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* United Nations Conference on Trade and Development, Geneva, Switzerland.
The views expressed in this paper are those of the author and do not necessarily reflect the views of the United Nations Secretariat.
The author thanks Dr. Roman Grynberg, the Commonwealth Secretariat, Dr. William J. Drake, University of Maryland, and Mr. Cato Adrian, WTO Secretariat, for their assistance in preparing this case study.
Table of Contents
Vanuatu applied for WTO membership in July 1995. The country had been a de facto member of the GATT; colonial countries automatically attained this status when they achieved independence from colonial powers that were GATT members. However, to become full-fledge members of the GATT, these countries were supposed to apply to formally accede to the organization before their de facto status expired. The countries that went through this process in time automatically became members of the WTO when it replaced the GATT organization. However, the government of Vanuatu was unable to decide whether it should go through this accession process before its de facto GATT membership expired. As such, when it subsequently decided that it would in fact like to join the WTO, it had to apply for membership as an outsider. More importantly, the new accession process established with the WTO was much more demanding than that of the GATT.2
The government of Vanuatu expected that the industrialized countries that control the WTO would be eager to bring it into the organization. This would be in keeping with their often-declared objective of helping the developing world join and benefit from the international trade system. And being one of the poorest countries in the world, Vanuatu expected that the rich countries would chart an accommodative course and not be too demanding with respect to the terms of its accession.
Alas, events were to prove the government wrong. After a difficult six-year process, Vanuatu came close to acceding, but it ultimately decided that it could not meet the stiff requirements set down by the United States. Hence, in 2001 the government abruptly backed away from the deal struck by its negotiators and threw its accession into limbo, where it has remained since.
The purpose of this case study is two-fold. First, it traces the historical evolution of the aborted accession negotiations in order to establish a baseline against which Vanuatu’s experience can be evaluated. Second, with this context established, the case study maps out the major constraints and choices Vanuatu faced at various steps along the way. These examples provide a menu of policy options and lessons that illustrate the strategic challenges of conducting international commercial diplomacy. Finally, the study concludes by highlighting some potential lessons to be learned by other countries involved in the WTO accession process.
I. VANUATU’S CONSTRAINTS
Vanuatu is one of the Least Developed Countries (LDCs), the official status designated by the United Nations for the poorest countries in the world. International economic institutions such as the World Bank, the International Monetary Fund, and the WTO formally recognize this designation. At present, forty-eight countries are categorized as LDCs, and the average of their gross domestic products (GDP) per capita is around $300. Although at over $1,000 Vanuatu has the highest GDP per capita of the LDCs, this is mainly due to the existence of a sizeable, affluent, expatriate community. The income disparity between the indigenous population, called “ni-Vanuatu,” and the expatriates is estimated to be over ten-fold.
has many of the structural problems common to poor island countries.
A joint survey by the government of Vanuatu and the United Nations reports
that Vanuatu’s adult literacy rate is about thirty percent for
both males and females. Over seventy percent of children leave the education
system at the end of primary school. About eighty percent of all employment
is in the rural areas and comprises agricultural subsistence production.
Fishing is also a growing activity. Cocoa, beef, timber, and copra---the
dried, oil-bearing meat of coconuts---are the major export commodities.
Vanuatu’s most important trade partner is Australia, which accounts for forty percent of its trade. New Zealand comes second, accounting for eleven percent. In contrast, the United State does not have significant trade relations with Vanuatu. Vanuatu’s trade with the United States represents less than two percent of the country’s trade. External aid forms a substantial part of foreign exchange receipts, representing twenty percent of GDP.3
Vanuatu has no personal or corporate income taxes, no estate or gift duties and no capital gains taxes on residents or non-residents. At the time of its WTO application the main sources of public revenues were international trade related duties and fees.
Economic development in Vanuatu has been hindered by export dependence on a few commodities that have volatile prices on world markets. Other barrier include the prevalence of natural disasters such as earthquake and tropical cyclones, and a range of related problems common to remote island nations.
These economic conditions presented a mixed picture from the standpoint of acceding to and subsequently participating in the WTO. On the one hand, many of the country’s key industries are small, inefficient, and unlikely to do well should well resourced foreign firms seek to attain market entry. Given the structure of the economy and the poverty experienced by much of the population, any real surge in foreign products and control could endanger the country’s political stability and economic development. More to the point, Vanuatu’s economic weaknesses and small markets would not provide its negotiators at the WTO with many big bargaining chips.
On the other hand, participation in the WTO system could bring in capital, knowledge, and related benefits, and give the country greater recognition at the international level. On balance then, the government of Vanuatu was hoping that WTO membership would be a key element of a new development strategy. However, economic problems meant that its calculations as to how much it might be worth giving up in order to achieve WTO membership were not entirely straightforward.
Domestic political conditions also provided a mixed picture from the standpoint of accession negotiations. Just as the process was gathering steam in 1996-98, the government was rocked by political scandals. There were multiple revelations of misconduct by prominent politicians, which resulted in a series of parliamentary non-confidence votes that changed the federal government twice a year during the period. In addition, revelations of large-scale misuse of public funds set off rioting in the capital city of Port-Villa.
In order to restore confidence in the political system and economy, the government in 1998 gave in to demands by the Asian Development Bank (ADB) that it implement a Comprehensive Reform Program (CRP).4 Prior to the CRP, trade taxes consisted of import and export duties, licensing fees and service charges. The CPR drastically changed the structure of trade taxes. The import duty system was simplified, and licensing fees and export duties were abolished. Service charges were replaced by a value-added tax system, but this last move resulted in significant enforcement problems as the government lacked the technical capacity to systematically collect value-added taxes. The cumulative impact of all these changes was that the government experienced a substantial reduction in its revenues, which in turn greatly increased its fiscal dependence on import duties and thereby complicated the accession negotiations.
