TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes Pierre Sauvé, Simon Lacey, and Csilla Lakatos © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions and is partially supported by the Umbrella Facility for Trade trust fund, financed by the governments of the Netherlands, Norway, Sweden, Switzerland and the United Kingdom. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution: Please cite the report as follows: Sauvé, P., Lacey, S., and C. Lakatos. 2024. “Timor- Leste and WTO Accession: Harnessing Momentum to Support Development Outcomes.” Washington DC: World Bank. License: Creative Commons Attribution CC BY 3.0 IGO. Translations — If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@ worldbank.org. Photo credits: stock.adobe.com and freepik.com Further permission required for reuse. Cover design: Arsianti The report was designed and typset by Arsianti TABLE OF CONTENTS ACKNOWLEDGMENT IV ABBREVIATIONS V EXECUTIVE SUMMARY VI PART I. SITUATING TIMOR-LESTE’S RECENT TRADE PERFORMANCE 1 PART II. AN OVERVIEW OF THE WTO ACCESSION PROCESS 6 I. Legal Foundations and Institutional Processes 6 1. Legal Underpinnings of the Accession Process 7 2. WTO Accession and Least Developed Countries 7 3. Domestic Institutional Arrangements and their Long-Term Importance 8 II. Market Access Negotiations 9 1. WTO Accession Negotiations as a Two-Way Street 9 2. WTO Accession and Development Imperatives for Timor-Leste 10 III. Legislative and Regulatory Reforms 10 1. Reforms and the Trade-offs of Membership 10 2. WTO Accession as a Once in a Generation Opportunity 11 3. Tapping into the Resources of the International Donor Community 11 PART III. THE WTO ACCESSION PROCESS AND ECONOMIC GROWTH 12 I. Market Access, Competitiveness and Export Growth 12 1. Linkages between WTO Accession and Economic Growth 13 2. Complementary and Sustained Commitment to Reforms 15 3. Potential Economic Gains for Timor-Leste 15 II. The Services Dimension 16 1. Services-Led Growth 17 2. Leveraging Trade in Services to Grow the Timorese Economy 17 3. Timor-Leste’s Services Offer 18 III. Leveraging Digital Transformation for Trade 19 1. Harnessing the Accession Process for Digital Transformation 19 2. Aid for Trade and Trade-Related Technical Assistance for Digital Transformation 24 IV. Regulatory Reform, Institutional Strengthening and Trade Facilitation 25 1. Leveraging WTO Accession and Membership to Improve Quality Infrastructure 25 2. Reducing Trade Costs through Trade Facilitation Improvements 26 3. Legislative and Regulatory Reforms to Improve the Business Climate and Attract FDI 27 CONCLUSION-HARNESSING MOMENTUM AND MANAGING EXPECTATIONS 29 REFERENCES 30 ACKNOWLEDGMENT This report was prepared by Pierre Sauvé (Senior Private Sector Specialist, World Bank), Simon Lacey (Head of Digital Trade and Geopolitics, World Economic Forum), and Csilla Lakatos (Senior Economist, World Bank). Detailed feedback, suggestions, and comments were received from peer reviewers Roberto Echandi (Senior Trade Specialist, World Bank) and Michael Ferrantino (Former Lead Economist, World Bank) as well as Alief Reza (Senior Economist, World Bank), Habib Rab (Lead Economist, World Bank), and Bernard Harborne (Country Representative, Timor-Leste, World Bank). The team worked under the overall guidance of Satu Kristiina Kahkonen (World Bank Country Director for Indonesia and Timor- Leste), Bernard Harborne (World Bank Country Representative, Timor-Leste), Lars Christian Moller (Practice Manager, World Bank), and Habib Rab (Lead Economist, World Bank). Financial support for this work was generously provided by the governments of the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom through the Umbrella Facility for Trade Trust Fund. ABBREVIATIONS ADB Asian Development Bank MFN Most Favored Nation AfT Aid for Trade MNCs Multinational Companies ASEAN Association of Southeast Asian MSMEs Micro, Small, and Medium Sized Nations Enterprises ASYCUDA Automated System for Customs NQCI National Quality Control Institute Data NQI National Quality Infrastructure CEM Country Economic Memorandum NSW National Single Window CTIF Canadian Trade and Investment NTBs Non-Tariff Barriers Facility for Development OECD Organization for Economic DTIS Diagnostic Trade Integration Study Co-operation and Development EDI Electronic Data Interchange PCs Personal Computers EIF Enhanced Integrated Framework PTAs Preferential Trade Agreements EPA EU-Pacific Economic Partnership SDT Special and Differential Treatment Agreement SEZ Special Economic Zone FAO Food and Agriculture Organization SPS Sanitary and Phytosanitary FDI Foreign Direct Investment Measures GATS General Agreement on Trade in STDF Standards and Trade Development Services Facility GATT General Agreement on Tariffs and TBT Technical Barriers to Trade Trade TFA Trade Facilitation Agreement GPS Global Positioning System TRTA Trade-Related Technical Assistance GSP Generalized System of Preferences UNCTAD United Nations Conference on HHI Herfindahl-Hirschman Trade and Development Concentration Index UNDP United Nations Development ICT Information and Communication Programme Technology UNIDO United Nations Industrial IP Intellectual Property Development Organization IPPC International Plant Protection USAID United States Agency for Convention International Development ISPs Internet Service Providers WHO World Health Organization ITA Information Technology Agreement WIPO World Intellectual Property ITC International Trade Center Organization JSI Joint Statement Initiative WOAH World Organization for Animal LDCs Least Developed Countries Health LED Light-Emitting Diode WTO World Trade Organization LPI Logistics Performance Index MC Ministerial Conference MCAE Coordinating Ministry of Economic Affairs TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes EXECUTIVE SUMMARY Executive Summary WTO accession is a challenging process typically while also being exposed to natural disasters. commanding a heavy price in terms of resources Additionally, Timor-Leste suffers from poor and time expended while also calling for the connectivity both regionally and globally, though expense of non-trivial political capital by an important improvements have recently made or acceding country’s policymakers. Nevertheless, are soon set to materialize in regard to transport gaining membership of the world trade body (both maritime and air) and telecommunications represents a once in a generation opportunity for links to the rest of the world. acceding countries to embark upon and sustain a set of deep structural reforms seldom possible While WTO and subsequently ASEAN accession in the absence of binding policy commitments. As can help Timor-Leste address and overcome many such, WTO accession affords candidate countries of the above challenges, neither of these outcomes a unique opportunity to align domestic policy, can – nor should be expected to - produce miracles legislative and regulatory norms and procedures by themselves. Both, however, can help guide and with international best practices, with the payoff anchor a wide range of reforms that the country being a permanent seat – and voice - at the table would be well-served to implement if either of of international trade rulemaking alongside the these processes is to succeed in helping Timor- explicit guarantee of non-discriminatory, stable Leste and its people secure greater and cheaper and predictable market access that the WTO access to the inputs and foreign direct investment provides to all its members. (FDI) needed