases of Ecuador, Bulgaria and Panama, but were not allowed in the cases of Mongolia, Kyrgyz, Latvia, Estonia and Georgia.

II. WTO-PLUS

In accession negotiations, there has been a tendency to press for commitments beyond the requirements of the WTO agreements. These WTO-plus commitments are discussed in the following section.

Enforcement of the WTO agreements by local (provincial) governments: Article XXIV:12 of GATT and Article I:3(a) of GATS provide that “each contracting party shall take such reasonable measures as may be available to it to ensure observance of the provisions of this Agreement by the regional and local governments and authorities within its territories.” Nevertheless, Kyrgyz, Latvia, Estonia, Georgia and Jordan had to agree that their central governments were the sole authorities on foreign trade policy issues,

and that they would eliminate or nullify any measures taken by their local governments that were in conflict with the WTO agreements. Demanding a commitment on enforcement by local government is a new tendency. The other four countries that acceded to WTO earlier were not required to make any such commitment.

Industrial development policy: While the WTO agreements set out rules and disciplines on subsides and trade related investment measures, they do not interfere in domestic industrial development policy per se. However, Kyrgyz was required to agree that its government would not protect any industry, market or business entity. This is an unprecedented condition for WTO accession, and one that may be interpreted as a commitment by a government to abandon its right to protect industries.

Privatization and economic reform: Article XVII of GATT defines the rules and disciplines which “State Trading Enterprises” must observe in conducting international trade, but there is no obligation concerning privatization or the ownership of enterprises. However, in Working Party meetings, major developed countries have exerted pressure to privatize as many “State Owned Enterprises (SOEs)” as possible in acceding countries. Moreover, most acceded countries have had to agree to report periodically to the WTO on the progress of their privatization programmes and the status of their economic reform programmes. None of the WTO agreements authorizes the Organization to require such information.

Right of appeal: While Article X:3(b) of GATT stipulates that a member shall ensure the right of appeal in “customs matters”, the commitment of Kyrgyz included a right of appeal in “official measures affecting trade”. Georgia also made a commitment including a right of appeal in “administrative rulings on matters subject to WTO”. Those commitments go well beyond the obligation required under GATT, and open up the possibility of a challenge on any trade-related measure.

Price and profit control: The WTO agreements include no provisions relating to price controls on goods and services in general. Rather, price controls on services are subject to market access negotiations on specific services-related commitments. However, Bulgaria, Panama, Kyrgyzstan, Estonia and Georgia were obliged to eliminate price control measures both on goods and services, except for certain products. Kyrgyzstan went on to agree that all price and profit controls would be applied in a WTO-consistent fashion, taking into account the interests of exporting WTO members as provided for in Article III:9 of GATT and Article VIII of GATS. In point of fact, there are no disciplines concerning profit controls in the WTO agreements, and Article VIII of GATS concerns only monopolies and exclusive service suppliers. Jordan made a similar commitment. These are very vague and general commitments, which may restrict the policy options of these countries concerned.

Export duties: Quantitative export restrictions are generally prohibited under GATT, and MFN treatment is required in the application of export duties. However, there is no provision obliging members to bind, reduce or eliminate export duties. Virtually all WTO members have avoided binding export duties in their schedules of concessions. On the other hand, Bulgaria had to freeze the coverage of products subject to export duties and agree to minimize its use of export duties upon its accession. Mongolia had to agree to eliminate export duties on raw cashmere within ten years, while Latvia undertook to abolish all export duties except those on antiques. Estonia and Georgia undertook to minimize the use of export taxes.

TRIMs and investment regime: The Agreement on TRIMs deals with trade-related investment measures and prohibits five specific measures that are inconsistent with GATT. In accession negotiations, however, some WTO members have demanded commitments to eliminate or not to introduce measures on export performance requirements, even if they are not linked to import volume. Such measures are beyond the scope of the Agreement on TRIMs. Furthermore, demands for liberalization of the investment regime and application of national treatment have been made in accession negotiations, although the Agreement on TRIMs does not require commitments on those aspects.

