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SUSTAINABILITY IMPACT ASSESSMENT OF PROPOSED WTO NEGOTIATIONS

MID-TERM REPORT FOR THE

DISTRIBUTION SERVICES STUDY

Prepared by:

Julian Arkell and Michael D C JohnsonInternational Trade and Services Policy

In association with:

Impact Assessment Research CentreInstitute for Development Policy and Management

University of Manchester, UK

30 July 2004

I T S Pinsights on issues

This report was prepared with financial assistance from the Commission of the European Communities. The views expressed herein are those of the Contractor, and do not represent any official

view of the Commission.

This Report has been prepared for the European Commission under Framework Contract No Trade 01/F3-1 (Sustainability Impact Assessment of Proposed WTO Negotiations)

Specific Agreement No. 3.

Project Reports and information about the project are available from the project website:

http://idpm.man.ac.uk/sia-trade

SIA of WTO Negotiations – Mid-Term Report for the Distribution Services Study

http://idpm.man.ac.uk/sia-trade

CONTENTS

ABBREVIATIONS........................................................................................................4EXECUTIVE SUMMARY............................................................................................61 INTRODUCTION..................................................................................................82 METHODOLOGY...............................................................................................10

2.1 Scenarios......................................................................................................102.2 Core and second tier target and process sustainability indicators................112.3 Availability of data.......................................................................................13

3 DISTRIBUTION SERVICES: TRADE AND NEGOTIATION ISSUES..........153.1 Treatment of GATS Modes of services trade...............................................153.2 Current state of negotiations on distribution services under GATS.............163.3 EU requests to developing countries for market opening relating to distribution services..................................................................................................173.4 Key issues for negotiation............................................................................18

4 CASE STUDIES..................................................................................................204.1 Malaysia.......................................................................................................204.2 The distribution sector in the ten new EU member states............................21

5 PRELIMINARY IMPACT ASSESSMENT........................................................245.1 The policy context: previous studies............................................................245.2 Key economic considerations.......................................................................265.3 Relationship to other current SIA studies: Agriculture and Forestry...........275.4 Sustainability Impact Analysis of the economic effects of liberalisation....285.5 Sustainability Impact Analysis of the social effects of liberalisation..........29

5.5.1 Work-related issues..............................................................................305.5.2 Health and education issues.................................................................315.5.3 Social welfare and poverty...................................................................315.5.4 Consumer choice..................................................................................32

5.6 Sustainability Impact Analysis of the environmental aspects of liberalisation33

5.6.1 Biodiversity..........................................................................................335.6.2 Environmental quality..........................................................................345.6.3 Natural resource stocks........................................................................35

6 MITIGATION AND ENHANCEMENT.............................................................366.1 The rôle and impact of standards.................................................................366.2 Sustainability and corporate social responsibility........................................40

6.2.1 Carrefour..............................................................................................426.2.2 Inditex...................................................................................................436.2.3 Metro AG.............................................................................................44

6.3 Conclusions on corporate responsibility......................................................456.4 International co-operation on environmental measures: The North American Agreement on Environmental Co-operation (NAAEC)...........................................46

7 NEXT STEPS.......................................................................................................48

REFERENCES.............................................................................................................50

ANNEX 1: Terms of reference for consultants conducting country case studiesANNEX 2: Results of country study: MalaysiaANNEX3: European Retailers: stores outside the EU (ERRT members)


ABBREVIATIONS

AAI Agribusiness Accountability InitiativeACP African, Caribbean and Pacific group of developing countriesAVE Foreign Trade Association of the German Retail TradeBSCI Business Social Compliance InitiativeBSR Business for Social Responsibility CEN European Committee for StandardisationCENELEC European Committee for Electrotechnical StandardisationCITES Convention on International Trade in Endangered SpeciesCPC Cenl Central Product Classification CSR Corporate Social ResponsibilityDDA Doha Development Agenda DG Directorate General EC European CommunitiesEII Earth Island InstituteEPE European Partners for the EnvironmentERRT European Retail Round TableETSI European Telecommunications Standards InstituteEU European Union EurepGAP Euro-Retailer Produce Working Group for Good Agricultural

PracticesFDI Foreign Direct Investment GAP Good agricultural practiceGATS General Agreement on Trade in Services GATT General Agreement on Tariffs and TradeGDP Gross Domestic Product GMO Genetically Modified OrganismGRI Global Reporting InitiativeICOT Information, Computing and other Information Technologies IDPM Institute for Development Policy and Management IISD International Institute for Sustainable DevelopmentILO International Labour OrganizationIMF International Monetary FundISO International Standards OrganizationITSP International Trade and Services Policy LDC Least-developed countryMERCOSURRThe Southern Cone Common MarketNAAEC North American Agreement on Environmental Co-operationNAFTA North American Free Trade Agreement NGO Non-Governmental Organisation OECD Organisation for Economic Cooperation and Development OHCHR UN Office of the High Commissioner for Human RightsSAI Social Accountability InternationalSAM Sustainable Asset Management Research (Switzerland)SARS Severe Acute Respiratory SyndromeSIA Sustainability Impact Assessment SME Small and Medium-sized Enterprise


SPS Sanitary and phytosanitary measuresSTIC Sustainable Trade and Innovation CentreTBT Technical Barriers to TradeTNC Transnational corporationTOR Terms of Reference UN United Nations UNCTAD United National Conference on Trade and DevelopmentUNDP United Nations Development ProgrammeUNEP United Nations Environment ProgrammeUNIDO United Nations International Development OrganizationWBCSD World Business Council for Sustainable DevelopmentWTO World Trade Organisation


EXECUTIVE SUMMARY

The aim of the present study is to provide information to assist the formulation of EU policy towards the negotiations under the General Agreement on Trade in Services, which form part of the WTO’s Doha Development Agenda (DDA), taking into account the United Nations Millennium Development Goals including environmental sustainability. The Sustainability Impact Assessment (SIA) of liberalisation of distribution services reflects a large body of published work on this issue. The overall thrust of these studies is that liberalisation of trade in distribution services can have a positive impact on the long run rate of economic growth, can lead to technology transfer via inward investment and to enhanced efficiency and competition, and at the same time may entail very significant economic, structural and social consequences in the countries concerned. In order to maximise beneficial impacts and minimise adverse ones, liberalisation needs to be accompanied by appropriate national systems of regulation.

This study applies the methodology developed by IDPM during earlier stages of the SIA process1, subject to a number of important reservations, such as that statistics regarding international trade in services, including distribution, are much less comprehensive and reliable than goods statistics; and that the structure of distribution varies widely from country to country depending on the stage of development reached, and on social conditions and priorities.

The present SIA concentrates on wholesale and retail trade and commission agents’ services (excluding franchising, which raises few issues that do not apply to distribution outlets more generally). It takes into account cross-sectoral linkages, and causal chain effects of liberalisation. As regards the EU, liberalisation of distribution services is likely over time to provide opportunities for distribution undertakings (wholesale and retail) to strengthen their presence abroad, with potentially beneficial results for product and employment standards in the countries concerned. On the other hand the EU distribution market is highly developed and already largely open, and even if distribution undertakings in developing countries were in a position to enter the EU, the overall impact of their doing so would be negligible. Accordingly this study focuses on the likely impacts of liberalisation of distribution services in developing countries, which are likely to be relatively much more significant.

The SIA methodology involves a base scenario which assumes that existing commitments under GATS are fully met; and a further liberalisation scenario, which assumes that commitments will be undertaken effectively to liberalise distribution in all markets, with the exception of specially difficult areas of policy such as the movement of natural persons.

Detailed studies are being undertaken of the impact of liberalisation of distribution in three developing countries, chosen as far as possible to be representative of their regions and stages of development, namely Brazil, Kenya and Malaysia. Local sub-consultants were appointed to conduct the study in each case. At the time of preparation of this mid-term report only the study of Malaysia has been received. The content and results of that study are considered, but any conclusions which may appear to emerge concerning the impact of liberalising distribution in developing countries are necessarily provisional.

1 Kirkpatrick and Lee (2002)


This report evaluates the sustainability impacts of liberalisation according to nine core indicators which were identified in the Phase 1 and Phase 2 studies of SIA methodology, respectively covering economic, social and environmental effects, and two further core indicators covering development processes. In the specific context of distribution services, each of those core indicators is broken down into a wide variety of appropriate sub-indicators.

Further liberalisation of distribution services will take place within a wide and complex context of national policies and international agreements which will have a close bearing on what liberalisation steps can be taken, how they may be implemented, and on other policies which governments may find it necessary to implement at the same time in order to enhance the beneficial effects of liberalisation and to mitigate adverse consequences.

The assessment takes account of standards which impact directly not just on what goods can be marketed, but also on their distribution, and on working practices and conditions in distribution outlets and associated transport undertakings. A number of international standards-setting bodies are described, including their areas of expertise and the standards which they set and how these affect the distribution sector. There is a strong trend towards co-ordinated international setting of standards and this may entail benefits for developing countries, despite their relative lack of resources in standards matters, because in the longer run their own access to international markets may be facilitated. The important issue for developing countries is how to use standards constructively both in their own process of market liberalisation and to improve their access to international markets.

An important consideration is how far sustainability issues are taken into account in international policy and by international business under the general rubric of corporate social responsibility. It is evident from the consideration of the wide variety of bodies which set commercial and environmental standards that affect distribution, and from the brief overview of company practices regarding corporate responsibility which has been undertaken, that suppliers in developing countries are now faced with a bewildering range of standards which frequently overlap. In Europe, certain groups of retailers are getting together to try to co-ordinate their standards. It does not appear that the current negotiations under GATS will directly affect international activity in this field, but negotiators still need to be aware of the crucial importance for the distribution sector of the existence and observance of voluntary codes.

It has been recognized from the outset of the SIA process that policies for economic liberalisation need to be accompanied by appropriate “flanking” measures, both to enhance positive effects of liberalisation and to mitigate adverse effects. Preliminary suggestions for such measures are discussed.

Preliminary conclusions are drawn from the country study of Malaysia, which at the time of writing was the only one of the three country studies to have been completed. The study identifies beneficial effects for some sections of society and adverse effects for others, such that further liberalisation may be highly controversial politically.

The report also describes the further work that will be undertaken for the completion of the study.


1 INTRODUCTION

The primary aim of the present study is to improve the basis for formulation of EU policy towards the negotiations under the General Agreement on Trade in Services (GATS) of the World Trade Organisation (WTO), which form part of the Doha Development Agenda (DDA). Paragraph 6 of the Ministerial Declaration adopted at Doha on 14 November 20012 states inter alia:

We strongly reaffirm our commitment to the objective of sustainable development, as stated in the Preamble to the Marrakesh Agreement. We are convinced that the aims of upholding and safeguarding an open and non-discriminatory multilateral trading system, and acting for the protection of the environment and the promotion of sustainable development can and must be mutually supportive.

In September 2000, 189 Heads of State and Government meeting in the UN General Assembly adopted a far-reaching Resolution (the Millennium Declaration) which committed their countries – rich and poor – to taking a wide range of actions, including a set of time-bound and measurable goals to be met by 20153:

1 Eradicate extreme poverty and hunger2 Achieve universal primary education3 Promote gender equality and empower women4 Significantly reduce maternal and child mortality5 Improve maternal health6 Combat HIV/AIDS, malaria and other diseases7 Ensure environmental sustainability8 Develop a global partnership for development.

These goals relate to general economic, social and environmental objectives, and are an important part of the context in which discussions on the further liberalisation of distribution services takes part.

Within the context of GATS negotiations on services under the DDA, the Inception Report for this study4 described the different forms of distribution services, and which forms of distribution were relevant to the SIA study and which were less relevant. It noted that international development of distribution services is closely related to foreign direct investment (FDI), which in turn is conditioned by the ways in which FDI is regulated in different countries. The Report considered the basic structure and requirements of GATS, and the range of requests which the EU has submitted to developing countries for further opening of their services markets.

The Inception Report discussed the application to distribution services of the SIA methodology. It recalled that although the basic brief was to consider impacts of further liberalisation on the distribution markets of both the EU and developing countries, the present study should concentrate on developing countries. This was because the distribution market of the EU, like those of other developed countries, is already largely

2 WTO (2001)3 United Nations (2000)4 Arkell and Johnson (2004)


open, as well as being complex and sophisticated. Accordingly, the impact of any future liberalisation measures which the EU might bind under GATS would be impossible to isolate and virtually un-measurable. Developing countries, however, generally had a much lesser degree of existing liberalisation, and their situations – both their economic conditions and their distribution sectors – varied widely,

During preparation of the Inception Report a wide range of studies of the distribution sectors in different countries were consulted. The Report described the scope and results of these studies. It concluded that while no single set of conclusions could be drawn from them, certain common factors and issues emerged. The studies suggested a number of positive aspects of liberalisation, including improved general efficiency, better consumer choice, and the improved support which efficient services can give to other sectors. They also pointed to negative effects such as short-term cost increases and loss of jobs, and possible environmental consequences. A number of other factors were also identified which were in themselves neither inherently positive nor negative, but to which close attention would need to be paid by negotiators during their appraisal of specific liberalisation proposals affecting distribution.

While the initial impetus for the present SIA of distribution services is the need to base liberalisation proposals made under the current GATS negotiations on principles of sustainability, the tools and procedures being developed under the SIA process in general, including this study, are equally relevant to proposals for market opening which may be made in other multilateral or regional negotiations on trade.


2 METHODOLOGY

The main focus of this study is the impact on wholesale and retail trade and on commission agents’ services, and necessarily extends to the activities of multinational corporations. Franchising is not included as a separate topic in the analysis, because there are few if any issues concerning franchising operations which do not apply to retail outlets more generally.

The study concentrates on the impacts in developing countries at different stages of development of liberalising distribution services. This is, as already noted, because the distribution markets of developed countries, particularly the EU member states, are largely open and the impact of any future liberalisation measures which the EU or other developed countries might bind under the GATS will be virtually un-measurable. The effect of such liberalisation would in any case be likely to entail increased investment by enterprises based in developed countries which already have an significant international presence. Few distribution companies based in developing countries are likely at the present stage to have the resources to build up an effective and competitive presence in developed markets. By contrast, in developing countries the potential impacts of further liberalisation are likely to be much more marked. The main consequence would be to open the way for increased investment in their markets by foreign-owned distribution undertakings.

The study is based on the methodologies and criteria developed in previous work on distribution services. As well as assessing the beneficial and adverse impacts of further liberalisation, it identifies how countries can formulate and implement policies in order to accentuate the positive impacts and minimise negative impacts. Both these objectives depend on optimising the efficiency increases arising from FDI, on associated transfers of distribution technology and management know-how, and on regulatory and institutional capacity to implement mitigation and enhancement measures.

The EC Communication on Impact Assessment Procedures5 requires that the depth of the analysis be proportionate to the significance of the likely impacts. Thus, proposed measures that are likely to have serious negative side effects or particularly to affect certain groups in society should be more thoroughly analysed than minor technical changes to regulations, while the analysis also needs to be adapted to the specific circumstances of the policy domain concerned. The Final Report on this study will analyse a wide variety of factors in the markets of developing countries, in order to assess whether they could be expected to be improved by opening up market access to foreigners. Such factors will include economic and social welfare effects in both importing and exporting countries, FDI flows, transfer of technology, the structure of industry and distribution in developing countries, corporate responsibility, consumer safety, and effects on employment, poverty and the environment.