to address prevailing supply-side and connectivity weaknesses. In turn, Timor- Timor-Leste is a young nation facing a set of unique Leste could reap the benefits of closer integration challenges as it nears the completion of its WTO into the global trading system and heightened accession process1. Such challenges include a participation in regional value chains. small domestic market, still comparatively behind in terms of purchasing power, and the high trade This report considers the case for Timor-Leste to costs that its firms and consumers are forced to bring its quest for WTO accession to a successful contend with. Timor-Leste further exhibits weak conclusion. It advances a set of arguments export diversification and is a post-conflict society designed to help the country’s policymakers in still susceptible to social and political tensions their dialogue with domestic stakeholders and 1 On January 11, 2024, members endorsed Timor-Leste’s WTO membership, concluding a more than seven-year process initiated in 2016. The formal decision is scheduled to take place at the WTO’s 13th Ministerial Conference (MC13) in Abu Dhabi in February 2024. For more information on the accession process see https://www.wto.org/english/thewto_e/acc_e/a1_timor_leste_e.htm. vi TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes constituents of the benefits that the Timorese other hand, refrain from offering WTO membership economy and its citizens stand to derive from as the solution to the many structural constraints placing the country’s trade ties to the world market currently besetting the Timorese economy. on a stable and predictable global footing. This is so because, as the experience of many recently This report articulates the potential benefits of acceded countries has shown, the many reforms WTO membership while also reflecting on the associated with WTO accession, when supported challenges involved in a least developed country by the necessary political will, are conducive to the (LDC) setting such as that of Timor-Leste. Several long-term, sustainable, strengthening of Timorese key messages emerge from this report’s analysis: economic governance. • Timor-Leste is a small open economy that relies This report is divided into three parts. Part 1 offers heavily on international trade for its prosperity. a brief overview of Timor-Leste’s recent trade The country’s limited progress to date in Executive Summary performance and the overall macro-economic tackling domestic supply-side constraints context within which the country’s quest for WTO has meant that Timor-Leste’s long-held accession takes place. Part 2 provides an overview commitment to an outward-looking economic of the WTO accession process and its legal and strategy has yet to produce sustained growth institutional implications for Timor-Leste. This part and development dividends. first examines the legal foundations and procedural • Supportive trade policies, including the twin aspects of the accession process and the long- processes of WTO and ASEAN accession, term impacts it can be expected to exert on trade need to be coupled with reforms that policy making in Timor-Leste. It then takes up the eliminate supply-side constraints to private implications of the market access negotiations in sector development and broader economic goods and services that form an integral part of diversification. WTO accession negotiations. Part 2 concludes • WTO accession is a long process with with a discussion of the legislative and regulatory established procedures and mechanisms that reforms that form part of the accession process can guide countries and offer insights into and offers some explanations on harnessing the the commitments they will be expected to process to maximize its benefits for the country. make. Each country’s accession is different, with scope for negotiators to craft a set of Part 3 of the report focuses on WTO accession outcomes and solutions specifically tailored and how it can be leveraged to achieve long-run to the circumstances of a given applicant. economic growth. This part discusses some of the Timor-Leste can leverage WTO Guidelines for identified linkages between WTO accession and the Accession of Least Developed Countries growth, as well as some of the potential gains on (LDCs) to secure additional policy space where offer for Timor-Leste, specifically. It also outlines needed. how the process of WTO accession can boost • Market access negotiations can also be used the contribution of services and digital trade to to extract needed policy space, for instance in Timorese growth and structural transformation. setting tariff bindings above currently applied levels (in the case of goods) where necessary, The report concludes with a call for Timor- but also to schedule services commitments Leste to maintain the strong existing momentum that will support regulatory reforms to of its accession journey while also managing strengthen the ease of doing business, more expectations of the short-term impacts of WTO generally. accession. The benefits of accession will take time • More than just being the trade-off for WTO to materialize as the Timorese economy adapts membership, the domestic reforms induced to more competitive market conditions while also by WTO accession represent a once-in-a- pursuing the deep domestic reforms needed generation opportunity for policymakers to to diversify and boost the competitiveness of bring Timor-Leste’s legislative and regulatory country’s export basket and strengthen its trade frameworks in line with international best infrastructure. Managing expectations requires a practice and expose key public and private careful balancing act for Timorese policymakers. sector stakeholders to high standards of global On the one hand, they will need to realize the economic governance. promised benefits of WTO accession, while on the v ii TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes • With a small domestic market, the only way for • Because of the elevated incidence of non-tariff Timorese firms to achieve competitiveness- barriers (NTBs) in international trade today, the enhancing economies of scale is by exporting importance of national quality infrastructure to regional and global markets, something that (NQI) has likewise taken on an elevated position accession to the WTO and later ASEAN can be in the interface between domestic regulation instrumental in supporting. and trade policy. • A large body of empirical research points • WTO accession offers a chance to tap into to important causal linkages between trade-related technical assistance in order to WTO accession, productivity, growth and improve and strengthen the institutions at the improved national competitiveness. However, center of Timor-Leste’s quality infrastructure, in it is important to understand the direction particular the National Quality Control Institute of the causal linkages, i.e., that it is pro- (NQCI). competitive domestic reforms that drive export • In an era of regional and global value chains, Executive Summary competitiveness. the critical importance of lowering trade • Given the many constraints faced by Timor- costs justifies the policy focus on border Leste, including a relatively narrow export management issues. Technical assistance base, the promise of services-led development provisions embedded in the WTO Trade appears particularly promising. Facilitation Agreement offer Timor-Leste • Conventional wisdom has long suggested an important