2. International Constraints
A second constraint Vanuatu faced was the bargaining stance adopted by the United States. The United States has been, of course, the leading champion of free trade around the world. This position normally reflects both particularistic and systemic considerations. The former refers to the United States’ material interests in securing access to specific foreign markets, while the latter refers to its leadership role in promoting an open global economy through strong multilateral institutions and disciplines. Ensuring that all prospective members undertake strong liberalization commitments---often akin to those of much larger and richer countries---was a way to expand the scope of the open trading system, increase the number of WTO members with strong commitments and, by extension, improve the political dynamics of international trade policy. Doing so would serve America’s particularistic interests down the line, i.e. by establishing precedents that could be invoked in more economically significant accession negotiations with countries like China and Russia. In keeping with this general orientation, the U.S. Trade Representative (USTR) consistently applied very strong pressure on Vanuatu to make very demanding concessions.
Finally, Vanuatu’s status as a remote island LDC placed it in a weak bargaining position. The government generally lacked significant international negotiating experience, as well as strong diplomatic allies which it could rely on when the going got tough. Accordingly, Vanuatu would have to respond to any pressure tactics essentially on its own.
II. VANUATU’S CHOICES
Before the Working Party could begin the conformity assessment, the government of Vanuatu had to complete some preparatory work. The most important activity was to prepare a Memorandum on the Foreign Trade Regime describing in detail Vanuatu’s economic and trade systems. This was submitted in 1996, after which Working Party members provided a first round of questions to which it had to respond. In addition, throughout the accession process, the Working Party would request that Vanuatu provide detailed economic, legislative, and regulatory information to further clarify the fit, or lack thereof, between the country’s measures and the WTO obligations.
Simply gathering these inputs was a big hurdle to overcome. Like many non-members, especially the LDCs, Vanuatu did not have in place the sort of institutional machinery and expertise needed to assemble the necessary information and to reevaluate domestic policies in light of WTO disciplines. Due to lack of resources the government had only a few officials dealing with the accession process. In some ways, the challenges the government had to manage were a harbinger of things to come.
Another notable disadvantage that Vanuatu’s trade policy makers faced was a lack of representation in Geneva, Switzerland. Most countries have a Permanent Mission in Geneva, the staff of which can represent them in international organizations.6 And usually, before a country applies for WTO membership, it applies for observer status in the organization and, if this is granted, sends mission staff to attend WTO meetings. By so doing they could learn the dynamics of WTO bodies and negotiations, including those dealing with accession. Vanuatu, however, did not have a Mission in Geneva, and hence its trade decision makers could not benefit from these information gathering and learning opportunities or get socialized into the WTO way of doing things. Moreover, Vanuatu could not have the sort of easy access to and ongoing consultations with trade officials from the major trading countries, which would be highly desirable both before and throughout the negotiations. Hence, the government of Vanuatu was forced to dive into the accession process without adequate preparation in a variety of respects.
Before the working party could proceed with the conformity assessment, there was a major configurative issue that had to be resolved.
Special and Differential Treatment
Vanuatu was keen to obtain S&D status because, to date, the developing countries that had acceded or were about to accede to the WTO had been obliged to undertaken liberalization commitments that were as substantial and sometimes even exceeded those made by the industrialized countries in some areas.7 Vanuatu was the first LDC to enter into accession negotiations, and it was very concerned that despite its status as one of the world’s poorest countries it would be compelled to make similar commitments. Accordingly, it hoped to receive a priori, across-the-board protection from any demands that it undertakes really sweeping liberalization commitments as the price of entry into the WTO. Doing so would significantly bolster its bargaining position.
The government of Vanuatu had two reasons for hoping that its request would be granted. First, it believed that since the country’s share of total international trade was so tiny, whether or not it had S&D treatment would not matter much to other WP members. Second, on a number of occasions WTO members had formally acknowledged the problems confronting LDCs and had pledged to assist with their integration into the international trading system. Taken together, these considerations seemed to constitute a straightforward case for according the country S&D treatment.
Nevertheless, to its surprise, the Working Party refused Vanuatu’s request. The United States played a lead role in the decision. U.S. negotiators argued that S&D treatment was available only to WTO members, not to countries that were merely prospective members. Moreover, they maintained that if Vanuatu wanted flexibility with respect to the extent and the pace of implementation of its commitments, this would have to be negotiated on a case-by-case basis, rather than granted across-the-board at the outset. Other Working Party members supported the U.S. position, or at least did not publicly object to it. Hence, Vanuatu’s negotiators had to begin down the road to accession without the enhanced bargaining leverage that S&D status would have provided. This was an critically important turning point that would have a substantial impact on the subsequent evolution and eventual outcome of the accession negotiations.
For historical reasons, the issue of land ownership was particularly sensitive in Vanuatu. The 1980 constitution declared that, “All land in the Republic belongs to the indigenous custom owners and their descendants.” Hence, with the abolition of the colonial freeholder system, all land that had been occupied by colonialists reverted to its traditional owners. However, the development of custom land is frequently frustrated by numerous disputes over ownership and boundaries. Such problems have been common among Melanesian countries, and none of them have been able to deal with these effectively because of the high political risks involved.