2.1 Scenarios

Two liberalisation scenarios are to be used in SIA studies:

5 European Commission (2002)


The base scenario assumes that the provisions of existing commitments under GATS are fully met. The effects of the EU’s Economic Partnership Agreements which are under negotiation with African, Caribbean and Pacific countries will not be separately appraised but are included in the baseline context, as are other regional trade agreements, including significant US ones.

The further liberalisation scenario represents the strongest probable implementation of the negotiations agreed to at the 4th WTO Ministerial Conference in Doha, that is effectively the removal of all restrictions on market access except in especially difficult areas of policy such the movement of natural persons. New liberalisation commitments would not be expected to cover unskilled workers, or significant proportions of semi-skilled workers.

The key trade changes specified in the further liberalisation scenario are the removal of limitations on market access and national treatment, together with further commitments on the movement of intra-corporate transferees and contractual service suppliers. The causal chain analysis traces the effect of this degree of trade liberalisation in distribution services on FDI flows, the effect of increased FDI on the domestic markets in the investment-importing and investment-exporting countries, and the final impact on sustainable development.

2.2 Core and second tier target and process sustainability indicators

IDPM’s Phase One and Phase Two studies of methodology for evaluating the sustainability implications of policy proposals identified a set of nine core indicators by which proposals and initiatives should be evaluated6. In the subsequent development of the methodology, these nine core indicators were retained and were complemented by the inclusion of both indicative second tier indicators and process indicators7. These indicators served two prime purposes:

to facilitate the presentation of SIA results in summary form, using matrices to indicate the direction and significance of aggregate impacts; and

to provide a basis for monitoring of actual impacts. The second tier indicators were intended to allow the presentation of results at a lower level of aggregation than had been used previously.

The full set of core, second tier and process indicators are reproduced below:

Indicator Core Second Tier (indicative)

Economic Real income savings, consumption expenditure

Fixed capital formation economic, other (social, environmental) components of fixed capital formation

Employment self-employment; informal sector employment

Social Poverty income and other social dimensions of poverty

6 Kirkpatrick and Lee (1999)7 Kirkpatrick and Lee (2002)


Health and education life expectancy; mortality rates; nutritional levels; literacy rates; primary, secondary and tertiary enrolment rates

Equity income distribution; gender; other disadvantaged age-related groups (young, old); indigenous peoples, ethnic minorities

Environment Biodiversity designated eco-systems, endangered species

Environmental quality air, water, and land quality indicators

Natural resource stocks energy resources; other non-renewable and renewable resources

Process Consistency with principles of sustainable development

Polluter pays; user pays; precautionary principles

Institutional capacities to implement sustainable development strategies

Sustainable development mainstreamed and integrated into policy-making; high-level ownership and commitment to sustainable development objectives

The eleven core indicators serve primarily to present the SIA results in summary form, and so generally represent a higher level of aggregation than is appropriate for detailed monitoring. Second tier indicators may be used to identify specific impacts which may be significant.

The core indicators cannot all be applied equally, or in the same way, in the various sectoral SIAs. Case by case, some will be more relevant than others. In detailed studies it is inevitable that more attention needs to be paid to the second-tier indicators. This is particularly so in the case of distribution services, whose function is to distribute the products of other industries. The direct impacts of liberalisation and further development of the distribution sector tend to be felt in a limited range of related sectors such as construction and transport, as well of course as in their impact on conditions and employment in previously existing distribution chains. The approach adopted in this report is therefore to discuss the impacts and consequences of liberalizing distribution services according to broad headings based on the eleven core indicators, and where appropriate to include more detailed discussion of specific impacts on the basis of second-tier indicators.

Further liberalisation of distribution services will have economic, social and environmental impacts in the countries concerned. Yet however detailed and comprehensive may be the methodology for evaluating these impacts, in the very diverse activity field of distribution services it is possible to form judgments on the extent of such impacts only case by case. Among the most important factors which will affect this judgment are the following:

The country in which further liberalisation is proposed, and its level of economic development

Specific distribution-related activities in which liberalisation is proposed


Existing importance of these activities in the national economy, including the proportions of employment and physical investment for which they account

Current degree of openness of the economy in the distribution activities concerned, including access for foreign-based service providers

Existing balance between domestic and foreign-owned providers of distribution services

Capacity of the economy to absorb further liberalisation of distribution services in the short and medium term

Extent and nature of government regulation in the national economy, such as competition, employment, operational and environmental policies

Timescale over which further proposed liberalisation would be implemented.

Developed economies are large and diverse enough to be able over time to absorb massive economic and structural change, particularly in service sectors, though the redistributive and social consequences may be far-reaching. While some developing countries already have large and rapidly growing economies, the majority do not have this cushion of size and resources. Depending on local social, economic and political conditions, proposals for liberalisation may, activity by activity, have very different consequences in different countries.

Potential positive and/or negative impacts are indicated according to the following system of symbols:

Blank Impact assessment as non-significant compared to base situation

∆ Positive lesser significant impact Negative lesser significant impact▲ Positive greater significant impact▼ Negative greater significant impact∆ Lesser positive and negative impacts likely to be

experienced according to context▲▼ Greater positive and negative impacts likely to be

experienced according to context? Impacts uncertain

2.3 Availability of data

A fundamental difficulty in the study of the impact of liberalising distribution services is the absence of reliable data, even as regards developed country markets, concerning the international structure of distribution and the trade and financial flows which are attributable to it. The poor quality of data is a constant problem in any study of international trade in services, despite efforts which have been made during several years by the United Nations, UNCTAD, OECD and the European Commission to establish a basis for the collection of statistics relating to services sectors or issues which are of particular negotiating interest.

The situation as regards distribution is particularly difficult, because there are no data series which separately identify distribution services. Distribution services do not feature in the IMF Balance of Payments Manual classification of services, so that there are no cross-border trade flow data on wholesale and retail transactions. The international flows of goods which pass through the medium of the distribution sector form part of national


and international statistics for merchandise trade. Capital investments undertaken abroad by distribution companies are buried in the aggregate figures for FDI flows, which themselves may be very unsatisfactory particularly in the case of developing countries. It follows that there is no statistical basis upon which the economic impact of further liberalisation of distribution, investment trends, or the impact on national balances of payments, could be modelled, or even for making a rough estimate of the current value of trade volumes generated through the activities of international distribution companies.


3 DISTRIBUTION SERVICES: TRADE AND NEGOTIATION ISSUES

3.1 Treatment of GATS Modes of services trade

The Modes of services supply set out in GATS Article I are as follows:

Mode 1 – cross-border tradeMode 2 – consumption abroadMode 3 – commercial presence in the territory of another countryMode 4 – presence of natural persons (representing a foreign-based service provider).

In the present context it seems that Mode 3 will be the most likely to be subject to further liberalisation efforts in the GATS negotiations. As explained below, the most important issues which arise concern inward investment and establishment of distribution enterprises.

Cross-border trade in services (Mode 1) has hitherto been relatively restricted, because most personal services can be consumed only on the spot, and many countries (including developing countries) currently restrict the ability of foreign service providers from outside their own territories to provide personal services such as legal or medical advice or accountancy. However this situation is rapidly changing as a result of the development of electronic commerce. So far, E-commerce mostly applies to trade in goods, but increasingly consumers in one country can seek professional advice on legal, financial and other business matters, and even medical advice, from abroad by electronic means. This raises serious issues for all governments, which go much wider than the distribution sector. The ability of consumers to seek timely and competent advice and other services which they need by the most efficient means should be fostered. However at the same time standards have to be safeguarded in the interests both of consumers and of the professionals operating under appropriate regulatory systems in the home country. And, bluntly, the growing use of E-commerce for the transmission of service-related information cannot be stopped without unwarrantable interference by governments in the freedom of individuals to engage in activities which are not in themselves illegal, or even necessarily undesirable. There are uncomfortable conflicts of public interest and national policy here which no government has yet solved, but which all – including developing countries – have increasingly to face.

GATS Mode 4 is relevant to distribution services in that while the overwhelming majority of people employed in any distribution undertaking will be nationals of the home country (for reasons which include culture, language, and employment costs), inward investors in distribution must be expected for a time at least to employ some expatriate managers and technical staff. In fact, Mode 4 is interpreted to cover only the temporary presence in a territory of employees or representatives of a foreign-based service provider. GATS places no obligations on WTO members relating to immigration policy or the treatment of long-stay workers from outside. Even so, Mode 4 has been from the outset the most sensitive area of GATS policy, and few WTO members have been willing to bind, in their GATS schedules, commitments relating to the admission or temporary stay of foreign workers, other than to admit employees or representatives of foreign service providers on a temporary and limited basis, because such people are necessary for the smooth working of economically desirable inward investments. It


seems however highly unlikely that the ongoing GATS negotiations will bring about any basic change in the present position regarding Mode 4.

3.2 Current state of negotiations on distribution services under GATS

Since the Doha Declaration was agreed by WTO Ministers in November 2001 the ongoing negotiations on services, though previously mandated under GATS Article XIX, have been integrated with the DDA. Inevitably they have been caught up in the political factors which have delayed progress on the Doha Agenda as a whole. At the time of writing this Report, WTO negotiators are attempting to agree by 31 July 2004 a framework agreement as the basis for completing the DDA negotiations. Without such agreement, progress on the DDA negotiations including services may be stalled indefinitely.

Developing countries inscribed fewer market opening commitments in their existing GATS schedules than did developed countries. Under the DDA they have been much less willing to offer proposals for further liberalisation in services, their most important argument being that it was the developed countries which got most benefit from the Uruguay Round Agreements, particularly the market opening commitments (even if autonomous and far from comprehensive) which were agreed under the GATS. While WTO members began to exchange their bilateral request lists for further market opening in services from 30 June 2002, a total of only 39 initial GATS offers (counting the EU 15 as one) was made, all after the WTO’s set deadline for that stage of 31 March 2003. Most of these offers emanated from developed economies, though offers were also made by some important developing countries such as China and Thailand. Offers were not put forward by other important developing countries including Brazil, India or Malaysia. Senegal was the only African country which submitted an initial offer.

Distribution services, while one of the sectors specified for further negotiations under GATS, have attracted relatively little interest on the part of negotiators. Here too such liberalisation offers or requests for market opening which have been put forward have emanated mostly from developed countries. We do not speculate on the reasons for that, beyond recalling the general reluctance of developing countries to negotiate further on services, as described above; the paucity of information concerning international distribution services; and the difficulty of disentangling issues which relate to distribution from those which arise more widely under GATS or in the DDA as a whole.

The few relevant papers which have been submitted to the WTO Council for Trade in Services clearly demonstrate this latter difficulty. A paper from the EU8 stressed the significant proportion of GDP in a number of developing countries, which is accounted for by distribution. It recalled that “the distribution sector within the EC is largely open to foreigners, and commitments have been given by the EC in all sub-sectors”. It proposed, in very cautious terms, that WTO members should discuss the removal of all restrictions on distribution other than restrictions on distribution of a very limited number of extremely sensitive products and, under Mode 3, clearly-defined and non-discriminatory needs tests in retailing services. It also proposed, in relation to Mode 4, that discussions be held “on how to improve and facilitate the temporary movement of natural persons for the provision of specific services.” A paper from the United States9

8 S/CSS/W/37, 22 December 20009 S/CSS/W/22, 18 December 2000


made a similar proposal for “discussion of various aspects of an open regime in the distribution sector”. It set out as a check-list a long list of specific obstacles which distribution undertakings may encounter in national markets, mostly relating to obstacles to establishment and to various forms of administrative discrimination. It noted explicitly that:

“Some items on the list may be market access restrictions, or national treatment limitations, or both. In addition, some obstacles, although not limitations on market access or national treatment per se, may result from regulatory provisions which make it difficult for foreign suppliers to market their services.”

The only significant contribution to the WTO debate on distribution services which was made by developing countries was in a paper from MERCOSUR10, to which Brazil contributed as a member of MERCOSUR. This referred to restrictions which still exist in developed country markets affecting the distribution of products of direct interest to developing countries, particularly agricultural products, and to the exclusion of certain goods or of whole sectors from the WTO commitments of developed countries. MERCOSUR proposed that all WTO members make commitments to liberalise distribution, that all restrictions on market access and national treatment be eliminated, and that exclusions affecting the distribution of certain products of special interest to MERCOSUR members be eliminated. In this case too the proposal related essentially to market access for goods, and to more general issues of market access for service providers.

3.3 EU requests to developing countries for market opening relating to distribution services

The European Union has made extensive requests to developing countries in the ongoing GATS negotiations to undertake further very specific liberalisation commitments. At the same time the EU stresses the importance of liberalisation being underpinned in national markets by appropriate domestic regulatory frameworks designed to ensure the achievement of public policy objectives: there is no point in a market’s being nominally open if entry conditions are non-transparent, or their actual administration is inconsistent or discriminatory.

A report prepared for the Commonwealth Secretariat11 in 2003 analysed the requests made by the EU for market opening in services to a total of 54 out of the 55 ACP countries which are members of the WTO. The EU addressed specific requests regarding distribution services to 14 out of these 54 countries12. In all except one of the 14 cases the request made was the same, namely that the country concerned should consider offering full commitments to eliminate restrictions on market access and national treatment for providers of wholesale and retail distribution services under GATS Modes 1, 2 and 3, and guarantee temporary access under Mode 4 for natural persons employed by distribution undertakings according to their horizontal commitments concerning Mode 4. The exception was the EU’s request to South Africa, where in addition the EU 10 S/CSS/W/80, 4 May 200111 Trade in Services under the Cotonou Agreement: policy options and priorities, J. Arkell and M.D.C. Johnson, July 200312 Antigua and Barbuda, Barbados, Belize, Dominican Republic, Jamaica, Kenya, Mauritius, Nigeria, St. Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, South Africa, Trinidad and Tobago and Zimbabwe.


requested unrestricted market access under Modes 1-3 for commission agents. As regards EU requests to larger developing country economies, that to Brazil included full market access and national treatment commitments under Modes 1-3 for wholesale, retail and commission agents’ services, and under Modes 1 and 2 the removal of certain restrictions on franchise contracts. From Malaysia, which undertook no commitments relating to distribution in its existing GATS schedules, the EU seeks full commitments under Modes 1-3 covering wholesale, retail, commission agents’ and franchising services. In all cases the EU’s request is for commitments under Mode 4 in accordance with the horizontal Mode 4 commitments of the country concerned.

The ACP countries to which the EU addressed no requests on distribution services are - like the numerical majority of the ACP – predominantly small, but they include some significant developing economies such as Ghana, Malawi and Namibia. The absence of a specific request in this sector may indicate either that the EU considered the access situation in the country concerned to be satisfactory, or alternatively that the prospects of economic return from negotiating better access were not judged to be worth the effort involved. That issue is not further pursued here. The EU’s requests to ACP countries and others give a clear indication of its objectives in GATS negotiations on distribution services, including its approach in negotiating with developing countries.

3.4 Key issues for negotiation

The most important objectives for the EU, in common with other developed WTO members, are to remove barriers and discrimination against providers of distribution services, initially at the point of entry to a market (market access), and subsequently once they are established in that market (national treatment). Predominantly the EU’s concerns and its requests to developing countries arise in relation to GATS Mode 3, that is over issues of establishment.