opportunity to improve and that manufacturing-led growth represents the streamline customs practices to benefit its own main path to economic development. Recent exporters as well as current and future foreign research shows that services-led growth investors. can be highly effective in helping countries • Experience shows that the domestic reforms accumulate human capital and move up the associated to WTO accession, in both the development ladder. regulation of cross-border trade in goods, and • Harnessing the development promise of the domestic regulation of services, help to services trade will require Timor-Leste to produce a better business environment and a focus on improving the country’s business more welcoming investment climate. and regulatory climate,s while also scaling up • Because the international community investments in education and skilling to raise recognizes that accession-related reforms can the quality of domestic human capital. be challenging, particularly for LDCs, WTO • Timor-Leste’s services offer recognizes accession offers a chance to secure hitherto the importance of open and competitive untapped levels of trade-related technical services markets. So does its commitment assistance from a broad array of donors. This to join both the Reference Paper on Basic is something that Timor-Leste has already Telecommunications and the Joint Statement experienced. Here again, experience suggests Initiative (JSI) on Domestic Services Regulation. that Aid for Trade support will expand once • Timor-Leste should consider pre-committing Timor-Leste becomes a WTO member. Such to the recently agreed JSI on Investment support can facilitate the implementation of Facilitation to Development. Doing so would accession commitments and the design and send a strongly positive signal to potential enactment of further domestic reforms. foreign investors. • The domestic consultative mechanisms • Timorese policymakers can harness the WTO established as part of the accession process accession process to position the country’s to allow different parts of the government firms to participate more fully in the digital to collaborate should be maintained after economy. the WTO accession process is completed, • Preparing to connect with digital value chains both to support implementation of accession requires its own set of comprehensive commitments but also the negotiation of regulatory reforms, many of which have future trade agreements. The maintenance of important synergies with those being such an institutional architecture will also lend undertaken as part of the WTO accession support to - and help expedite – Timor-Leste’s process. accession to ASEAN. v iii TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes PART I Situating Timor-Leste’s Recent Trade Performance Part I Timor-Leste is a small open economy that relies 8.4 (for services) respectively at the onset of the heavily on international trade for its prosperity. In COVID19 pandemic, among the highest compared 2021, the share of trade in GDP reached 89 percent, to peers. Such trends reveal not only the country’s with exports of goods and services contributing considerable reliance on imports but also the 26 percent of aggregate output while imports narrowness of its export basket. accounted for 63 percent of GDP (Figure 1). The export intensity of Timor-Leste’s GDP stood at only Figure 1: Trade as share of GDP (percent) 8.3 percent in 2011, its subsequent rise owing chiefly to the recording of oil and gas exports starting in Services imports Goods imports 2019 . Despite such advances, the country’s export Services exports competitiveness has been lagging and remains 200 Goods exports 120 Crude oil price index (RHS) significantly below potential. Coffee price index (RHS) 160 100 Between 2011 and 2018, Timorese goods and 80 120 services exports averaged US$19 million and 60 US$78 million respectively, representing only 80 40 1.3 percent (goods) and 5.5 percent (services) of GDP. By contrast, imports of goods and services 40 20 averaged US$522 million and US$697 million, 0 0 respectively, over the period. 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Evidence of the Timorese economy’s fragility can be seen in the ratios of goods and services imports Source: World Bank 2023 based on Timor-Leste customs transactions trade data to exports. These stood at 16.2 (for goods) and 2 Since the signature of the Maritime Border Treaty with Australia in 2018, previously disputed exports of oil and gas have been officially recorded in Timor-Leste’s trade data. 1 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes The high degree of concentration of Timor-Leste’s oils and fats. Following a decline between 2017 export basket exposes the country to significant and 2020, the Herfindahl-Hirschman (HHI) index vulnerabilities. In 2021, exports of oil and gas of export product concentration has been on the accounted for more than 94 percent of Timorese rise, reflecting high energy and commodity prices goods exports, while tourism generated 79 percent following the COVID-19 pandemic as well as the of services exports. Apart from hydrocarbons, rising share of oil and gas in total exports (Figure coffee has been the second most important export 2). Timor-Leste’s key export destinations are China, commodity, contributing a further 5 percent of total Singapore, and Japan, which absorbed more than merchandise exports in 2021. Such trends highlight three-quarters of Timorese goods exports in 2021. the critical importance of trade diversification Such a level of concentration exposes Timor- efforts, which rank among the main motivations Leste to adverse internal and external supply and behind Timor-Leste’s quest to join the WTO and demand shocks, as evidenced by recent events, ASEAN and to deepen its bilateral trade ties with including the 2021 floods, the COVID-19 pandemic, Part I leading partners. Boosting the country’s export and the war in Ukraine. potential will require a sustained strengthening of the country’s private sector alongside continued Figure 2: Export concentration (percent of total) efforts to build greater institutional capacity to address high and persistent structural economic Other, 6% Other, vulnerabilities (Figure 4). 21% Among the most notable structural constraints faced by Timor-Leste are its small domestic market, the country’s remoteness from global Mineral fuels and markets, the instability of its agricultural production, oils, 94% Tourism, 79% with attendant food security implications, and its vulnerability to environmental and natural disaster risks (World Bank 2023). Such constraints constitute potentially significant impediments to trade-led growth and translate into high trade Goods Services and transportation costs. Further, high domestic production costs and export instability, combined Source: World Bank 2023 based on Timor-Leste customs with the volatility of the country’s commodity transactions trade data exports, expose Timor-Leste to substantial terms of trade shocks and to the uncertainty of its export Timorese coffee exports more than doubled in revenue base. Although security in the country value during the last decade, increasing from has steadily improved, an overwhelming majority US$ 12 million in 2011 to US$ 27.6 million in 2021. of businesses in Timor-Leste named political Although Timor-Leste does not rank among the instability to be a major obstacle to their operations world’s major coffee producers, it aims to specialize (World