Some industrialized country members of the Working Party argued that Vanuatu’s land laws did not provide foreigners with adequate access to real estate or protection of property. In consequence, they demanded that the government undertake legal reforms. Vanuatu’s negotiators were surprised by this demand, since the question of domestic land policy was not a subject covered by the WTO’s general obligations and disciplines. The issue might only be relevant if Vanuatu chose to make negotiable Specific Commitments on market access and national treatment under the General Agreement on Trade in Services (GATS) that involved commercial presence. Even so, since the procedural rules of the accession process did not specifically define which subjects were or were not permissible to raise, governments were free to press the issue. Nevertheless, Vanuatu said it would not budge, even if its WTO accession was therefore jeopardized. In the end, the Working Party members involved opted to abandon this “WTO-plus” demand and hand Vanuatu a rare victory in order to keep the process moving forward.
Quantitative Restrictions and Export Price Supports
Vanuatu had long imposed seasonal quantitative restrictions on potatoes to develop the Irish potato production capacity in the island of Tanna, situated in the northwest of Vanuatu. The potato production program was considered a key rural agricultural development project. However, under the WTO Agreement on Agriculture, current and potential members are obliged to convert any non-tariff measures to tariffs. But in doing so, Vanuatu wanted to retain the right to protect potato production in accordance with the agreement’s Article 5 provision on special safeguard (SSG) measures.
SSG measures allow members to impose additional tariffs on agricultural products when import volumes exceed defined trigger levels, or when import prices fall below defined trigger prices. They are available only when countries specifically reserve access to them in their negotiated schedules of commitments. For example, Bulgaria and Panama, which had acceded to the WTO previously, managed to obtain the right to employ SSG measures. Vanuatu believed that it was perfectly reasonable to expect these precedents to apply in its case, especially because the value of the imports concerned was so marginal.
Another contested measure concerned copra. Vanuatu occasionally had used a price support program for this commodity. Copra was one of the main cash crops and an important income source for substantial number of local farmers, yet its international prices were volatile and resulted in substantial income fluctuations for these farmers. To ease the fluctuations, a state-trading agency called the Vanuatu Commodity Marketing Board activated the price support program when the price of copra fell to a trigger level. This scheme was financed with the funds generated by the Board and by the Stabilization of Export Earning Scheme (Stabex) Funds. The latter were provided under the first Lome Convention between the European Communities (EC) and the African, Caribbean and Pacific countries, but were eventually terminated.8
The government of Vanuatu wanted to retain its right to use the price support program for copra under Article 15 of the WTO’s Agreement on Agriculture, which exempts LDC members from any reduction commitments. It expected that Working Party members would accept this request because the WTO had extended the exemption to its LDC members. Moreover, as in the case of potato imports, the value of copra exports was so marginal that the price support would not notably affect other countries.
Australia and New Zealand, however, refused to grant Vanuatu the right to use SSG measures or keep the price support program. Both countries are major agricultural exporters and ardent opponents of support measures. With regard to special safeguards, they argued that this was a legitimate issue during the Uruguay Round negotiations, but not in accession negotiations. For the price support program, they maintained that only existing LDC members can benefit from the LDC exemption noted in Article 15 of the Agreement on Agriculture, whereas countries seeking to accede should not maintain any support measures except within “de minimis” level specified in the Agreement. The fact that Mongolia, though not a LDC but surely a very poor country, acceded to the WTO while yielding to the same demands from Australia and New Zealand on these issues did not help Vanuatu’s cause (see Table 2 of the Annex).
Vanuatu adamantly disagreed, pointing to the accommodative treatment accorded Panama and Bulgaria in regards to SSG measures, and the difficult condition of copra farmers in the rural area. Nevertheless, Australia and New Zealand refused to change their positions. Indeed, they threatened that if Vanuatu did not yield to their demands, their technical assistance to its agriculture sector would be terminated. A number of projects had been initiated in Vanuatu to diversify agricultural products, and Australia and New Zealand had been important donors. These projects aimed at reducing copra production and encouraged production of other commodities such as beef, coffee, vegetables, poultry, vanilla, and pepper.
Accordingly, Vanuatu decided to give in to the demands from Australia and New Zealand. As things turned out, abandoning access to SSG measures was not a difficult decision after all; the government’s Trade Division was later informed by the Customs Department that the seasonal quantitative restrictions had already been abolished in 1993. The government’s misunderstanding of its own policy was attributed to a lack of administrative capacity and effective knowledge management due to limited resources and high personnel turnover. On the question of the price support, Vanuatu had no cards to play in support of its position. Hence, in order to stay in the accession game, it had to relent in the hope that the increased output from alternative crops under the on-going diversification programs would eventually offset the loss of copra production as a result of the elimination of the price support program.
The Agreements on Government Procurement and Trade in Civil Aircraft
Moreover, with regard to procurement, Vanuatu said that it was obliged to observe the rules and special arrangements established by aid donors, whom it did not want to alienate. It also claimed that the country’s economy was too small to be of interest to WTO members, and that there was therefore little reason to undertake legal commitments on this score. With regard to civil aircraft, the reasoning offered was in a similar vein: since the national carrier, Air Vanuatu, leases all of its aircraft, taking on new commitments here would be an irrelevant burden.
These facts notwithstanding, U.S. negotiators were extremely reluctant to accept Vanuatu’s request, and maintained a hard line deep into the negotiation process. But Vanuatu stood its ground, insisting that without the transition periods it would withdraw its WTO membership application. These problems were to remain unresolved as the bilateral access negotiations got underway.