Annex III

OUTLINE OF COMMITMENTS: MARKET ACCESS

A. PROHIBITION OF ALL NON-TARIFF BARRIERS

Conversion of non-tariff measures to tariff equivalents:

A tariff equivalent (TE) of a non-tariff measure is determined from the following formula: TE = [(Internal price) - (External price)] / (External Price)

(a) Using average annual data for the period 1986-1988; (b) “External prices” are actual c.i.f. unit import values; (c) “Internal prices” are representative wholesale prices in the domestic market.

Measures exempted from tariffication include:

(a) Measures taken under balance-of-payments provisions; (b) Measures taken under general provisions of GATT 1994 or other WTO agreements, (such as safeguard measures, measures under the general exceptions set forth in Article XX of GATT 1994, and the like); (c) Measures relating to Special Agricultural Safeguards and Special Treatment, Annex 5.

B. TARIFF REDUCTIONS

Developed countries Developing countries Reduction rate (1995-2000) (1995-2004) Unweighted average 36 % 24 % Minimum tariff reduction 15 % 10 %

C. SPECIAL SAFEGUARD PROVISIONS

Under the special safeguard (SSG) provisions, members are allowed to levy an additional duty at a specifically calculated rate on imports of designated tariffied products, when the import price or volume of a tariffied product reaches the trigger level (trigger price or trigger quantity). Specific features of the SSG provisions include the following:

(a) SSG action may be taken without any need to prove serious injury to domestic production; (b) Exporting countries may not challenge the imposition of an SSG action on their products; (c) SSG provisions may not be invoked against imports within tariff rate quotas; (d) The “SSG” symbol must be marked in the member’s Schedule to signify that the product is under special safeguard provisions; (e) Members are encouraged not to use the price trigger if import volume import is declining.

D. MARKET ACCESS OPPORTUNITIES FOR TARIFFIED PRODUCTS

The objective of the provision of market access opportunities was to guarantee the base-period level of agricultural trade in tariffied products. Member countries are committed to import at least the same quantities of those products as they imported in the base period (current market access opportunities), or, in the case of products in which there had previously been no trade, to import a stated minimum portion of the

base-period consumption of the product (minimum access opportunities). Commitments are implemented through the use of TRQs, i.e. imports within a TRQ are levied at an in-quota rate that is lower than the corresponding MFN rate on the product concerned.

Minimum access opportunities are provided for products imports of which accounted for less than three per cent of domestic consumption in the base period (1986-1988). The minimum access quantity (the absolute quantity that a member is bound to import) is set at three per cent of domestic consumption in the base year period, rising to five per cent by the year 2000 (2004 in the case of developing countries).

Current access opportunities are provided for products imports of which were equal to or greater than three per cent of domestic consumption in the base period. The current access quantity should be at least the same as the quantity imported in the base period. That quantity may be increased during the implementation process.

OUTLINE OF COMMITMENTS: DOMESTIC SUPPORT

Type of domestic Trade-distorting support Criteria effect Reduction commitments Green Box - No effects on domestic production None or minimal Exempted - No effects on agricultural prices - Financed through public funds (no income transfer from consumers) Blue Box - Direct payments under Considered to be Exempted production-limiting programme low - Direct payments based on fixed area and yields, or livestock payments made on a fixed number of heads - Direct payments made on 85% or less of the base level of production Measures to encourage - Investment subsidies Yes Exempted agricultural and rural - Input subsidies generally available development to low-income or resource-poor (applicable only to farmers developing countries) Measures within the de - Product-specific support up to 5% Yes Exempted minimis limits of the total production value of the product - Non-product-specific support up to 5% of the value of total agriculture production - De minimis limit of 10% applies to developing countries Amber Box - Measures that are not included in Yes (i) Calculate the base-period total the Green Box or Blue Box aggregate measurement of support - Product-specific measures, (AMS) including market price support, (ii) Set the bound AMS in the final production-linked direct implementation year, which should payments, input subsidies, etc. be at least 20% less than the base- - Non-product-specific measures, period total AMS including investment subsidies, (iii) Set the annual bound ceiling value marketing-cost reductions, etc by distributing the reductions across implementation years in equal installments. Ensure that the current total AMS for each year does not exceed the annual bound ceiling. (iv) 13.3% rate of reduction applies to developing countries

CRITERIA GOVERNING GREEN BOX MEASURES

General criteria:

- Publicly funded and not involving transfers from consumers; - Having no price support effect for producers.