Bank 2023). in the production of specialty and niche coffee varieties for export markets such as the United Timorese exports are heavily concentrated both in States, Germany, and Canada. Despite its recent terms of products and destinations. In 2021, Timor- growth, Timor-Leste’s coffee sector operates Leste exported a total of 51 products (measured below its long-term potential, with production at the 8-digit level) to 24 export destinations. constrained by low yields, volatile supply, and Exports are dominated by oil, gas, and coffee, inadequate national quality standards, including a which together accounted for more than 99 limited capacity to meet certification requirements percent of the total in 2021. Among non-energy in key export markets. exports, coffee remains the most important source of export revenue. Other export products are Beyond coffee, Timor-Leste shows potential export mostly agricultural and include roots and tubers, competitiveness in vegetables oils and fats, ground nuts, vanilla, copra, locust beans and vegetable nut oils, seaweeds, fruit stones as well as in copra, 2 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes vanilla, candlenut, roots and tubers, vegetable as construction, transport, and insurance and extracts and nuts. By way of contrast, the country pension services significantly outweigh exports, shows declining export competitiveness for live resulting in a trade deficit in commercial services fish, vegetables oils, and honey. that reached $US212 million in 2021. Demand for imported goods has also grown fast, The absence of a conducive business environment at a yearly rate of 9 percent over the past decade, has limited the dynamism of exporting firms. resulting in a close to threefold increase in Timor- Although Timorese exporters are more numerous Leste’s merchandise trade deficit, from US$335 and larger in size than those in countries at million in 2011 to US$852 million in 2021. Imports of comparable levels of development, they are also oil and gas, together with machinery, iron and steel more concentrated and have lower entry, exit and articles, vehicles, and cereals amounted to more survival rates (World Bank 2023). Such findings than half of the total. Recent years have witnessed suggest that the business environment is hindered Part I an increase in demand for imported capital goods, by high entry and exit costs which discourage firms including tubes, pipes, and small equipment, as from participating in exporting activities. However, well as consumer items such as poultry meat, beer, once firms manage to enter export markets, they cigarettes, telephones, and pasta products. Timor- are competitive and have higher success rates. Leste’s key suppliers are Indonesia, Singapore, China, and Australia, but the country’s imports are Figure 3: Applied tariffs (percent, 2021) much less geographically concentrated than are its exports, originating from a total of 61 source 16 countries. 12 Timor-Leste’s weak export performance in 8 agriculture and food production owes in large measure to the fact that production remains 4 predominantly of a subsistence nature, with low 0 value addition generating limited exportable Rwanda Bhutan Papua New Guinea Comoros Sao Tome and Guyana Solomon Islands Timor-Leste surpluses. Accordingly, Timor-Leste records Principe sustained and persistent agricultural and food trade deficits driven by high imports of cereals (rice), beverages, meat, and tobacco products. Among these, policy measures directed to expand rice production have had limited success, with no Source: World Bank 2023 based on Timor-Leste customs surplus available for exports. transactions trade data Exports of Timorese commercial services showed Timor-Leste stands out for its long-standing steady expansion until 2019 but were hit hard by the commitment to trade openness. Its uniform COVID-19 pandemic. Total services exports, which import tariff policy of 2.5 percent applied across all grew from US$73 million in 2011 to US$92 million products remains the lowest among comparators in 2019, subsequently registered a precipitous (Figure 3). The country’s use of non-tariff barriers pandemic-induced decline, standing at US$17 has also been limited. Timor-Leste furthermore million by end-2021. Within services, tourism maintains an open services regime and a liberal exports have been the most dynamic, expanding stance towards FDI in goods and service sectors sharply from US$18 million and accounting for 24 alike. As an LDC, Timor-Leste benefits from percent of total services exports in 2011 to US$70 preferential market access terms under the million and 76 percent of total services exports prior Generalized System of Preferences (GSP) of a to the pandemic. As with merchandise trade, Timor- number of key trading partners. Utilization rates Leste’s high dependence on tourism receipts in of GSP preferences has been high, as on average total services trade remains a source of significant close to 98 percent of Timor-Leste’s exports benefit vulnerability. Demand for imported services such from duty-free access to key export markets. 3 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes Despite low barriers to trade and investment, a score of 1.67, whereas for “ease of arranging private sector competitiveness continues to be competitively priced shipments”, Timor-Leste’s hampered by a range of supply side constraints score came in at 1.5. These indicators are important and struggles to attract much needed FDI. Both because they provide insights on the high trade challenges represent significant impediments to costs that both importers and exporters in Timor- diversifying away from exports of oil and gas. Leste must contend with and the degree to which economic actors struggle to compete in regional Further, despite recent improvements in trade and global markets in which their competitors facilitation, some 75 percent of those actively face significantly lower trade costs and can thus involved in the trade sector (traders and freight- operate more efficiently (World Bank, 2023). Such forwarders) voiced continued concerns over long deficiencies stand to be improved thanks to the clearance times of at least 10 days for goods imports. operation of the country’s new seaport, connection This compares to around five days in Cambodia to submarine sea cables and the renovation of the Part I and 3 in Lao PDR, the two LDC-economies in country’s international airport in Dili. ASEAN (World Bank 2023). In addition, Timor-Leste scored poorly on a range of indicators measuring Timor-Leste’s limited progress in tackling the degree to which trade flows smoothly across domestic supply-side constraints has meant that borders, including transparency, formalities, its outward-looking economic strategy has yet institutional arrangements and cooperation, to produce sustained growth and development paperless commerce, and cross-border paperless dividends. Supportive trade policies would need trade. Timor-Leste scores poorly across all the to be coupled with reforms that eliminate supply- above indicators and significantly below that of its side constraints to private sector development peers (World Bank 2023). and broader economic diversification. Among these, political instability, access to finance and Figure 4: Economic vulnerabilities compared to electricity have been reported as the most binding. structural peers The development of Timor-Leste’s private sector continues to face several challenges, including Solomon Islands