Most of the bilateral negotiations went very smoothly and were completed within just a few days. For example, Australia and New Zealand demanded that Vanuatu reduce its tariffs on some daily products, but such demands did not cause particular difficulty. The vast majority of the Working Party members viewed Vanuatu’s proposed terms as being more or less reasonable, and believed that its accession was an easy win-win call that would be good for the country, the WTO, and the international trading system. But on the other hand, Vanuatu also lacked ardent champions willing to expend political capital to support it if the going got rough. And as it happened, the going got very tough.
The main difficulty involved the United States. Market access negotiations between America and Vanuatu turned out to be a very difficult and lengthy affair. While Vanuatu’s reluctance to rapidly open certain markets to full international competition was undoubtedly a key reason for this, America’s negotiating stance undeniably played a role as well.
As was noted above, the U.S. approach to WTO accession negotiations generally reflects a mix of particularistic and systemic considerations. But in the case of Vanuatu, the United States did not have especially strong stakes in its tiny markets. Total trade between the two countries in the year prior to the commencement of bilateral negotiations was less than a paltry $1 million.10 Indeed, the most likely source of competition for Vanuatu post-accession appeared to be companies from Australia, New Zealand, Japan, and the EU, and in most instances market access negotiations with those countries went rather easily. While of course Vanuatu’s accession could be expected to open up some new opportunities, there was not a long list of powerful American firms just champing at the bit and demanding that the USTR take a tough stance.
Instead, the U.S. approach seems to have been driven more by systemic concerns. Both with Vanuatu and with other LDCs, the United States very much wanted to avoid establishing any “bad precedents” in accession negotiations that could be cited by larger and more significant applicants down the line. As such, it chose to consistently take the hardest line of any WTO member and assumed that Vanuatu would have no choice but to comply with its demands.
Trade in Goods
Vanuatu pointed out that its tariff offer was far better than what many WTO members had agreed to during the Uruguay Round, both in terms of product coverage and depth of tariff reduction. The veracity of this view is demonstrated by the figures presented in Table 3 (see Annex). For example, the simple averages of bound tariffs for the countries included in the table ranged from fifty-nine percent (India) to fourteen percent (Senegal). Moreover, the shares of bound tariff lines for these countries ranged from sixty-eight percent (Thailand) to eight percent (Sri Lanka), the latter reflecting much lower levels of commitment than what Vanuatu was proposing.
Of greater direct relevance, Vanuatu’s tariff offer was much better than that of the Solomon Islands, a neighboring country and an LDC member of the WTO (Table 2). Solomon Islands had acceded to the GATT during the Uruguay Round of the Multilateral Trade Negotiations by converting its de facto GATT membership to full membership status. It has bound all tariffs at a simple average rate of eighty per cent, a substantially higher rate than Vanuatu’s offer. Another neighboring country, Papua New Guinea, has bound all tariffs at a simple average of forty-three percent, though its economy is much larger than Vanuatu’s, and it is not a LDC (Table 2).
In addition to the tariff proposal, Vanuatu proposed that it would provide duty free access for more than 160 tariff lines in aircraft, aircraft parts, and pharmaceutical products by the year 2005. This offer was made against the backdrop of the Zero-for-Zero Tariff Reduction Initiatives and the Information Technology Agreement, which Vanuatu offered to participate in later on.11 This offer was noteworthy because no LDCs and only a limited number of developing countries that were already WTO members had participated in these agreements.
All these considerations notwithstanding, US negotiators took a maximalist position. They maintained that accession terms had to be benchmarked to the very lowest levels previously obtained. By the USTR’s logic, since Mongolia had agreed to bind all its tariffs at the simple average rate of twenty percent ( see Table 2), Vanuatu’s proposal was not good enough.
The second problem area concerned Vanuatu’s practice of applying tariff escalations to alcohol, tobacco, and weapons. In Vanuatu these products were treated as “sin goods,” and the government wanted to maintain high tariffs in part to discourage their spread in the country. Vanuatu did not see why it should be forced to give up this practice insofar as many WTO members practiced tariff escalation on the very same products. But U.S. negotiators argued that tariff escalation discriminated against imported products, and insisted that normal taxes should be used instead.
In principle, domestic taxes are clearly preferable to border taxes as instruments for raising revenues because they are trade-neutral and nondiscriminatory. But in practice, LDCs like Vanuatu face a general problem in applying them due to the state’s limited capacity to collect fees. Economic and political calculations undoubtedly come into play as well. Hence, the government levied property and service taxes and imposed business license fees. But there were no excise taxes on domestic primary producers or manufacturers, with the exception of breweries. A significant part of the population engaged in these activities was poor, which also would make introducing excise taxes difficult.
Similarly, Vanuatu did not levy income taxes, e.g. on personal or corporate income, or on estates, gifts, or capital gains. There had been debate over the years about whether to introduce such taxes, but fears were raised that this would discourage wealthy foreigners from settling in the country and undercut its status as an offshore finance center. While some of these arguments may have been overstated, there was strong opposition to income taxes in influential circles, and the government remained very skittish about eroding one of its main attractions to inbound capital flows. Accordingly, domestic income taxes did not seem a realistic option, at least for some time.
In consequence, Vanuatu instead relied on import duties for about eighty percent of its total tax revenue. Accordingly, the government was not willing to reduce the proposed bound tariff rates below forty-nine percent, or to replace its high tariffs on sin goods with more neutral tax measures. This left it at an impasse with the United States.
Trade in Services
The first was telecommunications, on which the United States was concurrently making a major push in the WTO. Vanuatu initially refused the U.S. demand that it liberalize its markets, noting that it had given France Telecom and Cable & Wireless an exclusive contract until 2012.13 The government was very concerned that attempting to renege on that deal would discourage the companies from investing in the nation’s telecommunications infrastructure at a time when modern networks were becoming increasingly central to investment, trade, and wealth creation. Under pressure from the United States, the government later reversed this position somewhat, agreeing that it would open the sector to competition when the companies’ contract expired.
