It is with pleasure that I call your attention to the following changes in the team responsible for producing the World Trade Review.

This paper uses a newly collected dataset on business costs to investigate empirically whether small and remote economies are inherently uncompetitive. Although in theory these economies can overcome their small size by specialising and trading, this may not be enough to generate acceptable incomes because they face a combination of diseconomies of small scale and high transaction costs. We conclude that there are almost certainly some very small economies for which this is true. These economies are likely to become less attractive for commercial activities as globalization proceeds and their current trade preferences are eroded. The policy solution is not protection, however, but proactive policies from the international community.

Small and poor countries pose a challenge for the World Trade Organization (WTO). These countries have acquired a significant say in WTO decision-making. However, they have limited ability to engage in the reciprocity game that is at the heart of the WTO, and have limited interests in the broader liberalization agenda because of their preferential access to industrial country markets. Accommodating the interests of the small and poor countries is desirable in itself, but would also facilitate expeditious progress in the Doha Round. The stark reality facing the system is that the desirable ways of addressing their concerns – providing them additional financial assistance and nonpreferential market access – is proving infeasible. As a result, the system is gravitating toward the less desirable option of relieving these countries of obligations, including those that might be welfare-enhancing for them.

To what extent are the problems of small island economies unique, thus compromising the potential welfare gains from freer international trade? Is comparative advantage enough or even relevant in analysing the benefits from international trade for such economies? If the answer to the latter question is in the negative, then how can the WTO process be modified to maximise gains to the participants? Alan Winters and Pedro Martins (W&M) analyse the first of these two questions, arguing that comparative advantage is not enough, while Aaditya Matoo and Arvind Subramanian (M&S) come to the conclusion that desirable ways of addressing concerns of small countries within the WTO process are proving to be infeasible. Even though W&M and M&S raise legitimate concerns about small economies, I disagree with their policy conclusions. I argue below that comparative advantage is as applicable to small countries as to large countries and that liberal and uniform trading rules for all countries, with the option of temporary lump-sum transfers to the vulnerable ones, can achieve the dual objectives of economic efficiency with redistribution.

With rapid changes taking place in the global trading environment, there has been concern within several international arenas and academia about the future of small developing countries (SDCs). Although the discussion relating to the effects of country size on economic growth and development began in the early 1960s with the publication of Kuznets' (1960) article and Demas' (1965) monograph, there has been a recent flurry of writings on small developing countries in the context of the new global order. For example, the World Bank in collaboration with the Commonwealth Secretariat (2000) undertook a major study of small states and their ability to meet the challenges of a changing global economic environment. Kennes (2000) and Salvatore et al. (2001) have also analyzed the challenges and opportunities facing small countries in the global marketplace. The Commonwealth Secretariat had previously arranged two expert panels to examine the vulnerability of small states in a global society and also the future of small states in overcoming their vulnerability (see Commonwealth Secretariat, 1985, 1997).

Winters and Martins (W&M) ask the question of whether small and remote economies are inherently uncompetitive? They conclude that such economies do indeed face ‘huge competitive challenges’ and they discuss options for external sources of income that might contribute to the viability of such communities.

The works of Winters and Martins (W&M) and Mattoo and Subramanian (M&S) are two serious and innovative papers that begin to analyse not only what the WTO means for small states but now, just as significantly, what the numerical preponderance of small states might mean for the WTO. This latter issue is especially significant as members grapple with increasingly complex web of interests that need to be accommodated in order to arrive at a consensus in the Doha round. While neither papers represents the position of the World Bank and IMF, what they both have in common is that they approach the current round from the possibility that some WTO members, the smallest, poorest and most trade preference dependent – for example, Mauritius, Fiji, Guyana and Jamaica – may only benefit from Doha round trade liberalisation in geological time! The research, while not representing official Bretton Woods views, constitutes a dramatic shift in thinking inside the beltway from that which existed at the end of the Uruguay round when the dominant position was that ‘all members would benefit’.