Timor-Leste Comoros Rwanda the weak domestic demand associated with Sao Tome and Principe Papua New Guinea low incomes and high levels of poverty, limited Bhutan domestic input-output and upstream-downstream 60 linkages, weak insertion in regional production 50 networks, low productive capacities, insufficient 40 investment (domestic and foreign) as well as 30 inadequate financial and institutional resources 20 and capacity. The government could consider 10 developing export-oriented special economic 0 Economic and Export Agricultural Environmental zone (SEZ) to bridge some of the current viability environmental instability instability vulnerability gaps (World Bank 2023). vulnerability index Timor-Leste’s trade integration efforts proceed Source: World Bank 2023 based on Timor-Leste customs amidst a complex external and domestic trade transactions trade data policy environment. Despite the country’s continued commitment to an open trade policy stance, its The 2023 edition of the World Bank’s Logistics 2020 Economic Recovery Plan laid emphasis on Performance Index (LPI) also shows that Timor- the need for import substitution and the protection Leste performs poorly across the various logistics of local infant industries. Reflecting the prevailing dimensions that the LPI uses to compare and external and internal policy environments, the rank countries (using a score of 1 to indicate a low January 2023 doubling of uniform import duties, performance and a score of 5 for high performance). from 2.5 to 5 percent (and subsequently rescinded In the category of “quality of trade and transport- by the 2023 Budget Rectification), sought to boost related infrastructure” Timor-Leste was attributed low revenue collection, reduce imports, and 4 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes improve prospects for diversification.3 To achieve products, processed fruits and nuts, and tapioca. these objectives, however, Timor-Leste will need Exports of higher value-added products such as to enhance domestic productive capacities preparations of cereals, flour, starches, edible and implement policies to alleviate the supply- animal by-products, preparations of vegetables, side constraints weighing on the country’s trade fruits and nuts, and beverages also show potential. performance. Within manufacturing, products close to existing production capabilities include cotton, wood and Building on continued reform efforts and the articles of wood, apparel, and clothing accessories, opportunities expected from its accession to the while more distant capabilities offer promise for WTO and ASEAN and the deepening of its two-way products such as carpets, textile rags, footwear, trade ties with key partners such as the EU, Timor- wood pulp and other fibrous cellulosic materials. Leste has the potential to foster existing as well All in all, Timor-Leste has great potential to develop as emerging sources of comparative advantages niche and specialized industries and services Part I to boost the contribution of trade and investment sectors such as for example gourmet coffee or to inclusive growth and development. Agricultural marine, soft adventure, and cultural tourism (World products offering high diversification potential Bank, 2023). include cocoa beans, coconut oil, raw sugar, fish 3 With the rapid drawdown of the Petroleum Fund, accumulating petroleum proceeds over the years, Timor-Leste is facing a fiscal cliff by 2035. Fiscal consolidation supported by revenue mobilization, expenditure rationalization and efforts to improve the quality of spending will be key in addition to reforms to reduce reliance on oil and gas revenues (World Bank 2023). 5 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes PART II An Overview of the WTO Accession Process Part II I. Legal Foundations and Institutional Processes Although some countries may be tempted to boast Key Messages and Takeaways from this Section about how quickly they were able to complete  WTO accession negotiations, it is certainly not to • WTO accession is a lengthy process with be equated with a race. A slower, more deliberate, established procedures and mechanisms that approach has its advantages. The biggest of these can guide countries and offer insights into is arguably that a more measured approach to the commitments they will be expected to accession negotiations allows officials and political make. However, each accession is different, leaders in the applicant country to become more with scope for negotiators to craft a set of familiar with the rules and institutional dynamics outcomes and solutions specifically tailored to that underlie the accession process and (later) the circumstances of a given applicant. WTO membership and participation, both of • A set of Guidelines for the Accession of LDCs which are complex. This section first discusses exists and can be used to afford an applicant the legal underpinnings of the WTO accession like Timor-Leste with additional policy space process before briefly discussing how existing where needed. rules apply to LDCs. It concludes with a discussion • The domestic consultative mechanisms of the importance of harnessing the institutional established as part of the accession process arrangements that would need to be adopted in to allow different parts of the government order to effectively negotiate WTO accession for to collaborate should be maintained after long-term domestic inter-agency dialogue and WTO accession is secured, both to support regulatory cooperation, as well as their usefulness implementation of accession commitments for establishing and maintaining processes and but also to support the negotiation of future procedures that allow for broad-based and trade agreements. meaningful stakeholder engagement. 6 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes 1. Legal Underpinnings of the Accession Process The process of WTO accession is based upon their way from working party members, as well Article XII (Accession) of the Marrakesh Agreement as what the possible range of responses to these establishing the WTO, a sparsely worded three- requests are likely to be. paragraph article that in reality offer few insights to applicant governments on the arduous, lengthy, Today, in application of Articles XII and XVI of the and politically challenging negotiation process Marrakesh Agreement, the accession process of that awaits them. the WTO, similar to that which gradually evolved under the GATT 1947, is characterized by a set Arguably much more important as a legal basis for of formal legal mechanisms and procedures, accession is Article XVI (Miscellaneous Provisions), including the establishment of an accession where paragraph 1 reaffirms the centrality of the working party, the submission of and subsequent Part II “decisions, procedures and customary practices” revisions to the applicant’s memorandum of the that were established and followed under the 1947 foreign trade regime (which gradually evolves General Agreement on Tariffs and Trade (GATT). into the report of the working party), the bilateral It was under GATT 1947 that integral elements market access negotiations between the applicant of the accession process emerged and became and the members of its working party (recorded established, notwithstanding the important in schedules), as well as the emergence of the differences that characterized the processes of uniquely structured accession protocol as the accession to the GATT vis-à-vis joining the WTO instrument by