The other excluded sector was retail and wholesale trade. The reasons for this were perfectly clear to everyone. Retail and wholesale trade were highly important to the ni-Vanuatu, and there was strong and widespread sentiment that their interests would be severely affected by foreign competition. Moreover, the national policy goal of promoting ni-Vanuatu’s participation in the business community added to the solid political consensus that liberalization of this particular sector was virtually taboo.
With these factors in mind, the government refused to open retail and wholesale trade. Anyway, it argued, Vanuatu’s offer on services was already far more substantial than those of many WTO members who were not being subject to a similar level of pressure. And indeed, as is widely recognized, the services concessions of developing country members are generally quite limited. Of particular importance, comparisons with Solomon Islands, Papua New Guinea and Mongolia (Table 2) indicated that Vanuatu’s offer was notably greater than theirs.
Despite the probable benefits to Vanuatu and the low cost to the United States of bringing the country into the international trading system, neither side was willing to budge on these issues. In consequence, the negotiations in the fall of 1999 resulted in a deadlock. Given the absence of new ideas and political will and the distractions provided by other events in the United States and internationally, no follow-up meetings were held in the year 2000. Vanuatu’s application was in limbo, for what would turn out to be just the first time.
From Compromise to Collapse
However, one major issue remained unresolved: market access to the wholesale and retail trade. Vanuatu still insisted that opening this field to foreign entry would pose too big a threat to the livelihoods of poor local merchants and workers, and accordingly that this could undermine its efforts to sustain a political consensus for joining the WTO. Nevertheless, the United States would not accept that these concerns could not be overcome and hence refused to relent on the point.
The fourth WTO Ministerial Conference was scheduled to be held in Doha, Qatar, in November 2001. If the wholesale and retail issue somehow could be resolved, the Ministerial would then be able to make official Vanuatu’s accession. From a practical standpoint this would be a huge relief to all sides, since the negotiations by then had been going on for over six years. More importantly, from a symbolic standpoint, successful completion of the negotiations would be a political and public relations coup. Vanuatu would be the first LDC to be granted WTO membership, and it could be highly beneficial to the WTO to do so in conjunction with the conference’s issuing of a statement on LDC issues and launching of the “development round” of multilateral negotiations.
Conscious of these stakes, the WTO Secretariat stepped forward for the first time in the process. The Secretariat informed Vanuatu that its accession would be denied unless it gave in to the Americans and undertook strong market access commitments on wholesale and retail trade. One can only imagine how this added pressure from the institution itself focused minds in a negotiating team of an LDC that had undergone a protracted struggle with the world’s superpower.
As it happened, in the wake of the Secretariat’s move and under extreme time pressure, the negotiators sharply reversed course and agreed to liberalize market access in wholesale and retail services. The only conditions placed on the offer involved national treatment: non-citizens and non-resident investors would have to obtain a license and pay an additional annual fee. The United States decided it could live with this limitation.
On October 29, 2001 the WP met for its last time. With no obstacles remaining, the Working Party formally accepted the country’s terms of accession. The next day, the world press reported that Vanuatu had completed its accession negotiations and that its membership would be announced at Doha.
Alas, the story did not end there. Just a few days later, the government of Vanuatu sent a letter to the WTO Secretariat requesting a “technical delay” in its accession procedure. The letter did not publicly state how long a pause in the process it wanted, but there has been no initiative since then to conclude the matter. Moreover, the letter did not explain the reasons for this eleventh hour reversal, and the government has offered no official explanation since then to clarify the matter. Not surprisingly, this has given rise to speculations and competing accounts from various observers. For example, the website of Vanuatu Maritime Services Ltd. suggests that,
Close analysis showed that the reduction of import duties would dangerously undermine the revenue base of the country. The loss of revenue could not be recouped by other taxes. It would mean introducing an income tax, which does not currently exist. Further, the country's trade balance is already negative: any further reduction of import duties would aggravate the situation, resulting in local job losses that could not be replaced with new employment.14
This claim does not seem convincing though, since the United States had accepted Vanuatu’s tariff proposal. A more plausible view that one can hear among trade policy insiders is that acting under pressure from the WTO Secretariat, the negotiators had made commitments on the retail and wholesale trade without having agreement back home. It is not clear whether the negotiators had coordinated fully with the capital before making the commitments, or whether the Minister of Trade simply decided to reverse course after the fact. Either way, the government was unable to sign off on the deal.
In an effort to come to Vanuatu’s aid, Papua New Guinea stepped into the mix. The Doha Ministerial was set to approve China’s accession, a decision that under WTO rules would have to be taken with the consensus of all members. Papua New Guinea rather boldly tried to put pressure on the Director-General of the WTO, threatening that unless Vanuatu’s was admitted, it would not give its consent to the accession of any countries. However, Papua New Guinea is by no means a powerhouse in the trade negotiation realm and could not resist pressures itself. Lacking supporters for its cause, Papua New Guinea backed off before the Doha Ministerial Conference.
Accordingly, tiny Vanuatu was left to its own devices, and its accession was placed on indefinite hold. Since then it government representatives have participated in some trade policy training seminars and been observers to a few WTO meetings, presumably with an eye to keeping abreast of developments and perhaps building some capacity before making another move. But at present, there is no sign of when such a move might come, or of whether anything will change domestically or within the WTO setting to make accepting the agreement any easier.