Type of measures Basic conditions for exemptions i. General services Research, pest and disease control, training services, inspection services, marketing and promotion services and infrastructure services. ii. Public stockholding for food security purposes Must be an integral part of a food security programme identified in national legislation, government purchase should be made at current market prices, and release prices should not exceed current domestic market prices, except in the case of developing countries. iii. Domestic food aid Food purchases must be made at current market prices, except in the case of developing countries (for provision of food to the urban and rural poor on a regular basis at subsidized and reasonable prices). iv. Decoupled income support Must not be related to type or volume of production, prices, or production factors employed, and applies only to the case of no production. v. Income insurance and income safety-net Compensation should cover less than 70 per cent of the programmes income loss, only when the loss has exceeded 30 per cent of gross agricultural income; must not be related to type or volume of production, prices, or production factors employed. vi. Payments for relief from natural disasters Apply only to losses of income (exceeding 30% of production), livestock, land or other production factors. viii. Structural adjustment assistance (producer The subsidy for producer retirement must be conditional on retirement programmes, resource retirement total and permanent retirement of the recipients from programmes or investment aids) marketable agricultural production; The subsidy for resource retirement must be conditional on retiring land from marketable agricultural production for at least three years, and in case of livestock, on its slaughter or permanent disposal; The subsidy for investment should be to assist financial or physical restructuring to overcome structural disadvantages. ix. Payments under environmental programmes The amount of the payment should be limited to the extra costs or loss of income involved in complying with the government’s environmental programme. xi. Payments under regional assistance programmes Eligibility is limited to producers in disadvantaged regions, and to the extra costs or loss of income involved in undertaking agricultural production in those regions; The amount of the payment should not be related to the type or volume of production or the price, and must be generally available to all producers within the disadvantaged region.

BLUE BOX: EXEMPT MEASURES

Direct payments to producers under production-limiting programmes:

- Payments should be based on fixed area and yields; - Payments should be made on 85 per cent or less of the base level of production.

Calculation of AMS: product-specific support:

Market price-support Multiply the actual price difference between the administered price and the Fixed External Reference Price (FERP) by the production quantity of the commodity which receives the price support. (Administered price - FERP) * (Eligible production quantity) - FERP is the average c.i.f. unit import value in the base-year period (1986 - 1988) for a net importing country, or the average f.o.b. unit export value in the base-year period for a net exporting country. FERP is fixed throughout the implementation period; thus the price gap measured here is not the gap between the administered price and the current world price. - Costs to maintain the price gap (e.g. buying-in or storage cost) are not to be included in the AMS. Non-exempt direct If direct payments are dependent on a price gap between the administered price and payments FERP: - calculate AMS as in the case of market price support; or - measure AMS using budgetary outlay. If direct payments are based on factors other than price: - measure AMS using budgetary outlays. Other non-exempt Measure AMS using budgetary outlays provided for measures (including input measures subsidies and other measures such as marketing-cost reduction measures). If budgetary outlays do not reflect the full extent of the subsidies concerned, multiply the gap between the price of the subsidized good/service and its representative market price with the quantity of subsidized good/service

Peace Clause

Article 13 (Due Restraint) stipulates that all the Green Box measures are fully exempt from any action against subsidies (such as countervailing duties, request for consultations or referral of the case to the Dispute Settlement Body) as set out in the relevant provisions in GATT 1994 or the Subsidies Agreement.

While measures other than Green Box measures are not fully immune to such actions against subsidies, those measures are to be given due restraint in initiating any countervailing investigations. Exemptions do not apply, however, if such measures grant product-specific support in excess of the committed level.

The Peace Clause is due to expire in the year 2003.