means of which a new member joins today (Parenti 2000, Lanoszka 2001). Indeed, it the organization under international law (Basra is the precedential value of these practices and 2012, Kennedy 2013). As a number of WTO panels procedures, particularly how they have been and the Appellate Body rulings have highlighted, applied in recent accessions, that can be highly WTO accession protocols become part of the instructive for an applicant country seeking to WTO agreements and are binding on both WTO better anticipate what requests are likely to come members and the accession country in question.4 2. WTO Accession and Least Developed Countries In the case of Timor-Leste, another important legal basis for the country’s accession to the WTO is the General Council Decision of 10 December 2002 setting out Guidelines for the Accession of LDCs.5 This document provides that the accession of LDCs to the WTO should be facilitated and accelerated by way of simplified and streamlined accession procedures with a view to alleviating the accession burden of LDCs and allowing them to conclude entry negotiations more expeditiously. The 2002 LDC Guidelines call on existing WTO members to exercise restraint in market access negotiations (discussed in more detail below) and afford applicant countries the right to claim any transition periods or other policy space they deem appropriate in application of the many special and differential treatment (SDT) provisions found in WTO agreements. 4 See for example, China - Auto Parts, Report of the Appellate Body (WT/DS339/AB/R, WT/DS340/AB/R, WT/DS342/AB/R) at para. 214.. 5 WT/L/508 of 20 January 2003. 7 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes Some degree of skepticism has been voiced not adopting - or sequencing the implementation regarding the relevance of the 2002 LDC of - requested commitments. Secondly, they can Guidelines in facilitating the accession process condition the acceptance of such commitments for the handful of LDCs that have acceded to the on the supply of technical assistance. By exercising WTO since they were adopted (Adhikari and Dahal, such options, and doing so by recalling the 2002 2007). WTO members have taken steps to ensure Guidelines, LDCs have been able to manage that the burden of accession for the most resource what might otherwise prove onerous requests constrained countries remain manageable. LDCs to their own negotiating advantage. Further, SDT have some options when faced with requests they provisions could help acceding countries seek find overly onerous. For one, they can put forward a concessions otherwise not generally offered by credible and evidence-based set of arguments for trading partners. 3. Domestic Institutional Arrangements and their Long-Term Importance Part II One of the first steps any country takes in the that underpins any diagnostic exercise designed earliest stages of its accession, normally after the to help the applicant government fill any identified establishment of a dedicated working party by the gaps via trade-related technical assistance. WTO General Council, is the formation of an inter- ministerial or inter-government committee, tasked The inter-ministerial committee also serves as with working under the leadership of the line the long-term repository of expertise on the WTO ministry that manages diplomatic representation accession process and the inner workings of the to the WTO. This committee is invariably joined WTO, passing this knowledge on through both by different government ministries and agencies formal and informal transmission mechanisms to that exercise legal and regulatory authority over future Timorese trade diplomats and government one or more substantive aspects of the upcoming officials who will represent the country’s interests as negotiations. This has also been the case in Timor- a WTO member and implement the wide-ranging Leste, where a WTO Accession Inter-ministerial set of obligations the country will be required to Commission and Technical Working Group were assume as part of its accession package. established by Prime-Ministerial decree, appointing a total of 14 different government ministries and For this reason, it is advisable that upon conclusion agencies to one or both of these bodies, under the of Timor-Leste’s accession to the WTO, the overall leadership of the Vice Prime Minister for inter-ministerial committee continues to serve Economic Affairs (under the arrangements of the as the main engine of implementation of WTO new 9th Constitutional Government).6 commitments, but also assume a lead coordinating role with respect to ASEAN accession as well as the The work of the inter-ministerial committee is negotiation of any preferential trade and investment important at several levels. For one, it brings agreements the country want to conclude. together technical expertise on the many areas Accordingly, appointments to the inter-ministerial of government policy, laws and regulations, and committee should be made on an ex-officio basis the extent to which they are effectively being - thereby reducing the importance of individual implemented on the ground. This knowledge personalities and in order to institutionalize the is particularly relevant during the process of body’s existence, constitution and functioning. By negotiating the many commitments as part of the same token, a future prime-ministerial decree its accession package. Equally importantly, the should empower the inter-ministerial committee expertise and knowledge that collectively forms with a longer-term role, placing it on a permanent the inter-ministerial committee is well placed to footing. perform the legislative and regulatory analysis 6 See Journal da República from 25 June 2021, available at: http://www.mj.gov.tl/jornal/public/docs/2021/serie_2/SERIE_II_NO_25.pdf 8 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes II. Market Access Negotiations Key Messages and Takeaways from this Section • Market access negotiations on goods and services rank among the most challenging dimensions of the accession process, highlighting the asymmetries that lie at the heart of WTO accession. However, such commitments could be understood as the trade-off for entry to the world trade body overseeing the multilateral trading system. • Market access negotiations offer Timor-Leste Part II space to set tariff bindings above currently applied levels (in the case of goods) where necessary and, in the case of services, to schedule commitments that lend support to regulatory reforms to strengthen the ease of doing business, more generally. 