Under Mode 3 the EU and other developed countries seek principally the removal of:

Restrictions on entry to a national market on the basis of nationality, whether these are absolute restrictions or discriminate between providers of different national origins;

Restrictions on residency whether of corporations or individuals; Economic needs tests applied to inward investments, except where there is a need

to preserve balance or ensure minimum standards in particularly sensitive sectors; Restrictions on equity participation (for example requirements for minimum

investments or restrictions on shareholdings); Conditions governing the legal constitution of enterprises, accepting that

companies and/or branches must be established and operate according to local law;

Restrictions on the acquisition and holding of land which go beyond normal national planning and zoning requirements;

Any form of discrimination, for example in regard to tax rates, award of franchises, or the charges made for provision of local services;

Any form of quantitative restrictions on operation, such as limitations on the number of foreign staff employed, or requirements which limit or otherwise control the nature of services provided or goods handled.


These are issues of establishment and thus of general concern, though they apply to distribution companies as to other enterprises. Seen from the perspective of the EU, and specifically in relation to distribution, such issues are mainly of concern to large enterprises which have the resources to undertake large foreign investments and to sustain them until they become profitable. Numerically, even in the EU the majority of retail enterprises and many wholesalers are small companies which do not have such resources and are unlikely to want to invest overseas.

As regards Mode 4, the EU’s interest is in securing from WTO partners, including developing countries, a guarantee of the temporary admission of intra-corporate transferees where their expertise is required for the successful establishment or operation of a business. Developed country enterprises are unlikely to seek more or longer-term access under Mode 4 than this, given that in overseas markets they will anyway employ predominantly local staff, and will have no interest in wanting to import from home lesser-skilled staff at higher wage rates than apply locally.


4 CASE STUDIES

After careful review of existing studies of the distribution sector and of the availability of data, it was agreed that studies of the likely effects of further liberalisation of distribution services in developing countries should be carried out in respect of a group of countries which are representative of the range of developing countries both geographically and in terms of stages of economic development, as follows:

BrazilKenyaMalaysia.

Full Terms of reference for these studies are attached as Annex 1. The results of the study of Malaysia are described briefly below, and in more detail in Annex 2. The studies of Brazil and Kenya have yet to be received.

These studies have aimed to identify both direct and indirect impacts in the selected countries of the further liberalisation scenario compared with the base scenario. They have focused on economic impacts (both macro- and micro-economic); social impacts (including impacts on employment, social exclusion, poverty, consumer interests and health and safety); and impacts on the environment and biodiversity. The studies have attempted to identify how such impacts of liberalisation work through the economy and over what timescale, and how durable are the changes that they bring about. The aim is to identify trade-offs between different areas of policy and activity related to distribution, to clarify the occurrence and nature of risks, and to identify “win-win” situations under which policy initiatives can be formulated from which all parties potentially may gain.

While the impacts that are identified depend on the specific circumstances of the countries studied, lessons are drawn which may be applicable in other countries whose circumstances are similar.

The full texts of the three country studies will be annexed to the Final Report on this SIA, which will also include analysis and comparison of their results and draw conclusions which appear to be of general relevance.

4.1 Malaysia

A summary of the Malaysia study is attached as Annex 2. The retail sector in Malaysia is still characterised by inefficient small retail stores that have relatively low sales but account for the majority of employees. Their existence is threatened by the arrival on South East Asian markets of efficient foreign-owned hypermarkets. At the same time, retail trade in Malaysia is hampered by a shortage of qualified personnel, which increases wage costs.

Although classed as a developing country Malaysia is rapidly industrialising, and with the process of industrialisation consumers are coming increasingly to share the expectations and aspirations of consumers in developed countries. This has encouraged the development of large-scale retail outlets, which overall have clear advantages in terms of efficiency, lower prices, hygiene, and quality standards. Inevitably such


developments threaten the existence of large numbers of small and family-owned shops. That is a process which is already under way in Malaysia as a result of economic and social developments and regardless of international commitments or negotiations, though it obviously proceeds at different rates as between the cities and country areas. There is clear evidence in Malaysia that larger outlets, both wholesale and retail, are more efficient and profitable, that they employ fewer workers pro rata to turnover, and that they pay much better wages than the small shops.

Simultaneously however, and despite having a generally liberal distribution market in terms of such factors as opening hours and the location of outlets, Malaysia exercises detailed controls over a wide variety of factors which directly affect the structure and operation of distribution. Such controls have been in force for more than thirty years following serious inter-communal violence in the late 1960s. Their explicit purpose is to reduce social inequalities in Malaysia, to safeguard poor people against excessive price rises, and above all to increase the economic participation of the majority but disadvantaged Bumiputera groups. In recent years there has been significant liberalisation, particularly of the proportion of equity in Malaysian corporations which foreigners are now allowed to own, the key requirement being that an inward investment must incorporate 30% of Bumiputera interest.. The measures which remain in force range from detailed controls over the prices and supply of a range of basic foodstuffs and fuels to extensive controls over inward investment and the development of hypermarkets, which is subject to strict control and is currently blocked in certain regions. These measures are highly interventionist and explicitly political in intent, and they remain in force pending the longer-term objective of raising the Bumiputeras’ share in national corporate equity to 30% (it is currently about 20%).

Malaysia has not undertaken commitments under GATS which specifically relate to distribution services, so that the base scenario is effectively inapplicable. By contrast, the further liberalisation scenario would require extensive amendment of Malaysia’s regulations which affect distribution, both the price and supply controls and the various controls over investment and establishment of retail outlets, in particular the Hypermarkets Regulation. It is argued (though this cannot be demonstrated empirically) that liberalisation of these controls would undermine the efforts which have been made in Malaysia over the last 30 years to reduce financial and social inequalities among the population and to secure political stability.

So Malaysia is in the paradoxical position of seeking the advantages of economic liberalisation in the form of rapid industrialisation and introduction of modern technology, while maintaining a firm grip over many of the factors which would allow the benefits of liberalisation to feed more rapidly through the distribution sector to the general populace. The effects of further liberalisation of distribution could therefore be significant, perhaps acutely felt in some sectors of the population, though to a considerable extent these developments are already happening as a natural result of economic trends. There seems to be little current possibility, given the political nature and purpose of current Malaysian controls over distribution, that Malaysia would be prepared to undertake significant further liberalisation of the sector.

4.2 The distribution sector in the ten new EU member states


The Inception Report gave a brief overview of the distribution sector in the EU before the enlargement in May 2004. Eurostat has recently published an overview of the non-financial service sectors in the ten newly acceded Member States.13

Overall the new Member States are relatively more manufacturing based than the EU-15 economies, and non-financial services account for less than half of the total private sector. Employment in the “Distributive trades”14 in the ten grew in the 1-2% range in 2001, except in Malta and Slovakia where the increase was over 6%, and in Poland where it fell by 5%. In Lithuania and Latvia over half the total employment in 2001 in the non-financial service sectors was accounted for by distribution, and in all of the ten it was over 40%, except in Malta at 29%, due to the preponderance of hotels and restaurants.

Women working in distribution formed over half the workforce in eight of the ten countries, and in five the proportion of self-employed was higher in distribution than in the other sectors. Of course, in distribution the value added is a low proportion of turnover because the costs of the goods sold – the main purpose of the activity - and of other services purchased have to be deducted. Across all ten countries the unit labour costs in distribution were third in the ranking of activities, with only hotels and restaurants being lower. In both of these sectors the workers are less trained than in communications or business services, and there are proportionately more part-time workers.

Taking distribution services as a whole, retail accounted for the greater proportion of employment with Latvia having the highest share at 59%. The proportion in wholesale lay generally between 35-45%. The highest proportion of production value is in wholesale services, which generally exceeded 50%, and in some cases reached 60%.

Employ Fem- Self Turnover Production Enterprises Personnel Gross ees ales Empl. Value Nos. Costs Investment ’000 % % € bn € bn ’000 € bn € bn

CZ 498 52 27 67 14 205 3.3 1.4EE 83 61 12 8 2 12 0.4 0.3CY 45 45 30 8 2 18 0.8 0.2LV 139 64 9 9 2 18 0.4 0.4LT 169 52 21 10 3 27 0.5 0.3HU 292 51 21 39 7 18 1.9 1.0MT 17 29 38 3 1 12 0.2 0.1PL 1100 51 25 170 40 589 7.6 3.1SI 102 54 8 16 5 41 1.3 0.5SK 157 58 19 17 4 15 0.8 0.6

The potential significance of this information about the distribution sectors in the new EU member states is twofold. First, it demonstrates the gap in levels of development and sophistication between distribution in these countries and in the richer countries of the former EU15. There is at least a possibility that in future when considering proposals for

13 “Distributive trades and services in the new Member States and Candidate countries”, Statistics in Focus, No 27/2004, 5 July 2004.14 Defined as Sector G in NACE Rev. 1 – wholesale and retail trade; and repair of motor vehicles, motorcycles and personal and household goods.


liberalising distribution, EU negotiators will need to pay more regard to the interests of the relatively disadvantaged workforces in the new member states. Secondly, there may be similarities between the distribution situation in the new member states and that in at least the more advanced developing countries, which could offer useful pointers to EU negotiators in developing proposals for liberalisation in other countries.


5 PRELIMINARY IMPACT ASSESSMENT

5.1 The policy context: previous studies

In February 2004 the ILO published a report which had been produced under its auspices by the World Commission on the Social Dimension of Globalization, entitled A Fair Globalization Creating Opportunities for All15. This exhaustive report contributes to the context for ongoing discussions on liberalisation of services under the GATS, tracing both the positive and the negative impacts of globalization, and the economic and social consequences in developing countries. The report makes a series of balanced suggestions which aim at making globalization into a positive force, based on coherent economic and financial policies to encourage enterprise in a well-functioning market economy. It contains little discussion of infrastructure or services, except for concerns about the international financial system which are articulated at length. However many of its comments about the rôle of multinational companies investing in developing countries apply equally to investments in developing countries by providers of distribution services.

In August 2001 the World Bank published a paper by Mattoo and others entitled Measuring Services Trade liberalisation and its Impact on Economic Growth: An Illustration16. Taking into account the large body of previous work which suggests that the impact of liberalisation of trade in goods on the long run rate of economic growth is positive, the paper set out to analyse the economic impact of liberalisation of services, which are becoming increasingly tradable and which account for a large and growing share of output in most countries. It concentrated, as an initial stage, on the telecommunications and financial services sectors.

The authors argue that liberalized (and therefore more efficient and better funded) undertakings contribute to the general efficiency of economies, and hence to GDP growth. Liberalisation of services also leads to technology transfer via inward investment, and to enhanced competition, though the full benefits will be felt only if matching and adequate systems of regulation are in place to ensure fair and transparent competition. There is some econometric evidence—relatively strong for the financial sector, less strong but nevertheless statistically significant for telecommunications —that openness in services influences long run growth performance. It is suggested as a provisional conclusion that countries with fully open telecom and financial services sectors grow by up to 1.5 percentage points faster than other countries.

This paper did not specifically consider the distribution services sector, but in view of the increasing interlinkages between different services sectors in national economies, and the increasing proportion of the economies even of developing countries which is accounted for by services, its conclusions appear relevant to distribution, particularly as regards technology transfer and competition.

The Inception Report referred to a wide range of studies of the distribution sectors in different countries. Indications of the scope and conclusions of these studies, and detailed references, are included in the Inception Report and are not repeated here.

15 ILO (2004)16 World Bank (2001)


Nevertheless certain common factors and issues emerged. These are in no sense conclusions, but they are points and issues to which, in the practical business of negotiating on proposals which are put forward for liberalisation of distribution services, negotiators need to pay careful attention. For convenience these factors are repeated below.

Among the actual or potential positive aspects of services liberalisation are the following:

• As a general principle, liberalisation benefits the whole economy; • Even in relatively undeveloped economies the wholesale and retail sectors taken

together constitute a substantial proportion of the economy and employment; • Development of the services sectors, including distribution, is essential to the

balanced development of an economy as a whole; • The development of larger-scale distribution outlets, usually but not exclusively in

connection with inflows of FDI, improves efficiency and yields economies of scale, providing all but the poorest consumers with the chance of better prices, quality and choice.

Possible negative consequences include these:

• The benefits of liberalisation and development of larger distribution outlets can cause shorter-term increases in operating costs, and loss of existing jobs;

• In developing economies, the workforce may be in a weak position to resist potentially oppressive employment and sourcing practices on the part of major distribution outlets;

• Global sourcing practices of major international outlets may deny to local producers and suppliers the benefits of technology transfer and depress local prices;

• Increases in the quantity and scale of trade can lead to adverse social consequences and extra costs such as the generation of extra waste products and the need for new infrastructure developments;

• Increased regulation associated with liberalisation and new developments in distribution, covering such issues as trading hours and employment standards, may offset some of the efficiency gains from larger developments;

• There may be adverse financial effects which offset the benefits gained from lower prices to consumers, such as increases in land prices and building rentals, leading to inflationary pressures elsewhere in the economy.

The studies suggest a number of other consequences of liberalisation, which may be inherently neither positive nor negative, but which governments need to take into account when preparing policies to accompany liberalisation of distribution:

• Significant changes in the nature and scale of the distribution sector give rise to the need for new and effective regulatory and competition policies;

• In the interests of the national economy and of inward investors, regulatory systems need to be enforced equitably and transparently;

• Large retailers compete very closely with one another, particularly on price, and often operate on very narrow margins. Governments need to recognize this competition when negotiating with individual distribution undertakings e.g. on conditions and terms of entry;


• Large and well-financed undertakings naturally have extensive bargaining power in their dealings with governments, particularly in developing countries;

• Some barriers to entry in national markets may arise less from issues of economic or legal policy than from national tradition or social preference;

• Requirements governing market entry, for example capitalization or zoning regulations, or equity caps, may constitute important barriers;

• Regulation which inhibits the flow of inward investment to the distribution services sector also inhibits the efficiency gains;

• In principle, it is possible for governments to operate the full range of regulations governing the distribution sector so as to discriminate against foreign-owned undertakings.

5.2 Key economic considerations

Existing studies as summarised in Chapter 5 of the Inception Report on distribution services suggest that trade liberalisation influences the inflow of FDI to the service sector. In the reverse direction, studies suggest that restrictions on establishment are the most significant negative deterrent because of their impact on the price-cost margins of distributors17. However trade liberalisation alone is unlikely to have a significant impact on the volume of FDI flows to developing countries. Other determining factors include the existence of a consumer market sufficiently large to offer a return on investment; the investment and political climate; and the nature of local laws affecting employment and working conditions. A stable and predictable market environment – including a consistent and transparent regulatory framework – is a necessary pre-condition for trade liberalisation to have a significant impact on the level of foreign private participation in the distribution sector. The impact on sustainable development of increased foreign participation in distribution services will be affected by the characteristics and structural features of the domestic market. In developing countries it is likely that the greater part of the retail sector consists of small units which are likely to be inefficient and offers a limited range of products without the consistent product quality standards which larger retail undertakings can enforce. As GDP per head rises, the distribution sector offers considerable potential for economies of scale and scope, which provide opportunities for major wholesale and retail groups to establish chains of outlets. The major groups have the capital to install point of sale equipment that enables management to control costs and to predict consumer demand. New information technologies also enable sales to grow rapidly through non-store outlets, such as over the Internet. These changes also raise the likelihood of anti-competitive practices that only strong competition laws and enforcement can suppress. There may also be significant local effects in the form of squeezing small retailers out of the market and price and other pressures exercised on suppliers by big international retail chains18. Increased consumption raises the volume of products produced, and with this come associated issues such as the disposal of waste and (as mitigation measures) the possible need for recycling of packaging, cars and electronic goods. To the extent that improved distribution increases consumption and trade, this will also increase the need for road, rail, maritime and even air transport. More road transport may increase urban

17 Australian Productivity Commission (2000)18 Oxfam (2004)


atmospheric pollution, noise, traffic congestion and accidents. The increased use of telecoms services could have adverse environmental impacts, though to a limited degree, due to the erection of telephone lines and transmitter masts. Other increased inputs will be required from business and professional services and financial services. In developed countries, the impact of the liberalisation of distribution services will be largely confined to the gains from increased exports arising from investment abroad in foreign affiliates ( GATS Mode 3), and a few managers and specialists moving temporarily to developing countries’ markets (Mode 4). There is little prospect in the foreseeable future that developing countries will be able to generate significant FDI flows into developed markets.