Annex IV

OUTLINE OF COMMITMENTS: EXPORT SUBSIDIES

A. REDUCTION COMMITMENT

Members are committed to reduce their export subsidies by 36 per cent (24 per cent in the case of developing countries) from the base-period level in monetary terms and by 21 per cent (14 per cent in the case of developing countries) in terms of subsidized quantities, in scheduled steps. The base period for these reduction commitments is 1986-1990. If, however, the level of export subsidies during the period 1991-1992 exceeded the corresponding figure for the base period, members may opt for a “front loading” option, i.e. making their reductions from the 1991-92 level, while in the final implementation year the level is calculated from the 1986-90 base period level. The introduction of any new export subsidy outside the committed level is prohibited.

Export subsidies that are subject to these reduction commitments are:

(a) Direct subsidies (such as payments in kind) conditional on export performance; (b) The supply of non-commercial agricultural stock for export at lower prices; (c) Payments on exports of agricultural products; (d) Support for marketing cost reduction (not applicable to developing countries); (e) Favourable rates for internal transport and freight charges on export shipments (not applicable to developing countries); (f) Subsidies on agricultural products when these are incorporated in exported products.

B. IMPLEMENTATION METHODS (ARTICLE 9.2.b)

The annual level of export subsidies in any of the years between 1996 and 1999 may exceed the annual maximum commitment level provided the following conditions are met:

(a) Cumulative expenditure from the first year of implementation to the year concerned is within 3 per cent of base-period budgetary outlays;

(b) Cumulative quantities from the beginning up to that year are within 1.75 per cent of base-period quantities;

(c) Total expenditure and the total quantities over the whole implementation period do not exceed the sum of the corresponding annual values specified in the schedule;

(d) Reduction commitments on expenditure and quantities at the end of the implementation period are maintained.

In the case of developing countries, the following export subsidy measures are exempted form the reduction commitments under Article 9.4:

(a) Subsidies for the marketing of exports of agricultural products (including handling, upgrading and other processing costs, and the cost of international transport and freight);

(b) Internal transport and freight charges on export shipments provided or mandated by governments on terms more favourable than in the case of the corresponding charges for domestic shipments.

C. CIRCUMVENTION OF COMMITMENTS

Article 10 (Prevention of circumvention of export subsidies commitment) prevents circumvention of the above commitments by binding members to four disciplines:

(a) Prohibition of the introduction of new export subsidies: Members may not provide export subsidies other than those listed in Article 9.1, nor may they do so by the use of non-commercial transactions;

(b) Treatment of export credit: Export credits, export credit guarantees and insurance programmes are not included in the reduction commitment, but members undertake to work for the development of internationally agreed disciplines with which these measures will have to comply;

(c) Transparency in subsidized export quantities: Where the exported quantity is in excess of the reduction commitment level, the member is required to provide evidence that such excess amount did not receive any export subsidies;

(d) Prevention of export subsidies disguised as food aid: Food aid may not be tied to commercial exports of the donor country’s agricultural products; it must be provided either as a full grant or at an internationally agreed concessional rate for food aid.

D. EXPORT PROHIBITION AND RESTRICTIONS

The Agreement does not restrict export prohibition or export restriction, but Article 12 states that a member is required to:

(a) Give due consideration to the effects of such action on importing members’ food security; and (b) Notify the Committee on Agriculture in writing before taking the action, and provide opportunities for consultations with other interested members upon request. (c) Developing country members which are not net exporters of the product concerned are exempted from this obligation.

E. PEACE CLAUSE (ARTICLE 13)

Article 13 (Due Restraint) exempts export subsidy measures that conform to the Agreement on Agriculture from actions based on relevant GATT 1994 provisions and the Subsidies Agreement. Paragraph (c) of Article 13 (Due Restraint) states that export subsidies conforming to the Agreement are:

(a) Subject to countervailing duties only upon a determination of injury or threat based on volume, effect on prices or consequent impact in accordance with Article VI (Anti-dumping and Countervailing duties) of GATT 1994 and the Subsidies Agreement;

(b) But to be treated with due restraint with respect to the initiation of any countervailing duty investigation;

(c) And exempt from actions (i.e. consultations and referral to the Dispute Settlement Body) based on non-violation nullification or impairment of the benefits of tariff concessions accruing to another member as specified in paragraph 1(b) of Article XXII (Nullification or Impairment) of GATT 1994.

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