Developing countries are becoming more active participants in trade negotiations as manifested by the role played by recent coalitions comprising primarily developing countries (G20, G90; WTO Africa Group). Four small African countries (Benin, Burkina Faso, Chad, and Mali), previously unfamiliar to most trade diplomats, assumed centre stage at the Cancun WTO Ministerial. Burkina Faso and Mali do not even have an embassy in Geneva.

The two papers address questions related to the role and place of small, developing countries in the global trading system and in multilateral trade negotiations, reflecting the resurgence of interest in recent years in size-related constraints to development and to participation of small economies in international trade.

The number of sovereign states has steadily increased over the past few decades and is rapidly approaching two hundred. Many of these countries are small. The median country size in terms of population is around five million people. Tuvalu, the smallest state with a seat at the United Nations, has 11,000 people. The smallest country in the sample studied by Winters and Martins (W&M) is Niue, a self-governing country in free association with New Zealand, with only 2,000 inhabitants.

The two papers in this special issue both look at the problems that small economies face in participating in the world trading system. For Winters and Martins (W&M) small means small in population; they motivate their analysis with reference to the 82 countries with the smallest population, accounting collectively for less than 0.5% of world population. Many of these countries are also remote, making trade costly. For Mattoo and Subramanian (M&S) the focus is on countries that are small and poor; their list covers the 73 countries which each account for less than 0.05% of world imports and which also have low income. They investigate the engagement of these countries in the WTO. My comments will address both papers, although focus on W&M.

We are grateful to our commentators for their insightful contributions on our paper. We shall not respond to them one-by-one but rather very briefly address the main themes of the commentaries taken as a group.

We are grateful to the commentators for their valuable observations. We cannot do justice to the full range of comments we have received. Below we respond briefly to some of the issues raised.

The gas dual-pricing system in Russia has been a highly contentious issue in the context of the ongoing negotiations on the accession of Russia to the WTO. At present the domestic price for gas in Russia is set by the Government at a level several times lower than the freely negotiated export price. In the view of the European Union and other WTO Members such a policy is not permitted under WTO disciplines, while Russia persists in viewing the existing dual-pricing system as WTO consistent. The article pursues a legal assessment of the issue, demonstrating that although the Russian gas pricing system can be considered a subsidy, this subsidy is non-actionable under the WTO rules. This means that Russia has merit in its attempt to keep the gas pricing system in place after it accedes to the WTO.

Good evening. I am delighted to be back here this evening among so many oldfriends.

In the traditional theory of international trade, multilateral trade agreements should be easy because self-interested governments unilaterally commit to reduce their own protection and, as a bonus, they reap positive externalities from liberalization by other nations. In practice national governments do not behave as though they are maximizing the welfare of a representative citizen, but instead they respond to pressure from a diverse mix of constituencies and competing special interests. Governments attempt to manage domestic trade-offs within international negotiations, so progress is slow and protection persists. The practical operation of trade negotiations, emblemized by the infamous ‘green rooms’, is characterized by factionalism, horse-trading, and brinkmanship.

This paper addresses the dispute brought to the World Trade Organization (WTO) by Argentina concerning certain Chilean measures affecting the importation of wheat, wheat flour, oil seeds, edible vegetable oils and sugar. The complaint by Argentina challenged two types of policies – a ‘price band system’ that was applicable to four of those product categories, and safeguard measures that were applicable to three of them. The WTO panel ruled in favor of Argentina on both sets of measures. It found that the price band system violated Article IV of the Agriculture Agreement and Article II of GATT 1994. The safeguard measures, according to the panel, violated various provisions of the Safeguards Agreement, as well as Article XIX of GATT 1994. Chile elected not to appeal the panel ruling regarding the safeguard measures, but did appeal the adverse finding as to the price band system. The Appellate Body subsequently affirmed in substantial part the finding that the price band system violated Article 4 of the Agriculture Agreement, but reversed the finding of a violation under Article II of GATT 1994. Chile has since indicated an intention to comply with the ruling, and an arbitration pursuant to Article 21.3 of the DSU determined that the reasonable period of time for compliance would expire on December 23, 2003.