Where both trade liberalisation (the removal of government measures that constitute restrictions and limitations to trade) and deregulation (the easing of non-discriminatory restrictions and burdens) are carried out, the effects will be larger than where simultaneous deregulation is not undertaken. Where such regulatory policies are not in place, or are poorly co-ordinated with trade liberalisation measures, the potential gains in terms of sustainable development from distribution services liberalisation are likely to be compromised.

5.3 Relationship to other current SIA studies: Agriculture and Forestry

Distribution services are relevant to agriculture since agricultural products are processed and traded within distribution chains which involve different stakeholders at different stages in the process. For example, successful agricultural exports depend on efficient and accessible distribution channels; in cases where agricultural tariffs are reduced through market liberalisation, the question arises of how effectively such reductions in price are passed on to consumers through the distribution chain; and pressure exerted at the distribution level can have a real impact on the environmental and social standards of production. Liberalisation and modernisation of distribution, and the quality standards set by large retailers, can contribute, even within developing economies, in helping local produce to get to the consumer quicker, in better condition, and cheaper. However while GATS negotiations on improved market access for distribution services may bring about structural and operational improvements which directly benefit agricultural traders, the relationship between these two areas does not work in the same way in the reverse direction. The WTO agriculture negotiations are essentially about the terms of international trade, and reduction of domestic subsidies. They can have a profound impact on what is produced and sold, on who sells it and at what price, and hence on consumer welfare; but not on how produce is sold, since there is no essential difference between the distribution of agricultural and food products and that of other products.

The same applies more strongly in the case of forestry. Forestry products are traded in huge quantities internationally and between enterprises, but it is in the form of finished products that they reach consumers. The Mid-Term Report on the Forestry SIA19 suggests that further liberalisation of trade in forestry goods could have significant economic and social impacts particularly in developing countries, but that as regards the

19 Katila and Simula (2004)


distribution of forestry products no issues seem to arise which are different from those concerning the distribution of other finished goods.

5.4 Sustainability Impact Analysis of the economic effects of liberalisation

As described in Section 2.3 above, no data are available as a basis on which to identify international trade or financial flows which are specifically attributable to distribution services, much less to evaluate the impact on trade and national payments balances of further liberalisation of distribution.

Sections 5.1 and 5.2 refer to a number of common factors, both positive and negative, which emerge from previous studies of liberalisation in the distribution sector. A common theme of many of these studies is that even in developing economies the wholesale and retail sectors taken together usually constitute a substantial proportion of the economy. It is suggested20 that in general, liberalisation and development of the services sectors, including distribution, are essential to balanced economic development. The development of larger-scale distribution outlets, usually but not exclusively in connection with inflows of FDI, improves efficiency and yields economies of scale, providing all but the poorest consumers with the chance of better prices, quality and choice. At the same time there are significant actual or potential negative impacts, as also discussed above.

Information which can be gathered on such effects is incomplete, and may be largely anecdotal. Equally, there is no single pattern or template which can be applied to evaluate, much less forecast, the impact of liberalising distribution in different countries. Much depends on the current importance and structure of distribution in the economy, on the nature and size of foreign distribution companies that are attracted into the market by liberalisation, on the flexibility and ability of indigenous traders to adapt and find a rôle for themselves in new circumstances, and on the resources which governments have – or may lack – to operate policies to mitigate the costs of structural adjustment.. It is these effects which constitute the secondary indicators that need to be evaluated in the case of distribution.

Mention needs to be made of a further set of factors which are important in the decisions of distribution enterprises in developed countries to develop overseas. These are factors which do not arise in the first place within developing countries, but rather within intra-corporate and inter-corporate relationships in the developed countries. Given the scope of the present report, they are not studied in detail. However such factors also arise in direct response to liberalisation in foreign markets, including developing countries, and the decisions taken may have direct and even fundamental impacts in developing country markets.

Such considerations include the following:

Whether saturation of the domestic market and continued pressure from shareholders for growth and increasing profits necessitates expansion abroad;

Whether firms aim to gain “first mover” advantages in the early development of distribution outlets in the big emerging markets such as China, Brazil, India, Indonesia and the Philippines;

20 Government of Thailand (2002), Chul and Moon (2003)


Whether firms, particularly those based in the EU, find themselves under pressure to expand quickly abroad in order to pre-empt likely increased competition from US-based firms, which at present are not so well represented in most emerging markets.

Among the main economic effects of liberalizing distribution services in developing countries are the following factors:

Effects on the proportions of GDP and employment accounted for by the wholesale and retail sectors;

Effects of increased efficiency arising from economies of scale and scope; Effects of the sourcing practices of new distribution outlets, particularly

supermarkets, on local supply patterns and prices paid to suppliers; Effects on location of distribution outlets, including the cost effects of local

saturation; Effects on distribution of products as inputs to other sectors of the economy and

on competitiveness; Changed balance between formal and informal distribution sectors of the

economy (replacement of informal sector by formal and registered undertakings); Encouragement of development of larger undertakings, and consequences for the

survival or further development of SMEs; Flows of FDI from distribution enterprises in developed countries; Transfer of technology and knowhow from developed countries; Price of land in urban areas and in areas where there is a tendency for distribution

undertakings, particularly new distribution undertakings, to congregate; Introduction and encouragement of policies for social corporate responsibility,

including regulation of promotional activities and pricing; Greater integration into regional and local markets, including internationalisation

of supply chains and effects on local and regional transport networks; Effects on the national balance of payments, for example on one hand increased

capital FDI flows and on the other increased imports of retail goods and of capital equipment for foreign-based suppliers;

Effects on national finances, including potentially increased tax receipts from undertakings in a better-organised distribution sector;

Effects of monetary and interest-rate policy, for example setting the conditions needed for enterprises to borrow at sustainable interest rates for modernisation and expansion;

Impact of government controls on and screening of FDI; Existence and activities of state monopolies.

5.5 Sustainability Impact Analysis of the social effects of liberalisation

Liberalisation of the market for distribution services in developing countries may be expected to give rise, as first consequences, to diversification of the nature and range of distribution outlets, together with inward investment by foreign-based operators. Within the constraints of applicable local regulations the policies operated by those companies will have significant work-related and wider social effects, which according to circumstances may be positive or negative (for example, improved pay and working conditions in the incoming enterprises, as against loss of jobs in existing distribution outlets). The corporate responsibility policies of enterprises will have direct effects on


the welfare of employees, as well as on training and education, and environmental protection. The quality and health standards which they implement will directly impact on consumer protection, probably positively (through the ability to supply better quality goods in better condition and at more competitive prices) but possibly also negatively (if safety standards are lax). The employment policies of enterprises may affect the gender balance, immediately within the company according to whether more men or women are employed, and in the longer run in wider society. Many of these issues fall to be considered under the head of mitigation and enhancement measures, which are discussed in Chapter 6 below.

The relevant core indicators in this context are poverty, health and education issues and equity. These are however general headings, and at this stage of the analysis more precise indicators are required. We have therefore redefined the potential social impacts of liberalizing distribution services under four headings, though obviously there is much overlap between these:

Work-related issues Health and education issues Social welfare and poverty Consumer choice and welfare.

5.5.1 Work-related issues

The key questions are how far and how quickly the arrival in the market of foreign-based operators will have an impact on existing distribution structures, for example:

whether existing indigenous distribution outlets will be driven out of business, or conversely will be able to adapt to co-exist with the incomers, perhaps through concentrating on local and niche markets;

whether local governments will have the resources to assist small enterprises to amalgamate in order to gain economies of scale and to facilitate the purchase of IT equipment;

how far foreign-based operators such as supermarkets and hypermarkets will bring with them employment and labour relations practices from their home markets, or how far they will adapt and possibly downgrade such practices in the light of local conditions; and

how far local distributors will be able, or be compelled, to upgrade their own employment practices in emulation of the incomers so as to contribute to a general improvement in welfare.

The potential work-related impacts include the following:

Levels of employment, including labour intensity and efficiency; Displacement of existing distribution outlets; Unemployment levels including redundancy of lower-skilled people and

displacement of workers in other distribution undertakings; Job quality and requirement for higher qualification levels, leading to a need for

training in management, logistics and IT skills; Security of employment and staff turnover rates;


Employment of workers in contravention of required standards and/or other national legislation eg. on immigration;

Wage levels; Gender balance of workforce and possible gender discrimination according to

technical and qualification requirements; Hours of work, including requirements for shift work, possibilities for part-time

working and flexible hours, work breaks, paid overtime and unpaid work; Use of outsourcing and employment of short-0term contract workers without

social benefits; Employment of physically handicapped and other disadvantaged people; Health of workers; Labour standards, including implementation and monitoring of core ILO

standards; Representation of workforce, including recognition of trades unions and local

arrangements for staff consultation; Restrictions on the employment and/or length of residence of expatriate staff of

foreign-based undertakings; Government policies relating to the employment of nationals; Government policies regulating hours of business and other operational matters.

5.5.2 Health and education issues

Impacts need to be evaluated in the following areas:

Education and training of workers, including days of training per worker; Transfer of knowhow and technology; Health of employees, including improvement of local legislation on industrial

health and safety; Health of consumers, including improvement of local legislation on product

quality and safety; Work-related and transport accidents, including incidence of personal injuries to

workers; Insurance cover for workers.

5.5.3 Social welfare and poverty

In many respects the social welfare and poverty factors overlap with, or represent different aspects of, the work-related and health and education impacts which are discussed above. Examples of such overlaps might be where changes in business practices following inward investment led to reductions of employment in some sectors, as well as to improved working conditions for employed people; or where employment policies led to a significant shift in the balance between male and female employment; or where the upgrading of distribution activities actually accentuated social inequalities because of better pay and working conditions available to people who were employed by the incoming companies.

In particular, the question arises of whether the issues of corporate responsibility, governance and regulation which are discussed above in relation to companies that invest in developing countries should also be accompanied by a positive strategy to help the poor. In principle all inward investments ought to improve standards for poor people


through the benefits of better technology and efficiency and higher wages. However there is a delicate balance to be struck between the different concerns of achieving corporate responsibility and improved standards on the part of investors; enabling investors to make a sufficient return to justify investing in the first place; and enabling workers in developing countries – in the distribution sector as in other sectors – to benefit from the comparative advantage which they have in the form of lower wages. These too are issues which fall to be considered in the context of mitigation and enhancement measures.

Meanwhile the possible social and welfare consequences of further liberalisation are immediately visible and of direct concern, so they should be appraised in their own right and separately from the work-related and health considerations which are discussed above.

Impacts need to be evaluated in the following respects:

Distributional effects of changes over time in income per head; Effect of liberalisation of distribution services in bringing informal traders into

the formal economy, including impact on tax payments; Impact on inequalities in society, including access to the formal economy and

differences in income levels; Social safety nets and social spending, ie. whether the government itself provides

employment for displaced workers, provides retraining facilities, or compensates them through unemployment pay or similar schemes;

Employment of child labour (in the light of relevant ILO standards); Gender balance (eg. whether priority is given to employing men or women, and

effect on women’s rights); Social exclusion (displacement of unskilled workers who are not otherwise

employable); Possible increased pressure on workers to migrate to more highly-developed

economies; Contribution of liberalisation and development of distributions services sector and

achievement of UN Millennium Development Goals

5.5.4 Consumer choice

The immediate consequence of development of the distribution sector, whether as a result of inward investment or of locally-generated investment, is an improvement in the range, quality, price, accessibility and speed of delivery of consumer goods. Over time, consumers benefit from a greater choice and variety of goods on offer, and within product groupings, from a wider range of quality and price. The issues to be evaluated in respect of specific proposals are these:

Consumer choice and welfare; Safety, hygiene, quality and informative labelling of retail products; Effect on pricing of retail products, in particular of basic goods.

5.6 Sustainability Impact Analysis of the environmental aspects of liberalisation


The potential environmental impacts of liberalising distribution services fall under three broad headings, namely:

Biodiversity Environmental quality Natural resource stocks.

Developed countries on the whole already have liberal markets for distribution services. The extra liberalisation which they may be able to undertake in further GATS negotiations is likely to be relatively marginal, and therefore unlikely to lead to clearly discernible environmental consequences either in their own territories or in the developing countries which supply products to them.

In considering the environmental impact of further liberalisation of distribution systems in developing countries, it is both important and difficult to distinguish between the effects on their production patterns caused by changing commercial demand in their overseas markets (predominantly but not exclusively in developed countries) and the effects of liberalising their own services markets, essentially for imports of services and for corporate access to their markets under GATS Mode 3, but also for their exports through foreign-owned retail chains.

The environmental effects of their own further liberalisation of distribution services are likely to be indirect. The progressive widening of consumers’ choice of products may lead over time to demands for new crop varieties, or to improved quality standards which will involve changes in agricultural practices such as fertilizer use. Quicker distribution and changing local consumer preferences might lead to new crop priorities which could affect habitat and, in the longer term, species conservation. Such linkages could be difficult to establish except on the basis of long-run observation and, as already noted, difficult to disentangle from the knock-on effects of changes in policy and taste in developed country markets. However some impacts in developing countries may be more immediate and direct. Tighter product standards may result in changes in the use of pesticides, while longer distribution lines and demands for quicker local delivery may both lead to the need for more and larger transport vehicles, and with them to an associated need for better roads and to more pollution.

These impacts may be either mitigated or accentuated according to the policy response and regulatory initiatives of national governments, which in turn may in many cases be guided or determined by the terms of international agreements on the environment and conservation.

5.6.1 Biodiversity

Under this head, the impacts of further liberalisation of distribution services by developing countries in their own markets would appear to occur in a mainly indirect manner in the following areas:

Crop varieties; Agricultural practices such as crop rotation and increased use of machinery; Maintenance and protection of ecosystems;


Risks of soil erosion deriving from uncontrolled use of more intensive farming methods;

Effects on protection of species deriving from changes in farming methods affecting habitat;

Use of pest control products including insecticides and chemical control of plant diseases;

Build-up of pesticide and other residues in soil and species.

