Published on December 22nd, 2015 | by Guest1
Iran Gearing Up to Join the WTO–Again
by Semira N. Nikou
Iran is increasingly vocal about its readiness to join the World Trade Organization (WTO), which will involve a long, negotiated process with challenges both domestically and abroad.
In preparation, the Hassan Rouhani administration is tackling the diplomatic mobilization and economic reforms required for admission. This past week, Iran’s minister of industry, mines, and trade, Mohammad Reza Nematzadeh, attended the WTO’s high-level Ministerial Conference in Nairobi as an observer and announced that finalizing its WTO membership is “a priority” for Iran. He reportedly also met with his counterparts from Finland, Spain, and Russia to discuss bilateral trade relations and seek their support for Iran’s WTO ambitions.
But Iran’s renewed push to join began earlier—after it signed the Joint Comprehensive Plan of Action (JCPOA) with the P5+1 in July 2015, a deal that will incrementally eliminate or suspend economic sanctions against Iran in exchange for Iran meeting certain nuclear commitments. Two months later, the head of Iran’s Trade Promotion Organization, Valiollah Afkhamirad, announced that a team of lawyers and economists would evaluate the economic and institutional reforms needed to make Iran’s trade regime WTO-compliant.
The reason why the nuclear agreement matters to Iran’s accession is that any WTO member—including the United States—can veto a country from joining. With the agreement concluded, Iran now has a shot at gaining the necessary international support to join.
Process of Accession
The WTO governs trade among its 162 member states and customs territories, which together account for more than 95 percent of world trade. Many of Iran’s neighbors, including Bahrain, Qatar, Israel, Saudi Arabia, Turkey, the United Arab Emirates (UAE), and even Yemen—a country engulfed in civil war—are already WTO members, with Afghanistan en route to join in 2016. Iran is the largest economy still excluded from the organization.
Iran applied to the WTO in 1996 and gained observer status in 2005, which the United States allowed as a way of supporting the European Union’s then diplomatic efforts with Iran. At the time, Iran’s current president Rouhani was the lead negotiator during talks with Britain, France, and Germany (the E3) over Iran’s nuclear program.
For trade-starved Iran, accessing the markets of WTO member states is particularly inviting. Sanctions have led to a decrease in Iran’s trading partners, which now mainly include China, the UAE, and Turkey, and, to a lesser extent, the EU, India, South Korea, Iraq, and Afghanistan. Tougher international sanctions in 2010, and tightened EU and U.S. sanctions in 2011 and 2012, have restricted foreign trade and investment with Iran. These sanctions, combined with financial mismanagement under former President Mahmoud Ahmadinejad’s administration and a drop in world oil prices, have constrained Iran’s economy.
However, once Iran joins the WTO, it could challenge economic sanctions against it through the organization’s relatively successful dispute settlement system. The only provisions in the WTO agreements that potentially allow for economic sanctions are certain security exceptions. But the WTO’s dispute settlement system has never ruled on economic sanctions, and it is unclear what the outcome would be if it did.
Joining the WTO is not easy. A lengthy process, accession averages nine-and-a-half years, though Iran says it plans to accede within four. The time it takes to complete the process depends largely on the extent of trade liberalizing reforms the acceding country will be required to implement. These include lowering tariffs and eliminating or reducing certain types of subsidies for domestic industries. Of course, there are political components as well. The prerequisite trade commitments and economic reforms before joining vary from country to country, and, as Iran’s experience with WTO already shows, is influenced by a country’s diplomatic and economic relations with other WTO members. In light of Iran’s current international status, it can expect to face a tough crowd.
Establishing a Working Party
Iran already completed an initial step in the accession process by providing a report on its foreign trade regime in 2009, a file it now says it has updated. As procedurally required for accession, the government also established a working party in 2005, when Iran became an observer, which, however, has yet to formally convene. The accession process won’t go anywhere until it does.
When the working party does meet, it will comprise any WTO member interested in participating. That is when the trade negotiations happen. The process will entail multilateral negotiations with the whole working party or a subset of its interested members, as well as bilateral negotiations with individual countries. As a matter of policy, the United States engages in both the multilateral and bilateral negotiations. Therefore, for the negotiation process to move along, Iran and the U.S. will need to be in a position to meet bilaterally. That in itself could pose difficult domestic political challenges for both parties.
After the working party determines that Iran has made sufficient commitments and implemented the necessary economic and structural reforms, it will present a report of these outcomes to all WTO members for adoption.
Besides this lengthy, external process, there are internal challenges that Iran must also overcome. Its economy experienced a shock when the Ahmadinejad administration tackled the country’s expansive and deeply engrained subsidy program in 2010, a reform that President Rouhani has maintained. The original reform plan called for countering the increase in fuel and utility prices by upping cash support to key industries that rely on subsidized energy supplies. But the government was unable to give industries the intended economic support, as the cash grant program to families turned out to be more expensive than expected, using up most of the budget set aside for ameliorating the impact of subsidy cuts.
Therefore, some industries might challenge another sudden, yet more massive reduction in state subsidies to industries at the same time that it opens the domestic market to foreign competition. Domestic lobbies, such as the auto industry, banks, and home appliance sectors—all of which have benefited from a captive market—are particularly wary of foreign competition. Iran will thus need not just structural changes but also political mobilization to prepare its domestic industries for global trade regulations.
Impact of Liberalization
It is too soon to tell how WTO membership will impact Iran’s economy. It could boost foreign investment while also encouraging Iran to diversify its economy, as its manufacturers would benefit from the lowered tariff rates accorded to WTO members. Most of Iran’s export revenue comes from oil and gas. But the government is seeking to promote non-oil exports, notably certain metals, pistachios, carpets, and petrochemicals, which accounted for roughly $35.8 billion in export revenue in 2014.
Much of the private sector is promoting the move to join the WTO. According to Rahman Poorqorban, secretary general of the Association of Exporters of Industrial, Mining and Engineering Services, WTO membership would offer more predictability to Iran’s economy.
But there are skeptics. Critics argue that trade liberalization exacerbates poverty and social inequality in many developing countries. According to Mohammad Reza Sabzalipour, head of the World Trade Center in Tehran, joining the WTO would disadvantage protected industries and lead to their closure. Although he conceded that membership in the WTO is both “necessary and inevitable,” he argues that until Iran becomes an economically stable, export-driven country, it risks being strong-armed into conceding too much during the negotiation process. Ultimately, joining the WTO under current conditions will quickly force “several active factories to go bankrupt and close their doors,” he said.
Perhaps at first the benefits of WTO membership will be largely symbolic. The WTO will be a forum for Iran to demonstrate its integration in the international trading community, enabling it to participate in the institution’s numerous councils and committees and contribute to the future of international trade negotiations and trade policy formulation. Ultimately, however, real benefits will only accrue if Iran manages to reverse the damage done to its economy through years of sanctions and bad management.
Photo of the 10th WTO Ministerial Meeting in Kenya in 2015 courtesy of Make It Kenya via Flickr.
Semira N. Nikou is a Geneva-based attorney specializing in international trade. She previously worked at the Public International Law & Policy Group and the U.S. Institute of Peace.
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