Constraints and Choices
The government of Vanuatu may have needed greater institutional capacity to manage the accession process. The abovementioned lack of a permanent mission in Geneva provides a particularly clear example of this. But more generally, the government’s underdeveloped administrative machinery for the formulation and implementation of economic policy in field from tax collection to telecommunications regulation added to the challenges of conforming to WTO obligations and negotiating with WTO members.
a.2. Knowledge Management.
A particularly important subcategory of institutional capacity is knowledge management. Here too, the government of Vanuatu may not have had in place entirely adequate mechanisms. Ideally these would include, inter alia, the ability to generate, access, and aggregate information, whether in electronic or print form; to corroborate and (re)assess such information in a systematic, ongoing manner; and to fully learn from it in order to adopt effective bargaining strategies. Internally, the government may not have had its informational house in order; indeed, in the case of special safeguards for potato imports, the negotiators did not know that the government’s policy had changed years prior. And externally, it may not have understood WTO dynamics or the intentions and negotiating strategies of the Working Party members.
a. 3. Domestic Political Support
Democratic governments need domestic political support in order to make important choices and credible commitments in international trade negotiations. It is not clear that Vanuatu’s government had aligned the relevant interest groups or built support for accession among the broader public. Indeed, its 11th hour decision to suspend the process may suggest that important stakeholders did not support the negotiating team’s announced acceptance of terms in October 2001.
a.4. Government Revenues
Clearly, the government’s heavy fiscal reliance on trade duties and fees was a major constraint on its negotiating freedom. Reducing or eliminating charges on imports and exports would make it difficult for the government to cover its expenditures, especially in times of national emergencies.
The government needed a greater ability to assess and respond to the U.S. demands. If one assumes that particularistic interests ordinarily define national policies, then it might have seemed reasonable to expect that the United States would have no reason to really insist, down to the bitter end, on securing strong market access commitments from a country with tiny markets. But the United States had a wider and more long-term agenda that was really not so much about Vanuatu at all, but was rather about precedents and building adherence to the WTO’s institutional framework and disciplines. It hence insisted when it might have been expected to relent, and this left Vanuatu in a difficult position.
b.2. Lack of Allies
A major obstacle to more effective bargaining throughout the process was Vanuatu’s lack of significant allies it could turn to in attempting to soften the American demands. While some member countries such as Vanuatu’s neighbor, Papua New Guinea sympathized with its situation, they had no ability to influence the U.S. position. And for their part, the other industrialized countries had their own problems and agendas and seemed unwilling to expend political capital on Vanuatu’s behalf. Vanuatu was therefore on its own in an extremely asymmetric bargaining relationship.
c. Multilateral Conformity Assessment
the multilateral conformity assessment, there were some decision points
in which Vanuatu had options in deciding its course.
c.1. Special and Differential Treatment
The government of Vanuatu apparently believed that the industrialized countries would be so interested in bringing an LDC into the fold, and would see so little cost in doing so, that they would allow it to have S&D treatment. The failure to secure even narrowly targeted S&D treatment had a pervasive impact on the ways individual issues were addressed throughout the duration of the negotiations.
Did Vanuatu have any other options in arguing its case for S&D treatment, or in building support for its position?
Once the battle was lost, how should Vanuatu have proceeded? Might it have been advisable to delay further negotiations and try to use the defeat to muster political support, or was it better to plunge ahead anyway?
c.2. Export Price Supports
The government argued that its export subsidies for copra were consistent with the WTO Agreement on Agriculture, and that calls for their elimination constituted “WTO-plus” demands. Nevertheless, Australia and New Zealand insisted that they be eliminated.
Could the fact that the price supports were provided from the European Union’s Stabex funds have provided Vanuatu with any leverage, either in the negotiations or in providing alternative support to Vanuatu’s poor copra farmers?
c. 3. Other Agreements
Vanuatu refused to participate in the WTO’s agreements on government procurement and civil aircraft, and doggedly insisted that it would need two years from accession to implement the disciplines on customs valuation and TRIPs. Irrespective of the substantive merits of the arguments behind them, these positions became a source of friction with American negotiators and did not provide any tactical advantage.
Given the Americans’ systemic concerns on these issues and the relatively low cost to Vanuatu of relenting on some of them, could the government have explored offering concessions here in exchange for accommodation on other matters it cared more about, e.g. retail and wholesale trade?
d. Bilateral Market Access Negotiations
d..1. Trade in Goods
Vanuatu’s insistence on a forty nine percent bound tariff rate and its desire to retain some tariff peaks on sin goods met with strong opposition from the United States and may have contributed to America’s hard line on other points.
Beyond simply capitulating by lowering the bound rate and shifting entirely to administratively demanding trade-neutral taxation (mentioned in question a.4, above) on sin goods, were there any other options Vanuatu could have explored to reduce tensions over these issues?
d.2. Trade in Services
Vanuatu’s ability to respond to American demands was limited by the telecommunications monopoly granted to France Telecom and Cable & Wireless until 2012, and by the very high level of domestic sensitivity with regard to retail and wholesale services.
Is there anything Vanuatu could have done either internally or in its international relationships---with foreign corporations, governments, and aid donors---to help facilitate a near-term adjustment toward open markets and thereby make a deal politically acceptable at home and abroad?
e. From Collapse to Renewal?
As there is no expiration date for Vanuatu’s accession application, the main question is, what should the government do now?
Would it make sense to hold off on restarting negotiations until conditions are riper? Perhaps somewhere in the course of the “development round” a strategic window of opportunity will open up to mobilize support more effectively. Or perhaps domestic political conditions will somehow evolve so as to make sweeping liberalization commitments more viable.