5.6.2 Environmental quality

Very few service activities directly generate serious pollution or environmental degradation. However, services of all descriptions, including distribution, require construction of buildings and transport facilities, regular and copious use of vehicles, and increasingly sophisticated equipment, particularly electronic goods involving large quantities of high-quality plastics and high-purity metals – the manufacture of all of which can contribute environmental pollution. A development which in a developed country might be perceived as an environmental degradation – such as the loss of some countryside to road building – may in a developing country be associated with a real improvement in the quality of life such as easier access to education or medical services, and jobs. Environmental standards governing emissions etc. tend in developed countries to be absolute standards and uniform throughout the territory. Developing countries frequently lack such standards. Many of their cities are already seriously polluted by vehicle and industrial emissions and effluents, poor waste handling systems and so on. They would clearly be adversely affected by increases in traffic pollution and other forms of environmental degradation deriving from the further liberalisation of distribution. On the other hand such effects might be barely perceptible in more sparsely populated rural areas, where a development that would be seen as undesirable in a developed country can have a disproportionate effect for good on people’s lives.

Even so there may be specific and discernible environmental effects from liberalisation and the increase of distribution activities, such as increased traffic pollution and noise, pollution arising from oil storage and transport and bunkering of ships, or PCP emissions from refrigeration equipment (especially if undertakings in developing countries buy in second hand equipment of types now banned in developed countries). Such possible impacts include the following:

Consequences of diversion of land from agricultural to commercial uses; Noise and air pollution arising from increased distribution traffic; Effects on air and water quality; Increased effluents and other emissions and waste products; Fertilizer use resulting from consumer-driven changes in local agricultural

production; Contamination of soil and groundwater as a result of oil handling and storage,

bunkering of ships etc.

5.6.3 Natural resource stocks


Distribution services call on a wide range of inputs from other activities, particularly manufacturing and construction services. In this sense increased distribution activity could lead to environmental impacts through construction of new premises as well as increased calls on non-renewable natural resources such as plastics (for fittings, housings for electronic equipment, packaging and carrier bags); metals (for fittings and vehicles); and fuel. At the same time requirements for paper products, for packaging, catalogues and bags, would (or certainly could) be supplied from renewable resources.

To the extent that liberalisation involved increased investment by larger companies, particularly foreign-owned operators, the effect of increased requirements for resources such as packaging could be partially offset by arrangements for recycling packaging materials, at least at the wholesale distribution level where it is easier to organise such schemes on the inter-company level. However recycling schemes are underdeveloped or non-existent in developing countries. In general, personal incomes and living standards in these countries would have to increase many times over in order to be able to sustain the sort of recycling and resource conservation initiatives which are only now becoming the norm in developed countries. The impact of the scattering in the environment of waste plastic items such as water bottles and carrier bags could be mitigated by making such items from biodegradable materials, but that is not yet general even in developed markets and any beneficial effect in developing countries would be at best marginal. The increase in fuel usage deriving from increased distribution activity could also be mitigated by rationalising and optimising delivery routes and times, but here too the effect is not likely to be more than marginal.

The natural resource impact in developing countries of further liberalisation of distribution services could occur in the following main areas:

Use of land and water resources; Use of materials from non-renewable sources, such as metals, plastics, fuel; Use of renewable resources, eg. timber, paper products; Consumption of fuel.


6 MITIGATION AND ENHANCEMENT

Underlying all the issues of the impacts on national welfare and sustainability of liberalising distribution services are basic questions of national and international policy relating to business. Especially in developing countries, where frameworks of company law and regulation may be less rigorous, or may not exist, incoming distribution companies need to be persuaded to observe clear standards of corporate responsibility, especially in social and environmental matters. These should be based on agreed international best practice. That is easier said than done, as evidenced by the efforts made over many years by UNCTAD to achieve effective principles and rules for the operation of multinational enterprises, and by the inadequate observance of OECD’s Guidelines in the same field.

Therefore in parallel with negotiations for further liberalisation of distribution, it is important to seek wider acceptance of standards of corporate responsibility and also to develop a framework of flanking legislation, namely core requirements relating to corporate governance and regulations, applying to all undertakings which operate in a market. This is something that has to be done by the host governments. International organizations can offer a forum for discussion and development of standards, advice on implementation, and technical help. Some developed countries exert strong pressure over the standards eg. of pay and employment conditions operated by developing country affiliates of their national companies, but ultimately they cannot enforce such standards. It is entirely legitimate for developing country governments to build into their regimes for FDI requirements and standards relative to corporate practice, including foreign-based service providers. Such requirements should be based on internationally accepted best practices relating, in appropriate cases, to prudential regulation and to employment and workers’ health. According to internationally agreed principles, standards should operate even-handedly for all enterprises. A main objective would be to secure satisfactory and if possible improved conditions for the local staff who are engaged by such undertakings, which could lead in the longer run to a progressive improvement in conditions for the employees of locally-based firms as these latter adapt to compete with the incomers.

6.1 The rôle and impact of standards

In a background note by the UNCTAD Secretariat for the XIth session of UNCTAD in São Paulo in June 200421 it is stated that:

Market access difficulties are compounded by market structure issues, as well as by technical regulations and standards, SPS measures and complex and divergent rules of origin. Even more important are private sector measures and requirements such as voluntary standards. For instance, there is a growing trend towards harmonising private sector standards among international supermarket chains, making conformity with those standards a requirement for market entry. A key priority is to ensure that these standards and measures are developed transparently with the participation of developing countries, and applied in a non-discriminatory manner.

21 (Strengthening participation of developing countries in dynamic and new sectors of world trade: trends, issues and policies, TD/396, 17 May 2004, page 18 paragraph 42)


At the same time there is a risk of creating such a growing and confusing “spaghetti pile” of varied, overlapping and possibly conflicting requirements, whether official or private, that this effectively excludes smaller suppliers in developing countries and LDCs, who do not have the financial, technical and educational resources to comply.

Standards might be thought to be an issue exclusively of production of and trade in goods, because their function is to govern the safety and quality of what is produced and to provide impartial yardsticks by which these things can be evaluated. However because standards impact directly on what goods can be sold and traded, they directly affect the distribution of those products. Equally, the wider issues of regulation of working practices and conditions, financial probity of undertakings, safety in transport, and so on, are every bit as much issues of setting and enforcing standards, whether these are agreed on the national level or internationally. This applies to the distribution services sector just as it does to transport or to financial services. There would be little point in liberalising access to a market for foreign-owned distribution companies if local standards were applied so as to make it difficult or impossible for the incoming enterprise to operate. The WTO Agreements on Technical Barriers to Trade (TBT) and on the Application of Sanitary and Phytosanitary Measures (SPS) lay down clear requirements and procedures for the implementation of standards for industrial goods and agricultural products, but they do not extend to services, and the autonomous nature of the market opening commitments inscribed by WTO members under GATS means, for example, that there is no uniform application of the national treatment principle in the case of services regulation.

Some standards may as a minimum level conform to internationally agreed systems, such as the Codex Alimentarius, or the relevant WTO agreements. Others may conform at the international level to the voluntary ISO range of standards. It is of course open to governments and standards institutions to set higher standards where appropriate provided that these are administered in a non-discriminatory manner.

The context is a general global drive to move towards a co-ordinated international system of setting standards on a voluntary basis, and in so doing to co-ordinate the standards themselves. This presents acute problems both in the transition economies of Eastern Europe and the former Soviet Union, where the transition from a comprehensive structure of mandatory standards to modern voluntary standards is far from complete; and in many developing countries, where systems for setting and implementing standards may at best be inadequate, and at worst may barely exist.

One consequence of this complex and decidedly patchy international situation on standards is that private sector enterprises, including distributors, are grouping together to set standards to be enforced at the beginning of supply chains for the products which they purchase. Such standards may cover product quality, production processes (including farming methods, which are an increasingly sensitive matter particularly for consumers in developed countries), and labour conditions.

Some leading examples are now described.

Social Accountability International (SAI) is a US-based non-profit organisation dedicated to the development, implementation and oversight of voluntary verifiable social accountability standards. It convenes key stakeholders to develop consensus-based


voluntary standards, accredits qualified organisations to verify compliance, and promotes understanding and encourages implementation of such standards worldwide.

In 1996 SAI convened an international multi-stakeholder Advisory Board, including experts from trade unions, businesses and NGOs, to develop Social Accountability 8000 (SA8000), a voluntary standard for workplaces based on International Labour Organisation and other human rights conventions. SA8000 is currently in use by businesses and governments around the world and is broadly recognised by trade unions and NGOs. It covers all widely-accepted international labour rights (including those of the UN Universal Declaration of Human Rights and the Convention of Rights), requires an ongoing compliance management system, and involves independent expert verification compliance by auditing bodies accredited by SAI. Thus it bans child and forced labour, has strong health and safety requirements, asserts the freedom of association, and the right to collective bargaining.

The International Accreditation Forum Inc is the world association of Conformity Assessment Accreditation Bodies in the fields of management systems, products, services, personnel and other similar programmes of conformity assessment. Conformity assessment is the process by which a competent body issues a certificate that a particular business or product will comply with specific standards. The Forum operates a range of programmes including a Code of Conduct and aims to ensure that members accredit competent entities and establish mutual recognition arrangements.

Business for Social Responsibility (BSR) is a global organisation, formed in 1992, that helps companies to achieve success in ways that respect ethical values, people, communities and the environment. It provides information, tools, training and advisory services to make Corporate Social Responsibility (CSR) an integral part of business. BSR also acts to be a trusted intermediary between business and civil society, by maintaining strong relationships with other key stakeholders and opinion formers in the civic and public sectors.

The Sustainable Trade and Innovation Centre (STIC) is a global partnership designed to help developing country producers to benefit from growing market pressures to integrate environmental and social factors into their export strategies, and so to anticipate the environmental and social dimensions of the market, thereby capturing a greater share of the value-added of international trade. It publishes an annual “State of Sustainable Trade” report and is supported principally by UNEP, UNCTAD, IISD Canada, the Commonwealth Science Council, DG Trade (of the European Commission), European Partners for the Environment and the French Ministry for the Environment.

European Partners for the Environment (EPE), formed in 1994, is a multi-stakeholder ‘Centre of Competence’ which is co-managed on an equal footing by public authorities, business, trade unions and NGOs. EPE focuses on how Europeans can best exercise their responsibilities, and on investment, trade and purchasing dimensions for selected supply and value chains, including textiles, agri-food, water and IT. Membership includes UNEP, leading companies in the Dow Jones Sustainability Index, major trade unions (ETUC) and NGO networks at the global and European levels, including third world environment and development networks.


EurepGAP was formed in 1997 as an initiative of retailers for the Euro-Retailer Produce Working Group (Eurep), and has evolved into an equal partnership of agricultural producers and their retail customers. Its mission is to develop widely accepted standards and procedures for the global certification of Good Agricultural Practices (GAP). It produces a set of normative documents suitable to be accredited to internationally recognised certification criteria such as ISO Guide 65. Wide consultation internationally has produced a robust and challenging, but nonetheless achievable, protocol which farmers can use to demonstrate compliance with Good Agricultural Practices. Its Technical and Standards Committees has equal retail and producer representation, creating an effective and efficient partnership in the supply chain.

The Agribusiness Accountability Initiative (AAI) network promotes collaborative responses to corporate power in the global food system. It is a network of academics, activists and food system experts who are concerned that corporate concentration and vertical integration among trans-national agro-food companies threaten the sustainability of the global food system. It aims to ensure that different groups become aware of each other’s efforts, that their strategies become mutually reinforcing, and that new opportunities for reform advocacy are better exploited.

Within the European Union the “General Guidelines for co-operation between CEN, CENELEC and ETSI and the European Commission and the European Free Trade Association” were signed in March 2003. CEN is the European Committee for Standardisation, CENELEC is European Committee for Electrotechnical Standardisation, and ETSI is the European Telecommunications Standards Institute responsible for standardisation in the information and communication technologies (ICT) within Europe. This accord confirmed that “standardisation is a voluntary consensus-driven activity, carried out by and for the interested parties themselves, based on openness and transparency, within independent and recognised standards organisations, leading to the adoption of standards, compliance with which is voluntary.” It went on to “acknowledge that standards should be fit for the purpose, have a high degree of acceptability as a result of the full involvement of all relevant parties in the standardisation process, be coherent with each other and allow for technological innovation and competition; that therefore they should be based on sound scientific research, be updated regularly, and be performance-based, where possible.”

The Business Social Compliance Initiative (BSCI) of the Foreign Trade Association of retailers in Brussels sets standards in its Code of Conduct covering working conditions, based on UN Conventions and on ILO core standards. These apply to the retail sector, and also to the imports and manufacturers of consumer goods with which its members deal. This involves compliance with SA8000 certification schemes, or equivalents.

Individual multinational companies have developed their own standards for their affiliates, franchisees and suppliers in overseas countries. Such standards may cover matters such as working hours, minimum wage levels, physical conditions of work and bans on the employment of child labour, and directly govern what goods are permitted to enter the distribution networks.

An inevitable consequence of the various initiatives and processes described above is that the standards which are required and set in developed countries, whether these are


centrally set by accredited standards bodies or by powerful distribution firms, will come increasingly to predominate, including in the developing countries. This may look like another example of the relative weakness of developing countries in the face of powerful inward investors. On the other hand the process has powerful advantages for the developing countries, because:

As already noted, the global trend in standards setting and implementation is towards greater co-ordination and consistency, improving access to markets;

Standards in developed countries are frequently higher than those in developing countries, and their introduction and application can assist the transfer of technology, training, and improvement of quality;

Increasing impetus and support will be given to the process in developing countries of building up their own standards-setting procedures and accredited bodies;

If developing countries are to increase their exports to developed markets, it is essential for them to be able to comply with the standards which apply in those markets.

In short, while the majority of standards may not appear to apply directly to the distribution services sector, some do: for example standards governing working conditions, and transport standards. The full range of standards which affect international trade in goods apply indirectly to distribution, in the sense that they govern what goods are acceptable to be traded, and therefore what structures and chains exist to trade them. Further liberalisation of distribution services by developing countries must bring with it increasing pressure to apply standards across the board which are consistent with those in international markets. The issue here for developing countries is how, in the distribution sector as in other sectors of their economies, to use standards constructively both in their own market liberalisation process and in improving their access to overseas markets, and to contribute positively to economic development.

6.2 Sustainability and corporate social responsibility

The context in which business actions related to CSR reporting are taken in Europe is primarily conditioned by the stated aims of the European Commission. Its Green Paper referred to the overall context set by the Lisbon Council in 2000 concerning lifelong learning, work organisation, equal opportunities, social inclusion and sustainable development; to the Göteborg Council of 2001 concerning long-term economic growth, social cohesion and environmental protection; and to the Nice Council’s support in 2000 of the Commission’s Social Agenda. The Green Paper stated that

“Although the prime responsibility of a company is generating profits, companies can at the same time contribute to social and environmental objectives, through integrating corporate social responsibility as a strategic investment into their core business strategy, their management instruments and their operations [and that this should] be treated as an investment, not a cost, much like quality management.”

The Green Paper referred to the ongoing work in this field including the UN Global Compact (2000), which brings together various UN agencies22, labour and civil society 22 OHCHR, UNEP, UNDP and UNIDO - with the ILO.


to support principles in the area of human rights, labour and the environment. It was launched operationally in July 2000, and held its first Leaders’ Summit in June 2004. It “seeks to advance responsible corporate citizenship so that business can be part of the solution to the challenges of globalisation [by] mainstreaming its ten principles in business activities around the world.”