1. WTO Accession Negotiations as a Two-Way Street Market access negotiations are often some of the With trade in intermediate goods and services most arduous of the entire negotiation process, accounting for an estimated 70 percent of world with members of the applicant’s accession trade (Shepherd 2022), both firms and consumers working party advocating for the lowest possible stand to benefit from lower overall tariffs, tariffs for products of their export interest. These particularly on the traded inputs and components would also cover a range of other concessions, (Irwin 1996, Topalova 2004, Yu 2014). Such a benefit including geographical indications on certain is of considerable importance in the case of a small agricultural products, foodstuffs, wines or spirits economy like Timor-Leste, where firms face high they manufacture and export, or conferring an initial trade and transport costs for imports (Freedman negotiating right on a specific agricultural export 2020). Indeed, it is precisely the reduction of these product of interest. Market access negotiations on costs that will be important for Timor-Leste if it is to services can likewise be characterized by demands connect with the regional value chains that ASEAN for the applicant to commit to minimum restrictions membership could significantly facilitate. in services sectors and modes of supply that are of systemic importance and sensitivity, such as A similar dynamic prevails in the case of services telecommunications and financial services. trade, with negotiators facing expectations of significant market opening requests from WTO accession negotiations on market access can working party members on the one hand, while also be viewed as an opportunity for the applicant, aiming to retain some degree of policy space in since it is being asked to concede some policy systemically important sectors on the other. Here space in exchange for the non-discriminatory again, recent research is unequivocal in pointing market access and good governance attributes to the importance of the services sector as an associated with WTO membership. Although engine of productivity growth, particularly in terms some have criticized the asymmetric nature of the of technology transfers and skills development WTO accession process (Lennon 2005), acceding (Nayyar et al 2021, World Bank and WTO, 2023). countries can use the negotiating process to extract The openness of the latest WTO services offer some degree of policy space to raise tariffs above underscores the priority of this issue for Timorese current applied levels, in addition to not having to policymakers. renounce the WTO-compliant use of tools such as import licensing procedures, procurement preferences, or sanitary and phytosanitary (SPS) measures. 9 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes 2. WTO Accession and Development Imperatives for Timor-Leste For Timor-Leste, the primary policy objective represent the most reliable and expedient source related to tariffs is their revenue-generating of revenue collection. This explains the reluctance function, which is the main reason provided for of a number of acceding countries to reduce tariffs the recent doubling of applied tariff rates to a below what they deem to be the minimum required flat import duty rate of 5 percent on all imported to guarantee the continued funding of central goods. Although the prevailing policy consensus is government operations (Grynberg and Joy 2000). geared towards countries reducing their reliance Even after WTO accession, Timor-Leste should on customs duties as a source of government refrain from allowing tariffs to increase already high revenue in favor of other forms of taxation, the trade costs borne by firms and consumers that rely reality in many developing countries and LDCs is heavily on imported goods. that, due to structural reasons and a persistently Part II large informal sector, customs duties still III. Legislative and Regulatory Reforms Key Messages and Takeaways from this Section best practice and expose public and private sector stakeholders to high standards of global • The broad and extensive regulatory reforms economic governance. that WTO accession requires across a range • WTO accession also offers prospects to secure of sectors should also be regarded as the expanded levels of trade-related technical means by which the many treaty commitments assistance from a broad array of donors and flowing from WTO agreements are effectively development partners. While this is something implemented. that Timor-Leste has already benefitted from, • However, accession-induced reforms experience shows that it can expect Aid for represent a once-in-a-generation opportunity Trade levels to expand once the country to bring Timor-Leste’s legislative and becomes a WTO member. regulatory frameworks in line with international 1. Reforms and the Trade-offs of Membership Similar to joining any organization with a large and Negotiating success involves both affording established body of rules, the process of WTO increased access to the home market - primarily accession involves a broad set of legal reforms and by lowering tariffs and opening services markets the upgrading of domestic regulatory frameworks. - for those products of greatest export interest to Whereas accession to the GATT was largely a working party members, while simultaneously process of bilateral negotiations with working implementing significant legislative and regulatory party members centered on tariff concessions reforms that underpin the acceding country’s to be granted by the applicant as the trade-off market access commitments in goods and of membership, WTO accession today involves services. the applicant demonstrating that it is willing and able to comply with a considerably broader body of rules spanning a range of behind the border measures either upon or soon after entry. 10 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes 2. WTO Accession as a Once in a Generation Opportunity Despite the burden it places on acceding countries secure property rights and ensure due process, given their often-limited size and weak resources administrative transparency in government agencies, (particularly in LDCs such as Timor-Leste), WTO and regulatory to domestic policy making. accession can be seen as an opportunity to bring a country’s legislative and regulatory frameworks A Legislative Action Plan dated February 2023 in line with international best practice and expose indicates ongoing or planned revisions and key public and private sector stakeholders to high amendments to no less than forty laws, acts, standards of global economic governance. As regulations, and decrees, covering a diverse Lanoszka (2001) put it (p. 577): range of activities and sectors from insolvency to intellectual property. The timeframes agreed […] by forcing higher regulatory standards, to implement many of these legislative reforms Part II transparent policy making, and by encouraging are remarkably short, with full compliance being national treatment for the commercially present set by the end of 2024 in most instances. Such foreign suppliers of services, WTO legal rules can an undertaking will doubtless pose important help build market-supporting mechanisms such challenges to Timorese policy makers. as a professional judiciary to enforce contracts, 3. Tapping into the Resources of the International Donor Community A large number of donors and development partners Timorese trade policy expertise, a high degree of have been supporting Timor-Leste’s accession bid, strategic prioritization will be required, whereby including the WTO Secretariat, the Canadian Trade officials from Timor-Leste will have to earmark and Investment Facility for Development (CTIF), those areas of legislative and regulatory reform the Geneva-based International Trade Center most likely to yield the highest payoffs in helping (ITC), the World Bank, the Enhanced Integrated the country achieve its economic development Framework (EIF), UNCTAD, UNIDO and WIPO as goals. well as the governments of Australia, Canada, China, Indonesia, Japan, New Zealand, Portugal, Part 3 of the report provides further guidance on South Korea, Thailand, Singapore and the United just what such strategic prioritization might involve, States. both in terms of adopting legislative changes but also implementing the WTO accession package as Nevertheless, given