Alternatively, would waiting be risky? With the passage of time the rules of the international trade regime may become stricter and international markets may become more hotly contested. Perhaps the costs of entry---in terms of commitments and relative national competitiveness---will be significantly higher in a few years, particularly once the current round is over.
If waiting therefore is deemed to be risky, should Vanuatu promptly resume bilateral negotiations with the United States? Could the government try to negotiate compensation measures in exchange for accepting U.S. demands on wholesale and retail trade? For example, while these are not normally to the Americans’ tastes, mandatory measures to employ and train local personnel or partial liberalization, e.g allowing foreign investments in distribution of imported products, might be explored.
2. Considerations for the International Community
a. Institutional Issues
If the objective is to increase membership in the international trading system, then it is not in the WTO institutional interest to have accession negotiations fail. While large industrial economies like China and Russia can defend their interests in negotiations and handle the adjustment costs that accession entails with comparative ease, the LDCs---the poorest of the poor---are clearly in a less advantageous position. A pressing outstanding question then is whether procedural rules should be established to assist such countries and allow them a “soft landing,” in keeping with the WTO’s charter provisions on progressive liberalization.
At the third WTO Ministerial Conference at Seattle in December 1999, LDC members proposed granting acceding LDCs the full LDC status permitted under the WTO framework, to include S&D treatment. The main thrust of the proposal is indicated in Table 6 in the Annex.15 These members argued that such an initiative would be in accordance with the formal ministerial pledge to assist LDCs in their integration into the international trading system. In addition, the EU proposed to simplify and facilitate the accession process for LDCs. The main thrust of the proposal is indicated in Table 7 in the Annex.16 While the other industrialized countries have not taken formal positions and the proposal has not been discussed subsequently, the idea is still out there and has received support from countries in both the North and the South. If the current round is in fact intended to promote global development, should a serious effort be made to advance this issue?17
b. The Industrialized Countries
The case of Vanuatu may offer some lessons that merit contemplation in Washington D.C. The average annual per capita income of the LDCs is just $300. Is it necessary to insist that such countries undertake immediate and deep liberalization commitments that go way beyond what existing members have undertaken, and that the LDCs might not be able to handle either politically, economically, or administratively? For example, how much damage would it do to the trading system to allow LDCs to have S&D treatment with phased in commitments and so on? Would not it be possible to argue to the Russians and other non-LDC applicants (China having already acceded in the meanwhile) that any flexibility shown toward these exceptionally poor countries does not establish precedents applicable to their cases? At a minimum, these and related points could be appropriate subjects for an open international debate.
The other industrialized countries might also consider the efficacy of their approaches to the accession of LDCs. In Vanuatu’s negotiations, the EC and other countries tended to keep quiet and let the Americans “do the dirty work” of pressing the cause of swift liberalization, knowing that MFN would generalize any benefits that were achieved. But the EC and other industrialized countries have made a series of political commitments to help the LDCs in integrating these countries into the international trade system (Table 9 of Annex). If, as they often suggest, they have broader and more long-term view of the processes of building an inclusive international system and promoting development in the poor countries than that of the United States, perhaps this could be more fully reflected in their bargaining positions.
c. The Developing Countries
Vanuatu’s experience also suggests some potential lessons and forward-looking considerations for other players. Clearly, the story presented here points to difficulties that other LDCs entering into accession negotiations should anticipate and seek to manage. Eight LDCs---Bhutan, Cambodia, Cap Vert, Lao PDR, Nepal, Samoa, Sudan, and Yemen--- began accession process after Vanuatu. Not surprisingly, the problems Vanuatu has experienced are a real source of concern for these countries. All kinds of precedents were being established in its negotiations---in terms of both legal and procedural issues and bargaining dynamics---that could directly bear on their own cases.
At a minimum, current and future LDC applicants must do everything they can to strengthen their analytical and bargaining capabilities. By employing multiple public and private information resources and sources of expertise, they could enhance their capacities to assess the domestic requirements of WTO conformity and market access commitments, the interests and strategies of dominant WTO members, and the dynamics of negotiating in the WTO context. Similarly, they must carefully consider the mechanics of coalition building to offset their individual weaknesses, e.g. by reaching out more effectively to the EU, Canada, and other LDCs already in the WTO, and perhaps by working the press, public relations, and NGO angles.
Commercial diplomacy is a field fraught with difficult choices in which trade-offs and compromises must be made within frequently tight constraints. This is especially so for diplomatically inexperienced governments of the world’s poorest countries, especially when their counterparts across the table represent the world’s richest and most powerful nations. Vanuatu’s aborted drive to join the WTO amply demonstrates the point. Six years and two ministerial conferences passed as the government struggled to align its policies with the WTO’s demanding requirements and to negotiate the hurdles erected by the industrialized countries, most notably the United States. And by the end of the process, Vanuatu was left with a “take it or leave it” offer that was judged to entail domestic adjustment costs that were beyond anything the government could cope with. Could Vanuatu have played things differently and won, even with the cards it had been dealt as a remote island LDC? Or were the rules and power dynamics of the game simply too prohibitive? This case should provide ample grounds for students to consider the strategic challenges of asymmetric bargaining in order to answer these questions.
Asian Development Bank. Vanuatu: Economic Performance, Policy and Reform Issues, (Manila: Asian Development Bank, 1997).
Walter Goode. Dictionary of Trade Policy Terms, Second edition (Adelaide: Center for International Economic Studies, University of Adelaide, Australia, 1998).