The private sector response is led by the World Business Council for Sustainable Development (WBCSD) which is a “coalition of 170 international companies united by a shared commitment to sustainable development via the three pillars of economic growth, ecological balance and social progress.” Members are drawn from over 35 countries and 20 major industrial sectors, and through its regional business councils it involves some 1,000 business leaders globally. Its aim is “To provide business leadership as a catalyst for change towards sustainable development, and to promote the role of eco-efficiency, innovation and corporate social responsibility.”

The Global Reporting Initiative (GRI), which is affiliated with the UN through its status as a Collaborating Centre of the UN Environment Programme, has published “The 2002 Sustainability Reporting Guidelines”.23 “GRI is a new independent, international institution, whose mission is to develop, promote, and disseminate globally applicable” sustainability guidelines. Such “reporting is an organisation’s public account of its economic, environmental, and social performance in relation to its operations, products, and services.” It is intended to cover both public and private organisations. The guidelines include ten principles, and mandate that five sections appear in a sustainability report: Vision and Strategy, Profile, Governance Structure and Management Systems, GRI Content Index, and Performance Indicators.

At the European level, in addition, there is CSR Europe, a non-profit organisation which helps companies place CSR in the mainstream of business practice. It was set up in 1996 and now has 65 member companies and 18 national partner organisations, reaching out to more than 1,500 companies around Europe.

More specifically for the distribution sector, EuroCommerce promotes initiatives on CSR and ethical reporting.24 It has a membership of over 100 trade associations and companies in 29 European countries in the fields of wholesale, retail and international trade. This sector accounts for 13% of EU GDP (pre-enlargement). EuroCommerce has two seats on the European Multi-Stakeholder Forum which was set up by the European Commission. At the end of a conference in November 2003, EuroCommerce and Uni-Europa Commerce (representing trade unions) jointly signed a statement indicating the distribution sector’s commitment to promote CSR practices and tools: “CSR initiatives cannot replace compliance with existing legislation, but CSR is a voluntary concept, whereby companies integrate social and environmental concerns into their business operations.”

Two standards are most directly relevant to CSR reporting: ISO 14001 and AA1000.

The ISO 14001 international standard is for environmental management systems, and just as ISO 9001 requires a Quality Management System, ISO 14001 requires an Environmental Management System to be implemented in accordance with

23 See www.globalreporting.org24 See www.eurcommerce.be


internationally recognised standards. This covers the establishment of an environmental policy, the determination of environmental aspects and impacts of products, activities and services, the planning of environmental objectives and measurable targets, implementation and operation of programmes to meet objectives and targets, checking and corrective action, and management review. The environmental policy has to be made public, and an internal audit routinely conducted. It is likely to become a contractual requirement for suppliers and eventually a requirement for attaining ISO 9001 re-certification.

The AA1000 Assurance Module, launched in March 2003 by the Institute of Social and Ethical Accountability25, is a world-wide first, aimed at providing a crucial first step towards more credible reporting, stimulating much needed debate, and an important reference point for those auditing reports. The Standard addresses the need for a single approach that effectively deals with the qualitative as well as quantitative data that makes up sustainability performance plus the systems that underpin the data and performance. AA1000 provides a rigorous process of stakeholder engagement in support of sustainable development, while GRI provides globally applicable guidelines for reporting on sustainable development that stress stakeholder engagement in both its development and content. The AA1000 Assurance Standard fundamentally complements the GRI by providing a basis for independent third parties to assure, or verify, sustainability reporting.”26

Annex 3 lists the numbers of stores outside the EU which are owned by certain important European retailers. The most important of this group is Carrefour (France), with several hundred stores in Argentina and Brazil taken together, but also significant numbers in China, Indonesia, the Republic of Korea and Thailand.

Highlights are given below taken from the CSR reports of three European retailing firms. These have been selected in order to indicate the type of material to be found in such documents:

Sales Employees Stores Countries Year € bn ’000

Carrefour (France) 89 419 10,378 29 2003Inditex (Spain) 4 33 1,558 44 2002Metro (Germany) 54 242 2,370 28 2003

6.2.1 Carrefour

“Program for socially responsible commerce”. Mission: “To meet our customers’ needs by giving as many people as possible access to quality products at the best price. To act as a responsible corporate citizen in every country where we do business. To set benchmarks for modern retailing in terms of health, consumer safety and environmental protection.”

Since 2001 Carrefour has adhered to the UN Global Compact. Examples of action taken include their “defence of ILO rules aimed at protecting basic rights”, a “campaign on the GMO issue”, “initiatives in the field of logistics to improve the environment”, a “Charter

25 Based in London: see www.accountability.org26 Global Reporting Initiative is based in The Netherlands: see www.globalreporting.org.


for the sustainable management of forests and [..] programs for fair and responsible trade.”

Some 88% of sales is in Europe, 6% in the Americas and 6% in Asia, with Hypermarkets (5-20 thousand square meters – tsm - of sales area) accounting for 58%, Supermarkets (1-2 tsm) 26%, Hard discount (0.3-0.8 tsm) 8%. About 59% of the stores are managed within the group and the rest are franchised. The staff numbers put Carrefour in the top ten private employers in the world.

“Quality and Sustainability Directors” identify important issues based on the monitoring of regulatory, scientific and social developments and anticipate and handle crises, with the aid of a scientific committee and outside experts. Their environmental responsibility includes choice of products, reduction of packaging, purchase of recycled paper, promotion of ecological agricultural practices, preservation of resources and biodiversity, reduction of atmospheric emissions and noise, use of transport by water instead of lorries, establishment of local roots, reduction of store energy consumption, and the monitoring of the use of refrigerants. Their reported environmental performance indicators cover 89% of sales.

Their social responsibility includes pricing products for different degrees of purchasing power, high quality and safety, sustainable relationships with suppliers, easy access for the disabled, store safety, fair compensation of staff, customer safety, charity work and local social solidarity.

In 2003 Carrefour was included in the Dow Jones Sustainability Index Europe.

6.2.2 Inditex

The first Sustainability Report by Inditex was “prepared in accordance with the framework established in 2002 by the Global Reporting Initiative”, to give “a balanced and reasonable presentation of social, environmental and economic performance” of the organisation.27 The group is best known for its Zara brand, one of their seven. About 59% of its stores are in Spain, and a further 21% in other European countries; 5% are in Mexico and 2% each in Venezuela and Israel, totalling 88% in these top nine countries. The firm undertakes the design and almost half of the manufacturing in its own factories, and is “capable of introducing a new model into the stores in just two weeks.”

Its Code of Conduct has features covering its five stakeholders: employees, business partners, suppliers, customers, and society. A second Code for External Manufacturers and Workshops covers child labour, non-discrimination, freedom of association, harassment and abuse, health and safety, remuneration policy, environment, subcontracting policy, applicable law, supervision and compliance, and publication of the Code. The Social Audit includes the selection of independent auditors, and independent verification of the degree of compliance with the Code for external production, leading to corrective action plans. The social auditors visit every factory, warehouse and the facilities used by staff. The assessment is based on a system of indicators that measure compliance with each of the eleven points in the Code.

27 www.inditex.com


Social action covers the community environment, the development of social and community fabric through technical and human support, strengthening the production and distribution chains. Collaboration agreements with local and international NGOs have been made, and grants given to assist vulnerable groups and the disabled.

The Systems of Environmental Management of factories and logistics centres are being certified in accordance with ISO 14001, with initial emphasis on “self-produced renewable energies.” During distribution there is re-use of packaging and hangers, so that cardboard boxes can be used on ten consecutive journeys, and overall a 60% saving on the consumption of boxes achieved. The use of transport is being evaluated in accordance with the recommendations of the “Greenhouse Gas Protocol of the World Business Council for Sustainable Development.” As for waste disposal “72% of total waste generated is managed by authorised agents.”

Sustainable Asset Management (SAM) Research of Switzerland, which rates companies on sustainability for investors reported that “Inditex has an overall sustainability performance that positions it among the sustainability leaders of its industry.28 Its management capabilities in the economic dimension are among the best, underlined by a particularly strong performance in codes of conduct and compliance. [ ] In the environmental dimension, Inditex scores significantly above the average with a clear outperformance in eco-efficiency performance and transport and logistics. Moreover, Inditex performs among the best in the social dimension, particularly in management attention to human resources.” SAM rated Inditex as second highest in the economic, environmental and social dimensions after Marks and Spencer of the UK, with Metro and Carrefour taking thirteenth and fourteenth places respectively.

6.2.3 Metro AG

Metro is a Düsseldorf based trading and service group, and foreign sales accounted for about 40%.

“Active for the Environment”: Environmental Report 2000. “As far as we are concerned, the term ‘environment’ encompasses not only natural resources, but also people, be they customers, employees, suppliers or shareholders.”

“Our merchandise mix policy is based on ecological and economic strategies: we are investing in the creation of closed packaging cycles and resource-conserving logistics strategies; we are working on Group-wide eco-controlling; and are systematically developing progressive products and services in cooperation with manufacturers and suppliers.”

Metro’s own environmental guidelines deal with protection which “means using resources sparingly, minimising risks to the environment and preventing harm.” Products are selected “which exclude or at least minimise pollution during their production, use/consumption and disposal, and satisfy the customers’ wishes.”

For organic foods, the ingredients of the “product line are produced in accordance with the strict guidelines of the EC Organic Farming Regulation. Compliance with the provisions is constantly checked by government-approved control agencies.” The 28 www.sam-group.com


“Dolphin-friendly” tuna is “caught with ecologically acceptable fishing methods,” and Metro “only cooperates with tuna suppliers who are affiliated to the Earth Island Institute (EII).” Free-range eggs have the KAT seal on the box, to indicate that the “living conditions and packaging facilities are inspected on behalf of the association.”

Since 1997 careful management of lorry journeys has “reduced pollution discharge by about 6,000 tonnes of CO2.” As for waste disposal “Metro achieves a 90 percent recycling rate.” In 1999 over 50% of the total paper used was made of 75-100% recycled fibre. Through purchases on-line followed by delivery to the door, Metro “can dispose of old packages, thus creating a closed cycle.”

They use the seal of quality of the Forestry Stewardship Council in the Praktiker stores for timber taken from forests managed for sustainability.

Some of their stores take back defunct appliances and accept responsibility for having them disposed of safely – this includes cookers and refrigerators, mixers, hi-fi, TV and PC equipment.

Metro abides by the Code of Conduct of the foreign trade association of the German retail trade (AVE), for goods procurement.

6.3 Conclusions on corporate responsibility

What emerges from this brief overview of company CSR practices is a sense of unco-ordinated initiatives which leave a number of issues open, both (a) within the EU and in its relation to similar movements around the world, and (b) as regards the knock-on effects for the suppliers in developing countries. These latter are now faced with a number of different standards: global, regional, country and company-specific, each voluntary and not yet systematized, in addition to such requirements as apply in their home countries.

"However, while we have outsourced most of our production, we have not outsourced moral responsibility for the way in which our products are manufactured and distributed."

adidas-Solomon, Social and Environmental Report, 2003

A major retailer acts quite properly when it responds through the deployment of codes of practice to its ethical responsibility to society, its corporate social responsibility in the political context, and to traditional economic risk management, which includes brand protection. All these elements now operate potentially on a global scale. The challenge lies in whether a code devised and operated by an individual company can be credible, and in whether reliance on independent standards gives it greater legitimacy; or whether in turn this is only possible through consultation with and the approval of stakeholders such as trade unions and NGOs. Further questions which arise are whether the approach should be sectoral, to what extent governments should be involved in the approval of voluntary codes, and what should be the connection with stakeholders in the developing countries. A number of sectoral initiatives are in hand with the aim of systematizing the operation of voluntary codes:


In the UK, the Ethical Trading Initiative groups over 30 retailers attempting a national multi-stakeholder dialogue and solution. It is now developing and testing a code through the exchange of best practices, and aiming to reduce the costs of multiple audits.

In France, under the aegis of the trade association, a smaller group of retailers shared for some years the result of external audits of their code and only later began a dialogue with civil society.

In Germany a similar group within their trade association adopted a code based on one which was developed five years ago resulting from a joint private-public initiative, and are now promoting it more widely.

A small group of retailers from around Europe, at the Free Trade Association in Brussels, is developing a European-level uniform standard for business social compliance for good governance.

Also at the European level, EuroCommerce is defining a common position on CSR and its standards, and projecting this into the European CSR Multi-Stakeholder Forum set up by the European Commission. EuroCommerce is aiming at mutual recognition of its standard so as to avoid duplication of costs, and also cooperation with counterparts in Canada and the USA.

The balance of risks and benefits of implementing codes effectively varies with company size and geographical spread. Even though all seem likely to observe the ILO core labour standards, there are various designs and varied degrees of stakeholder participation resulting in a lack of comparability and in confusion, especially for SME suppliers (based in developing countries) to the retail trade, who are faced with a variety of standards many of which are beyond their technical resources for compliance.

The trade negotiations under the GATS focus on government regulations, and so will not take into account, or even necessarily affect, the content of voluntary codes. Nevertheless national negotiators must be made aware of the crucial importance of voluntary codes in the distribution sector and their immediate effect on all firms in the supply chain, whether producers, wholesalers or retailers, when trade liberalisation enables foreign wholesalers and retailers to enter a market.

6.4 International co-operation on environmental measures: The North American Agreement on Environmental Co-operation (NAAEC)

There is in existence a large number of international conventions which lay down standards for environmental protection, species conservation and similar matters, including the Convention on International Trade in Endangered Species (CITES), the Montreal Protocol concerning the emission of chlorofluorocarbons, and many others. All of these agreements state multilaterally agreed objectives; some of them are accompanied by specific administrative and enforcement procedures. The possible environmental impacts from liberalising distribution services are of course only one, and probably limited, aspect of such concerns; but they form part of the larger picture, and in principle multilateral or regional action could provide a means of controlling and mitigating environmental degradation which might occur as a consequence of liberalising distribution.


By way of illustration, the NAAEC is an example of a regional agreement which was put in place specifically to provide means of counteracting the possible adverse consequences of economic liberalisation.

The North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico was accompanied by a number of side agreements, of which NAAEC is one. NAAEC came into force on January 1 1994. It sets out specific objectives, including improvement of the environment and conservation of species, commitment to sustainable development, transparency of environmental laws and regulations, and regular co-operation and reporting obligations between the parties.

The Agreement recognizes that the parties have the right to set their own environmental and conservation standards, but requires that these shall be high. It lays down detailed obligations regarding transparency, enforcement of environmental standards, and sanctions for breaches. It provides for private persons to have rights of access to judicial and quasi-judicial procedures in the event of complaints.

Much of the Agreement is procedural. It establishes a joint Commission for Environmental Co-operation between the parties. The Commission has its own Secretariat and acts as a forum for discussion and exchange of information, oversees implementation of the Agreement, and makes policy recommendations including recommendations on environmental standards as they relate to economic development. There are detailed provisions (based on those of the pre-WTO GATT) for settlement of disputes between the parties, including the establishment of arbitral panels and in the last resort withdrawal of trade concessions in retaliation against unrectified abuses.

