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Opinion

Trade row over 'developing nation' status highlights Trump's fears

He worries World Trade Organization members are getting favorable treatment

The WTO headquarters in Geneva: changing the status of members like China or India could dramatically alter negotiating dynamics.   © Reuters

Last week, South Korea decided that it would abandon its status as a developing country in any future negotiations at the World Trade Organization. Given that World Bank figures show Korea's gross domestic product per capita crossed $10,000 in the 1990s and currently exceeds $31,000, many might rightfully ask: "What took so long?"

What prompted South Korea's move to reclassify as a developed economy was U.S. President Donald Trump's July announcement that he might take unilateral action to address the problems of a host of countries unfairly using developing country status.

The most important thing to know about this argument over developed/developing status in the WTO is that it is not actually about South Korea. What Trump had in mind was how China, India and other large developing countries have used or could use their status to obtain benefits in future trade talks or the flexible application of current rules. One word covers a world of trade politics.

The decision to be named a developed or developing economy in the WTO is not based on a specific threshold. Unlike least developed countries, or LDCs, which are classified by the U.N. with fairly clear criteria, the division between developed and developing has never been defined. Each individual member self-declares when they feel comfortable making this transition.

Having three categories at the WTO assumes each set of members is in a different position to approach the responsibilities and obligations of membership.

In time, as LDCs strengthen their internal capacities, grow and graduate out of LDC status to become developing countries, responsibilities kick in. Developing country members have significant latitude within the WTO's rule book to pursue a wide range of domestic policy objectives, although most of the obligations embedded the rules apply.

For developed country members, the entire rule book is applicable, as these members are assumed to be capable of implementing all provisions.

But in practice, for most countries at the tipping point between developed and developing country status, the distinction is not terribly meaningful. This is because most advanced developing countries have already abandoned the majority or even all of the potential advantages they might obtain from using a developing country designation.

To see a concrete example of a difference in the WTO rule book, members are allowed to apply what is called a safeguard to prevent sudden surges of imports. Without getting into all the details, developing countries are allowed to reimpose a safeguard in half the time allowed for developed economies.

The skyline of central Seoul: what took so long for South Korea to abandon its status as a developing country?   © Reuters

South Korea, Singapore and most of the developing countries at or near the threshold have not actually exercised these rights in some time, or even at all.

An area of greater concern for many WTO members is the flexibility granted to developing country members deciding what commitments they will undertake in negotiations, such as how quickly to cut tariffs or which service sectors should be considered for greater market access. Developed countries take on higher levels of obligations, which typically means deeper tariff cuts or greater market opening than developing countries.

However, given the moribund status of negotiations at the WTO -- the last substantive negotiations on a large scale closed in 1995 -- South Korea and others have also not taken advantage of the opportunity to obtain more relaxed outcomes for themselves either.

If negotiations took off, of course, things might be different and developing nations might start using their privileges more often. This is why some WTO members are concerned about the distinction between developed and developing with regard to future trade talks.

So why, then, has South Korea maintained developing country status at all if it does not actually seem to use it? The primary reason is that it matters for South Korea when it enters into trade negotiations with other parties outside the WTO.

The WTO rule book allows members to negotiate trade deals outside the organization. Although the rules are a bit unclear, one basic principle is that these arrangements are meant to cover "substantially all trade." This is to prevent members from doing deals on only a few key items of interest and then undercutting benefits that would otherwise flow to all other WTO members.

A second important principle is that agreements between two developed country members needs to be more robust than one between a developed country member and a developing country member. Those between two developing country members can have additional flexibilities built in.

Hence, when South Korea or Singapore negotiates bilateral or regional trade deals with developing countries, their own developmental status matters. If they switch to developed country status, they are effectively asking their trade partners to upgrade their offers, which could mean deeper tariff cuts or wider market opening or greater promises on behind-the-border regulations in bilateral negotiations.

Having South Korea switch status is likely to set off a chain reaction, with other members asked or required to either switch their own status or to consider upgrading existing agreements as needed.

It also, of course, revisits the entire issue at the WTO. Given the breakdown of the negotiating function of the organization, this is another challenging topic to be addressed by members. One key reason for the collapse of WTO trade talks that started in 2001 was an inability to resolve issues in what was meant to be a "development round."

The reclassification of members like South Korea will adjust future negotiations at the WTO a small amount. But changing the status of members like China or India could dramatically alter negotiating dynamics in Geneva.

The latter have lined up with other developing countries on many issues. Reclassification of these members will be a major adjustment with spillovers felt across nearly all aspects of the organization. This would be a legacy that long outlasts the Trump administration.

Deborah Elms is Executive Director of the Asian Trade Centre, Singapore.

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