Jim Rollo, and Rachel Thompson. “Vanuatu and the WTO: Why Might
a Small Country Refuse Accession?”
Roman Grynberg and Roy Mickey Joy. “The Accession of Vanuatu to the WTO: Lessons for the Multilateral Trading System,” Journal of World Trade 34.6 (2000): 159 – 173.
Michalopoulos, “WTO Acession.” http://www.worldbank.org/wbi/attackingpoverty/events/Turkey_0601/Michalopoulos2.pdf
UNCTAD. WTO Accessions and Development Polices, UNCTAD/DITC/TNCD/11, (Geneva and new York, UNCTAD, 2001).
World Bank. Vanuatu Data Profile, http://devdata.worldbank.org/external/CPProfile.asp?CCODE=VUT&PTYPE=CP
World Trade Organization. “Services Sectoral Classification List: Note by the Secretariat,” MTN.GNS/W/120, 10 July 1991.
World Trade Organization. The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts (Geneva: WTO, 1995).
World Trade Organization. “Schedule of Specific Commitments: Solomon Islands,” GATS/SC/117, 1 April 1996.
World Trade Organization. “Accession of Mongolia: Schedule of Specific Commitments on Services,” WT/ACC/MNG/9/Add.2, 27 June 1996.
World Trade Organization. “Summary, Trade Policy Review Body: Solomon Islands,” September 1998.
World Trade Organization. “Accession of Vanuatu: Offer on Services (Revision),” WT/ACC/SPEC/VUT/3/Rev.2, 22 September 1999.
World Trade Organization. “Technical Note on the Accession Process: Note by the Secretariat,” WT/ACC/7/Rev.1, 19 November 1999.
World Trade Organization. Market Access: Unfinished Business, Post-Uruguay Round Inventory and Issues, Special Studies 6, (Geneva: WTO, 2001).
 A round of the multilateral trade negotiations, which took place from 1986 to 1994, called “Uruguay Round” has resulted in the establishment of the WTO. The new organization is governed by the WTO agreements. These agreements encompass much wider areas such as services, intellectual property rights and investment measures, and they require significantly higher disciplines than the GATT.
The main focus of GATT accession negotiations was tariff reduction,
while WTO accession requires legislative and regulatory reforms and
market access concessions on goods and services.
 While the World Bank was the sponsor of the structural adjustment programs for the larger neighboring economies such as Papua New Guinea, Fiji and Solomon Islands, for a small state like Vanuatu, the ADB was designated as the leading agency of the program.
 The Working Party comprised Australia, Canada, the EU, India, Indonesia, Japan, Korea, Kyrgyz Republic, Malaysia, New Zealand, Papua New Guinea, Philippines, Singapore, Switzerland, and the United States.
 The city of Geneva hosts a number of international organizations, for example, the WTO, International Telecommunication Union, World Health Organization, International Labor Organization, World Intellectual Property Organization and the United Nations and its various agencies. Some countries, mostly LDCs, do not have representations in Geneva due to resource constraint.
 These countries included Ecuador (January 1996), Bulgaria (December 1996), Mongolia (January 1997) and Panama ( September 1997)
 The Stabex Funds were WTO inconsistent and terminated when the WTO agreements have come into force.
 There are twenty eight signatories to the Agreement on Government Procurement are: Austria, Belgium, Canada, Denmark, EU, Finland, France, Germany, Greece, Hong Kong China, Iceland, Ireland, Israel, Italy, Japan, Korea, Liechtenstein, Luxembourg, Netherlands, Netherlands with respect to Aruba, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom, and US.
There are thirty Signatories to the Agreement on Trade in Civil Aircraft: Bulgaria, Canada, EU, Austria, Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, the United Kingdom, Egypt, Estonia, Georgia, Japan, Latvia, Lithuania, Macao, China, Malta, Norway, Romania, Switzerland, Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu. and US.
 Roman Grynberg and Roy Mickey Joy. “The Accession of Vanuatu to the WTO: Lessons for the Multilateral Trading System,” Journal of World Trade 34.6 (2000), p. 167.
 These sectoral agreements were initiated by a number of WTO members at the first Ministerial Conference held at Singapore in 1996. Participation in these agreements is not obligatory.
 For reference, Table 5 of the Annex indicates services included in the WTO Services Sectoral Classification List.
 Telecom Vanuatu Limited is the sole supplier of communication services. The company consists of Cable and Wireless of UK and CID Alcatell in Paris and the Vanuatu Government. The Vanuatu Government holds a 33.3 per cent share in the form of issued capital in the company.
 See, Vanuatu Maritime Services Ltd., Update, January/March 2002. http://www.vanuatuships.com/safety/fsls/updatejan2002.htm
 WTO Document, “The Challenge of Integrating LDCs into the Multilateral Trading System - Coordinating Workshop for Senior Advisers to Ministers of Trade in LDCs in Preparation for the Third WTO Ministerial Conference, Sun City, South Africa, 21-25 June 1999 - Communication from Bangladesh,” WT/GC/W/251, 13 July 1999.
 WTO Document, “Communication from the European Communities: WTO Accession,” WT/GC/W/153, 8 March 1999.
Since then, the discussions on the issue of LDCs' accession continued
in the WTO, and the guidelines for accession of LDCs were adopted in
December 2002 (WTO Document, "Accession of Least-Developed Countries:
Decision of 10 December 2002," WT/L/508, 20 January 2003). The
adoption of the guideline is a major step to facilitate and accelerate
LDCs' accession negotiations, however, as shown in Table 8 of Annex,
the power of the text was considerably weakened than those proposed
by the LDCs or by the EU.