NAAEC is a highly-developed and formal system for the handling of environmental co-operation between the parties. Its objectives are universally valid, but the procedures which it lays down are complex and demanding. As it stands, NAAEC does not appear to provide a viable model for developing countries to follow in the context of controlling or mitigating the environmental consequences of liberalising distribution. However its provisions could provide a quarry on which developing countries in general or regional groups could draw in developing their own environmental protection priorities and standards.


7 NEXT STEPS

The Final Report will include the three studies of liberalisation of distribution services in individual developing countries which are being conducted as part of the present SIA, as well as a detailed appraisal of their results. It will identify common factors which emerge from those studies, as well as differences. It will consider whether they permit consistent conclusions to be reached about the effects of liberalising distribution services in developing countries.

The Final Report will also draw together the indications which emerge from all the analyses conducted during the present SIA, as well as relevant conclusions drawn from work done in other fora. Based on the methodology applied in the present report, it will suggest point by point whether the following aspects could be expected to be improved by opening up market access to foreigners:

o inward flows of foreign direct investment o the transfer of management know-how and technology o training programmes o employment in importing countries, both on a sectoral and whole economy basis,

and both as to transitional and long term effects, in line with the determining characteristics of the country

o gender-related employment, within the distribution sector and through indirect effects on the active population (this may be strongly conditioned by social norms)

o prices in importing countries overall, and the effect on different social groups o integration into regional and global import and export markets o developing countries’ ability to export products to each other o formal income distribution and poverty in developing countries, including the

gender effects and urban and rural livelihoods and standards of living: though the effect on the informal economy cannot be assessed

o the distribution of products and equipment to other sectors of the economy, and hence on overall economic development, international competitiveness and growth rates.

o small and medium sized enterprises in the sector and across the economy o sources of supply, and hence on local and international transport and associated

environmental impacts, including the relative magnitude of the effects; o the environment and natural resources because of possibly different sourcing

preferences o public finances, and in particular overall compliance with tax-collection laws in the

distribution sector, and compliance in other sectors (manufacturing, other services).

It will also seek to appraise the consequences of liberalisation for average levels of:

o safety and quality of distributed products and convenience for consumers; o policies for corporate social responsibility.

Taking into account earlier work carried out by international bodies including OECD, the Final Report will propose a checklist of issues and factors against which specific national


proposals to liberalise distribution services could be considered as part of the process of policy formation. To be useful, this checklist must be clear, straightforward and not too long.

Proposals will be made for parallel measures which may be taken internationally or by individual governments to enhance the positive benefits from liberalising distribution services, and to minimise or mitigate the negative effects. Such proposals should include the possibility of appropriate national regulation, within the framework of relevant international agreements, but at the same time take into account the fact that developing countries’ policy and administrative resources are limited, so that the measures proposed must not be burdensome to operate.


REFERENCES

Arkell J and Johnson MDC (2003) Trade in Services under the Cotonou Agreement: policy options and priorities. International Trade and Services Policy.

Arkell J and Johnson MDC (2004) Sustainability Impact Assessment of Proposed WTO Negotiations: Inception Report for the Distribution Services Study. International Trade and Services Policy and IDPM, University of Manchester

Australian Productivity Commission (2000) Restrictions on Trade in Distribution Services, Staff Research Paper, Australian Productivity Commission

Chul KH, Itoh M, Luo W, McGuire G. Moon W and Shimoi N (2003): The Costs and Benefits of Distribution Services Trade Liberalization: China, Japan and Korea, Asia Pacific Economic Cooperation, Group on Services, Committee on Trade and Investment.

European Commission (2002) Communication from the Commission on Impact Assessment, COM (2002) 276 Final, Brussels

European Commission (2004) Distributive trades and services in the new Member States and Candidate countries”, Statistics in Focus, No 27/2004

Government of Thailand (2002) Communication by Thailand, Assessment of Trade in Services, tabled in Geneva on 22 July 2002, TN/S/4

ILO (2004) A Fair Globalization Creating Opportunities for All World Commission on the Social Dimension of Globalization and ILO, Geneva

Katila M and Simula M (2004) Sustainability Impact Assessment of Proposed WTO Negotiations: Mid-Term Report for the Forest Sector Study. Indufor Oy, Finland, and IDPM, University of Manchester

Kirkpatrick, C. and Lee, N. (1999) WTO New Round. Sustainability Impact Assessment Study (Phase Two Report), IDPM, University of Manchester.

Kirkpatrick, C. and Lee, N. (2002) Further Development of the Methodology for a Sustainability Impact Assessment of Proposed WTO Negotiations (Final Report), IDPM, University of Manchester.

Oxfam (2004) Trading away our rights – women working in global supply chains, Oxfam International, Oxford

United Nations (2000) General Assembly Fifty-fifth Session. United Nations Millennium Declaration. A/RES/55/2. United Nations, New York.

UNCTAD (2004) Strengthening participation of developing countries in dynamic and new sectors of world trade: trends, issues and policies, TD/396. UNCTAD.

World Bank (2001) Measuring Services Trade liberalisation and its Impact on Economic Growth: An Illustration, World Bank, Washington DC


WTO (2000) S/CSS/W/22, 18 December 2000

WTO (2000a) S/CSS/W/37, 22 December 2000

WTO (2001) Ministerial Declaration. Ministerial conference. Fourth Session. Doha. 9-14 November. WTO, Geneva. WT/MIN(01) DEC/1.

WTO (2001a) S/CSS/W/80, 4 May 2001


ANNEX 1

TERMS OF REFERENCE FOR CONSULTANTS CONDUCTING THE SURVEY OF THE IMPACTS OF LIBERALISATION OF DISTRIBUTION SERVICES IN DEVELOPING COUNTRIES

1 Introduction

The European Commission, in the context of its overall international trade policies, requires that Sustainability Impact Assessments (SIA) be made of prospective free trade and trade liberalisation agreements to provide an analysis of the complex interaction between trade, social and environmental factors. The aim is to develop a systematic basis for evaluating the likely economic, social and environmental impacts of proposals for trade liberalisation which might be implemented. The policy is designed to enhance networking between researchers, policy makers and other stakeholders such as businesses, labour unions and NGOs, and thus to improve the transparency of trade policy formation.

The methodology to follow in the country studies is that developed for the European Commission by the Institute for Development Policy and Management (IDPM) of the University of Manchester, United Kingdom. This takes into account work by OECD, UNEP and UNCTAD. By deepening the appreciation and analysis of the nexus between trade, the environment and economic development, the three country studies which are to be conducted in the context of the SIA of liberalisation of distribution services aim to empower governments and other institutions which seek to respond to the challenge of proposed trade liberalisation. The ultimate aim of such assessments is to maximise the net gains of trade and trade liberalisation by enabling countries to design and implement integrated policies which minimise associated environmental damage.

2 Background – the sectoral approach

The Inception Report on Distribution Services, which forms part of this brief, assessed existing material which largely dealt with the economic impacts and legal aspects of liberalising trade in the distribution sector. Little research was found on the social and environmental linkages and effects.

It could be that in the sector of distribution, the social effects of liberalisation and restructuring are more easily identifiable than the environmental effects. This has been suggested by some of the studies of the agriculture and fishery sectors carried out by UNEP. The relationship between trade liberalisation and the environment is complex, often indirect, and is mediated via effects on levels and patterns of production and consumption. Trade can lead to the increased generation of financial resources to help overcome poverty and pay for environmental protection measures. It can also lead to more pollution and natural resource depletion. Many factors influence what the particular mix of benefits and costs from liberalisation will be in different countries, which are at different stages of economic development and under different policy and market conditions. The pressure on natural resources will vary between countries, but is likely to be greater when imports are liberalised before competitive manufacturing export industries are established. In the short term, countries tend to react to a developing trade deficit by increasing exports of or raw or minimally processed products. Associated


problems of natural resource depletion and environmental degradation will then be exacerbated, especially in the absence of a well developed environmental policy framework.

The advantage of a sector-based approach such as that adopted for the series of SIA studies is that the positive and negative effects of the issues under consideration may be more easily identifiable, because collecting statistical data can prove less difficult and the data be in principle more consistent and reliable. On the other hand, country by country there may be wide differences in the quality of the data available regarding the distribution sector. Such data may be inconsistent or incomplete, so that there may be a need to refer instead to proxy indicators and to use ranking lists. Even where there are good data, the disadvantage of the sectoral approach is that economy-wide impacts may not be immediately identified, so that important cross-sectoral links may not be captured.

3 Key factors

Given that distribution is an important sector for a national economy, consideration should be given to how it relates directly and indirectly to major environmental elements and natural resources, to important issues of equity and social well-being, and how it furnishes strategic natural resources, such as certain foodstuffs, to a large proportion of the population. Other key factors to look out for are any changes in economic rules induced by trade-related policies, how significant the sector is in terms of trade flows, both in volume and financially, possible changes to such flows likely to be experienced, and the extent of sustainability effects due to trade-related policies. SIAs for the agricultural and forestry sectors are being carried out in parallel by other consultants, and therefore a careful look-out for any cross-linkages with those sectors should be kept.

Trade can have a range of environmental, health, and social impacts. Environmental impacts include those measured by air, water, and land pollution associated with the enterprises producing the products that are traded. There could also be effects associated with change in the demand for the use of natural resources, leading to either more, or less resource depletion and environmental degradation, depending on the scale and resource-efficiency of enterprises following liberalisation. The causal links between the distribution sector and other sectors should be borne in mind.

Judgement will have to be exercised independently in each country study on which factors are likely to be the most significant, but the following aspects should be considered:

Product effects: do any products themselves have an impact on the environment or development, due to their being either hazardous or environmentally friendly?

Technology effects: does increased trade lead to the transfer of production technologies across borders, and are these harmful or friendly to the environment?

Scale effects: these can occur when trade reforms raise the overall level of economic activity, which would usually be accompanied by a higher rate of use of natural and environmental resources - but are they offset by improved efficiency or greater investment in environmental projects?


Structural effects: will trade liberalisation lead to change in the composition of a country’s comparative advantage, as it specialises in the production of goods or services? Will this affect the less-polluting activities, which should lead to positive environmental effects, or will there be a higher pollution intensity?

Regulatory effects: will trade reforms have an impact on environmental regulations and standards, or will they impinge on the ability of a government to set environmental protection standards?

In the case of social impacts, more open trade may result in certain sectors expanding and others contracting, possibly leading to a rise in inequality or loss of employment opportunities (depending on labour intensity of sectors and which enterprises shrink or expand following liberalisation), and whether SMEs are enabled to move up the chain of value added production. There can also be positive effects in terms of poverty alleviation due to higher rates of trade-led growth. Thus the balance of benefits and costs as between urban and rural populations should be considered.

Other factors to bear in mind are the effects of currency devaluation as a flanking measure (whether consciously implemented by governments, or dictated by international currency markets); and market distortions, such as for prices, which can play a large role in determining environmental, economic and social effects. Compared to macro-economic policies and trade-distorting policies, trade liberalisation policies would be expected to prove less influential in determining aggregate production and consumption effects and hence overall effects on the national environment.

4 Interplay of significant factors

UNEP studies which have been carried out to date seem to show that while the specific sectoral situation, the overall policy environment, and more importantly the external market realities are all in principle significant in determining whether the environmental effects of trade expansion would be positive or negative, cross-country comparisons do not yield any systematic patterns in environmental effects consequent to policy liberalisation. Generalising across countries is thus difficult. The same policy under different circumstances may have both positive and negative effects to different degrees, and it is thus necessary in the circumstances of individual countries to focus policies on mitigating negative effects and enhancing positive ones.

In general, the consequences of trade liberalisation for product or service composition, and for technology, tend to be positive. However, the distribution of the gains from increased trade may be skewed against small-scale producers. The gains additionally favour traders over producers, even though wages may rise generally. The overall social effects of trade liberalisation still need more detailed study, and so there is not yet much guidance here.

Trade policies which reduce trade distortions such as tariff escalation can bring environmental benefits by enabling producer countries to move to higher value added production, and to use their natural resources more efficiently. The onus is on industrialised countries which import natural resources, and in general still use tariffs to protect their own upgrading industries, to take proper account of the developmental and


environmental interests of developing countries and to adapt their own tariff policies accordingly.

5 Involvement of policy-makers

A key to success is the amount of effort needed in the implementation of policy packages, and identification of the challenges to their implementation, in addition to the assessment of environmental and other impacts of trade-related policies. This implies engaging senior decision-makers at an early stage in the assessment process, enabling them to see its inherent value, and also for them to develop ownership of its ultimate policy product. Most of the measures identified to alleviate environmental, social and economic problems include a mix of sector-specific polices, broader macro-economic policies, and environmental policies, together with trade policies that promote higher value exports. This requires a systematic effort always to consider policies for liberalisation of distribution, as of other sectors, in the wider national economic context.

6 Specific terms of reference for country study: [COUNTRY]

1. These Terms of Reference apply to the Sustainability Impact Assessment for [COUNTRY] of further liberalisation of trade in distribution services in the context of further negotiations under the General Agreement on Trade in Services (GATS).

2. The study is to be based on two alternative scenarios:

(a) A base scenario which assumes that no new commitments to liberalisation under GATS are made, but that [COUNTRY] will fully meet the provisions of its existing commitments under GATS (ie. excluding the implications of regional trade agreements and other trade negotiations).

(b) A further liberalisation scenario which represents the strongest probable implementation of the negotiations agreed to at the WTO 4th Ministerial Conference in Doha.

3. For the purpose of examining the further liberalisation scenario mentioned at 2(b) above, restrictions are presumed to remain for difficult areas such as the movement of natural persons.

4. Otherwise it is assumed that countries will bind their further liberalisation commitments according to a notional schedule across the four GATS modes of supply:

(a) Mode 1 (cross-border trade) – minimal restrictions other than for consumer protection

(b) Mode 2 (consumption abroad) – no restrictions

(c) Mode 3 (commercial presence) – removal of the market access restrictions listed in Article XVI of GATS (Market Access) and of all scheduled


restrictions on national treatment in accordance with article XVII (National Treatment)

(d) Mode 4 (temporary presence of natural persons) – further limited commitments on the movement of intra-corporate transferees and contractual service suppliers.

5. The criteria to be used in assessing the significance of potential impacts are:

a) The extent of existing economic, social and environmental stress in affected areas;

b) The direction of changes in base-line conditions;

c) The nature, order of magnitude, geographic extent, duration and reversibility of changes;

d) The regulatory and institutional capacity to implement mitigation and enhancement measures.

6. In the light of the above framework criteria, the consultant is requested to carry out a study which will deliver the following specific outputs:

(a) Analysis of the size and structure of the distribution services sector in [COUNTRY], including the following:

Proportion of GDP accounted for by distribution services Growth trends Structure of the sector, including relative shares of small retail

outlets and of nationally- or internationally-based large retailers Relevant information relating to geographical concentration of

distribution services

(b) Analysis of existing commitments inscribed by [COUNTRY] under GATS which are relevant to distribution services

(c) How far existing GATS commitments affecting the distribution services sector have been observed by [COUNTRY] and, where appropriate, how far they have been incorporated in legislation

(d) In the light of these analyses, the respective likely impacts of :

(i) The base scenario described at 2(a) above; The further liberalisation scenario described at 2(b) above

7. The impact analyses should make explicit the possible difficulties with the identification of impacts, taking into account in particular:

(a) Economic impacts: both macro- and micro-economic impacts, notably in terms of economic growth and competitiveness ie. changes in compliance costs, including administrative burdens to


businesses/SMEs and implementation costs for public authorities, impacts on the potential for innovation and technological development, changes in investment, market shares and trade patterns as well as increases or decreases in consumer prices etc.;

(b) Social impacts: impacts on human capital, impact on fundamental/human rights and equity, changes in employment levels or job quality, changes affecting gender equality, social exclusion and poverty, impacts on health, safety, consumer rights, social capital, security (including crime and terrorism), education, training and culture, as well as distributional implications such as effects on the income of particular sectors, of consumers or workers, etc.;

(c) Environmental impacts: positive and negative impacts associated with the changing status of the environment such as climate change, air, water and soil pollution, land-use change and bio-diversity loss, changes in public health, etc.

8. The impact analyses should also:

(a) Concentrate on the most significant impacts which lead to distributive effects throughout the economy;

(b) Take into account the time-dimensions of impacts, in particular balancing short-term against long-term effects and considerations;

(c) Consider how far changes introduced into the distribution sector as a consequence of further liberalisation will be irreversible, and the need for possible application of the precautionary principle when considering the approval of changes and new developments.

9. In the light of the analyses carried out, the consultant should propose policy priorities for [COUNTRY] to pursue in further negotiations under the GATS, with an indication of the likely shorter-and longer-term economic impacts of putting such measures into effect. Proposals could include reference to the need for technical assistance and capacity building.


ANNEX 2

RESULTS OF COUNTRY STUDY: MALAYSIA

In Malaysia the distribution services sector (wholesale and retail) amounts to 13% of value added of the services sector (itself 47% of total GDP), or just over 6% of GDP. The retail sector is still characterised by inefficient small retail stores that have relatively low sales but employ the majority of workers. Their existence is threatened by the arrival on South East Asian markets of efficient foreign-owned hypermarkets. At the same time, retail trade is hampered by a shortage of qualified personnel, which increases wage costs.

Retail sector

In the fourth quarter of 2003 retail sales totalled approximately US$3.9 bn. Despite seasonal and cyclical fluctuations the trend has been a steady increase in turnover of the retail sector since 1999, while in real terms the average salary in retailing increased by one third between mid-1999 and end-2003. Over the same period numbers employed in retailing hardly increased, despite the 18% growth in retailing turnover. This suggests that there was already a labour shortage in retailing because of low unemployment rates and competition elsewhere in the economy.

There are several retail store formats, ranging from hypermarkets and supermarkets to small family shops, with a large sector of specialist retailers (dominated by the motor trade). In 2002 the Malaysian retail sector comprised 153,660 establishments, generating US$19 bn of revenue. According to the Census of Distributive Trades 2002, the sector employed 512,815 persons of whom 288,147 (56.2%) were employees and the remainder working proprietors, partners or family workers. It is possible that the actual number engaged in retailing is higher, because for taxation reasons many family businesses prefer to work with fewer formal employees and participation of more family members – prior to the 2002 Census the Malaysian Retailers Association actually estimated employment in retailing at about 700,000.

80% of retail trade in Malaysia is handled by specialised stores. Food shops accounted for 40% of the total sales of non-specialist stores, but 54% of employment. Average salaries paid in retailing were about one-half of the level in wholesale establishments.

Convenience stores are already widespread, and for example 300 7-Eleven stores operate under franchise in Malaysia. While some discount stores have been established, the concept is not yet widespread. Supermarkets are increasingly prevalent, frequently combined with department stores. Franchising operations generated US$2.6 bn of revenue in 2003. Hypermarkets and large supermarkets are mainly owned by foreign retailers, including Carrefour, Giant, Tesco and Jusco, but the rapid growth of this sector was stopped by the Government’s decision to refuse permits for further hypermarkets in certain areas until 2009.

At the end of 2003 almost 60% of retail sales were accounted for by larger stores (supermarkets and department stores taken together), with annual sales of US$330,000 or over. These stores accounted for some 23% of workers employed in stores and paid wages up to five times the level of those paid by the smallest stores. Growth in the retail sector in Malaysia amounted to 18% between 1999 and 2003, and this was almost


entirely due to growth in the large store sector, and in particular to the influx of hypermarkets.

Specialist retail shops, with total sales valued at just of US$3 bn, employed 201,701 workers. This sector is dominated by the motor trade, which accounted for 58% of the total sales of specialist shops, and in overwhelming measure for the apparent superiority of specialist shops in terms of sales per worker.

Whereas in Europe small retailers have largely been forced out by the supermarkets and now operate in niche markets, in Malaysia there are still large numbers of family-owned stores selling the same products which are found in supermarkets, since from the social point of view people have not yet accepted the general practice of travelling far away from home to shop.

The Government has identified retail trade as one of the main tourist attractions of Malaysia, and a national sales carnival, with heavy price discounting, is mounted three times a year with the participation of all major retail businesses. However the volatility of retailing is underlined by the impact of the outbreak of SARS (Severe Acute Respiratory Syndrome) in early 2003, which led for a time to declines in retail sales of between 10% and 50% following Government advice to people to avoid crowded places.

Wholesale sector

Wholesale distribution accounts for 62% of value added in the distribution sector but requires a lower proportion of manpower. In 2002 there were 16,386 wholesale establishments in Malaysia generating total revenue of US$30 bn and employing at that time almost 180,000 workers who were paid on average twice the salary of workers in retailing. Again there has been an overall increasing trend in sales by wholesale establishments since 1999, despite seasonal and cyclical fluctuations, which was mainly attributable to the rising trend in sales through specialised shops. The number of employees in wholesaling has remained fairly constant for the last five years, though salaries in the sector have been on a rising trend.

Importance of distribution services in Malaysia

Malaysia’s distribution sector is significantly less developed than that of European countries, but it still stands in 33rd place in the world in terms of per capita retail sales, at US$1,025 (compared with Japan at $8,522 and Singapore at $3,695). Except for Singapore, Malaysia has the highest per capita retail sales in South East Asia.

Taking the retail and wholesale sectors together, about 700,000 workers or some 7% of the total workforce work in distribution. However, partly owing to long working hours and low salaries, the sector is not popular among educated workers, and this is a further factor contributing to shortage of labour in retailing.

Regulation of distribution

While the sector can be seen as generally liberalised, there are a number of measures in force which affect distribution. Malaysia has inscribed no commitments in its GATS Schedules relating to Mode 1 and Mode 2, and in any case these Modes are not seen as


relevant to the liberalisation distribution. In Malaysia only Mode 3 is relevant. The relevant measures are as follows:

Price Control Act 1946 and subordinate regulations, which confer wide powers to control prices of a long list of items such as basic foodstuffs and fuels, and to require information to be included in labels. The provisions are to safeguard the position of poorer consumers, and the risk of creating supply shortages is offset by producer subsidies.

Control of Supplies Act 1961, which confers powers to regulate the supply and distribution of essential goods so that they are easily available at reasonable prices in any situation.

Regulations concerning Bumiputera29 participation. In 1970, following a period of inter-ethnic unrest, the New Economic Policy (NEP) was introduced for the purpose of increasing the economic participation of Bumiputera (63% of the total population) and reducing social inequality. Bumiputera make up only 15% of the distribution workforce, and those in distribution are frequently engaged in fringe areas such as handicrafts. Under the NEP the Government introduced policies for the participation of the Bumiputera Commercial and Industrial Community (BCIP) in the mainstream economy, including credit and training facilities and entrepreneurial development. This programme continues, and a current focus is to encourage Bumiputera to participate in retailing as well as other services, and to prepare them to stand up to the challenges of trade liberalisation.

Guidelines on Foreign Participation in Wholesale and Retail Trade. In order to secure an orderly and fair development of the sector, modernisation and increasing Bumiputera participation, all proposals for foreign involvement must be approved by the Government’s Committee on Wholesale and Retail Trade. All wholesale and retail businesses with foreign equity must be incorporated locally. Bumiputera equity of at least 30% must be included, and there are minimum capital requirements for FDI equivalent to roughly US$13 million for hypermarkets, US$1.3 million for supermarkets and for direct selling business, and US$0.35 million for speciality outlets.

The Foreign Investment Committee (FIC) has administered guidelines relating to acquisition of assets, mergers etc. since 1974, including regulations governing takeovers by foreign interests, although the rules were significantly relaxed in a recent Stimulus Package to encourage investment.

Hypermarket Regulation, which responds to the rapid increase of foreign hypermarkets in Malaysia from 15 in 2000 to 27 in 2003. New hypermarkets have to get approval from the Ministry of Domestic Trade and Consumer Affairs, based on a local economic impact study and on strict criteria designed to safeguard the position of small retail outlets.

Approval is required for the acquisition by foreign interests of voting rights in Malaysian corporations above certain limits or of a controlling interest in any form. There are strict criteria for the admittance of intra-corporate transferees and technical experts (including a requirement to train Malaysian staff).

Impacts of liberalisation of distribution

29 Bumiputeras is a term for the ethnic groups of Orang Asli (native people) and the Malays. The term is used to distinguish Malaysians (which include Chinese and Indians as well) and Malays which refers to the ethnic group rather than the nationality.


The study concludes that Malaysia’s GATS commitments are to a large extent not applicable to the retail and wholesale sectors. The SIA base scenario, envisaging the complete implementation of current WTO commitments by Malaysia, would be unlikely therefore to have a significant impact.

Malaysia already has a generally liberal distribution system, subject to the specific measures listed above. For example, it is much less regulated than many European countries as regards opening hours. Many shops open for long hours 7 days a week or even round the clock, and the mayor of Kuala Lumpur has expressed the intention of encouraging 24-hour shopping.

In this light, further liberalisation of distribution in GATS terms would be unlikely to bring about major changes throughout the economy. However in specific areas the further liberalisation scenario could have considerable impact, particularly on the environment and social life. It could lead to increased efficiency, because hypermarkets are more efficient than small local shops. On the other hand, liberalisation of distribution is unlikely to bring with it useful transfer of technology such as might result from other forms of FDI. Malaysia would also have to amend most or all of its control measures, with possible adverse results for the poorer consumers who benefit from controlled prices (even though in aggregate economic terms the abolition of controls would be economically beneficial), and for the small food outlets where they shop. It is argued that abolition of the Bumiputera Regulations could pose a threat to the social stability of the country. For these reasons and in the light of the overriding priority which Malaysia has given during the last three decades to measures to encourage economic and political stability, the process of liberalising the economy looks likely to continue on a cautious and measured basis; but Malaysia is unlikely to undertake significant further liberalisation of distribution, and certainly not in relation to GATS Mode 4 because of the fears which already exist in Malaysia concerning potential immigration from neighbouring countries.

Liberalising the Hypermarket Regulation would be controversial. Its abolition would certainly lead to more retail competition and to lower prices, but pressure would increase on manufacturers in their turn to reduce prices and costs, with possible adverse effects on product quality as well as on the competing small shops. Producers in Malaysia also find it difficult to get hypermarkets to accept their products, because the big chains have their own established networks of international suppliers. On the positive side there would be benefits for hypermarket customers, not just from lower prices but also from greater choice and from better standards of hygiene. The concentration of more food retailing capacity into new premises might also free up existing retail premises for other retail use, and reduce rents. Finally, there is evidence that in Malaysia foreign and majority foreign-owned firms tend to demonstrate better environmental practices than local and majority local firms because they are larger, more export-orientated, and tend to use more recent technologies.

Despite those benefits, liberalisation can pose threats for a country which is on the way to becoming industrialised. A social balance needs to be preserved in order to survive this process, and rapid liberalisation could unbalance the economy. For that reason, liberalisation should be undertaken progressively and cautiously.


The various measures taken for increased Bumiputera participation have made substantial progress. By 2000 the Bumiputera owned almost 20% of total corporate equity, and inter-ethnic inequalities have perceptibly declined although the various programmes have fallen short of their goals of reducing inter-ethnic tensions and Bumiputeras still tend to live in poorer rural areas, to work in agriculture, and to have lower incomes. The special privileges and aid granted to Bumiputera over several decades have considerably improved the social and economic position of these groups, but remain necessary for further progress to be made. Full liberalisation of the economy, including the distribution sector, would mean abolition of these special privileges, which could set back the progress being made in Malaysia towards establishing national unity.

The study concludes that there must be a fear that full liberalisation of distribution would lead to the disappearance of small family-run retail businesses. However that process is happening already as Malaysian consumers increasingly demand international-standard shopping services, and it will proceed much faster in the towns than in the countryside. Adverse economic and social effects of liberalisation could also be accentuated by the tendency of Malaysian consumers to prefer imported (that is, Western style or Japanese) goods, so that improved and more liberal distribution systems would facilitate higher imports and damage Malaysian producers. Again however this is a process that is already happening, which the Government has tried to counteract in recent years through devices such as “Buy Malaysian” policies. On the other hand, improved distribution systems could also benefit Malaysian firms who would be able to make use of them.

As to the environmental consequences of liberalisation, Malaysia already has stricter environmental laws than most other ASEAN countries, so liberalisation of distribution would be unlikely to have significant environmental effects within the country. On the other hand if one effect were to increase the proportion of goods imported from countries with lower standards, there could be (unquantifiable) environmental effects on the global level. Equally, increased imports from countries and suppliers with higher standards could encourage Malaysian consumers to demand higher standards of packaging and distribution.

Malaysia is already a relatively open market, particularly for high technology. The distribution sector is, with the exceptions discussed in this report, broadly open, and there appears to be a disposition among Malaysian politicians and businessmen to favour continued liberalisation, provided that it is conducted in stages (for example the recent easing of the restrictions on foreign equity holdings in companies). It is unlikely that in the next few years at least the price controls will be significantly liberalised, because the poor are not protected by European-style social security provisions. It appears likely however that there will be further liberalisation of the Hypermarket Regulation because of the overall economic benefits which more efficient distribution can bring.


ANNEX 3

EUROPEAN RETAILERS: STORES OUTSIDE THE EU (ERRT MEMBERS)

Ahold C&A Carrefour Delhaize Dixons Ikea Kingfisher M & S Metro Sainsbury Tesco TotalsNon-EU EuropeSwitzerland 35 11 6 12 64Iceland 1 1 2Norway 99 5 104Poland 169 3 7 16 2 77 66 340Bulgaria 7 7Romania 12 2 16 30Croatia 1 2 3Turkey 145 5 16 22 188 738CSIRussia 3 3 6Ukraine 1 1 7N AmericaUSA 1615 1485 18 27 185 3330Canada 11 20 31Mexico 21 21Bermuda 1 1 3383

C America 287 287 287S AmericaArgentina 421 421Brazil 256 256Chile 4 4Colombia 8 8 689

Australia 6 6 6AsiaChina 35 2 8 16 61Hong Kong 4 10 14Indonesia 10 34 10 54Japan 4 1 78 83Malaysia 6 1 2 3 12Singapore 1 1 14 3 19S Korea 25 12 21 58Taiwan 28 1 14 3 46Thailand 47 17 64Philippines 11 11Vietnam 2 2India 3 1 4 428Med/Mid.EastMorocco 5 5Israel 1 1Bahrain 1 1Kuwait 1 1 2Saudi Arabia 2 7 9Qatar 1 1UAE 2 3 5 24

Totals 2118 38 992 1531 100 72 87 100 165 185 174 5562


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