the scale of the work to be a whole. done, and the limited extent of currently available 11 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes PART III The WTO Accession Process and Economic Growth Part III I. Market Access, Competitiveness and Export Growth Key Messages and Takeaways from this Section competitiveness, which WTO accession can then help to secure and leverage, particularly for • With a small domestic market, an important firms that have already learned to successfully means for Timorese firms to achieve contest regional and global markets. competitiveness-inducing economies of scale • While the export gains from Timor-Leste’s is by exporting to regional and global markets, accession to the WTO may take time to something that accession to the WTO and later materialize given the county’s limited export ASEAN can be instrumental in supporting. basket and supply side constraints, experience • A growing body of empirical research points to has shown that the improvements in domestic important linkages between WTO accession, governance and doing business conditions productivity, growth, and improved national have typically translated into sustained competitiveness (see Box 1). improvements in trade performance and FDI • However, it is important to understand the attraction post accession. direction of the causal linkages: it is pro- competitive domestic reforms that drive export 12 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes 1. Linkages between WTO Accession and Economic Growth The stable and predictable market access countries that joined the WTO under the Marrakesh conditions that WTO membership provides ranks Agreement’s Article XII accession procedures (and among the main reasons why countries aspire thus subject to far-reaching commitments and to join the organization. Moreover, with a small extensive domestic economic reforms), shows domestic market, Timorese firms can achieve that the latter group of countries experienced needed economies of scale by exporting to significantly faster growth in aggregate output and regional and global markets. Accession to the WTO, trade performance (see Box 1). ASEAN, and the EU-Pacific Economic Partnership Agreement (EPA) can potentially contribute such More recent research confirms the strong links an outcome if the structural and supply-side between international trade and productivity constraints facing the domestic private sector are growth both for firms and industries in countries Part III successfully addressed. that reduce or remove tariffs on intermediate goods (inputs), as well as for firms that export, A growing body of empirical research has since doing so gives them access to a bigger documented the strong linkages between WTO market while also exposing them to new sources membership and trade growth (Subramanian and of knowledge (the so-called “learning by exporting Wei 2007; Tomz et. al. 2007; Larch et al. 2019). In effect”).7 Such findings and their corresponding addition to these important findings, empirical policy implications lend strong support for Timor- research comparing benefits for countries that Leste to join the WTO under terms and conditions joined the GATT without making extensive that have the potential to both boost the country’s commitments (mostly former colonies that were two-way trade and enhance its attractiveness to waived into the GATT under Article XXVI 5 [c]), with foreign investors. Box 1: The impact of WTO accession on trade performance and growth Since the WTO’s establishment in 1995, 36 states or customs territories have acceded to the WTO. These accessions have been negotiated under Article XII of the Marrakesh Agreement, which requires the terms of accession to be agreed between the acceding country and the WTO, and that the accession apply to all WTO agreements (the so-called single undertaking). This process has often been associated with significant domestic reforms. Acceding governments have pointed to economic reforms and transition to a market economy among the reasons for seeking WTO membership. Almost all LDCs cite poverty reduction and economic diversification as key motivations, reflecting their desire to use WTO specifically as an instrument for economic development. The WTO currently has 164 members, with 24 other countries negotiating (or having signalled a willingness to negotiate) their accession. Joining the WTO requires important changes in the domestic and trade policies of acceding members. Besides binding and reducing tariffs, WTO membership involves commitments related to non-tariff barriers and transparency. The benefits that such commitments generate are all the more important because – even with the explosion of preferential trade agreements (PTAs) witnessed in recent decades – three-fourths of world merchandise trade still occurs on a non-discriminatory, i.e., most- favoured nation (MFN) treatment basis. WTO membership and trade performance The creation of the GATT/WTO has generated significant trade gains for its members but also for non- members. A comparison of trade volumes before and after joining the GATT or WTO shows that almost all countries experienced a steady increase in trade following membership. Although such gains tend to be country- and time-specific, they are found to be large, positive, and statistically significant across all settings. 7 This research and its corresponding policy implications is summarized in National Board of Trade Sweden (2023). 13 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes A causal empirical analysis by the UK government confirms a positive WTO effect on international trade (Department for International Trade, 2022). From 2000 to 2016, the overwhelming majority (79 percent) of WTO members experienced a significant decrease in trade (export and import) costs as a result of WTO membership, with many of the largest positive impacts observed in developing countries. The minority (21 percent) who did not experience a marked decrease in trade costs largely consisted of former centrally planned economies and very small nations confronted with punitively high trade costs. When converting the decline in trade costs into tariff equivalent measures (AVE), the study found that the average WTO member saw a 15 percent decrease in AVEs as a result of WTO membership. The greatest fall in AVEs was for developing countries (a 21 percent drop), followed by fuel exporting countries (17 percent), and developed countries (7 percent). Assessing the post-accession trajectory of a sample of 43 WTO members, all saw increases in both relative (compared to the rest of the world) aggregate exports and aggregate welfare resulting from WTO membership. Part III The estimated impact of WTO membership was found to be highly variable across sectors. Across all countries, the highest increase in exports due to WTO membership were found in the agricultural sector (28.5 percent), followed by manufacturing (28.4 percent), services (27.4 percent), and mining (18.3 percent). More recent findings by a team of WTO economists show that, on average, WTO membership has increased trade between members by 171 percent and trade between member and non-member countries by about 88 percent (Larch, Monteiro, Piermartini and Yotov, 2019). Part of the positive effect of WTO membership on trade between members as well as between members and non-members was found to stem from the non-preferential nature of the commitments that WTO members undertake. Commitments to notify trade policy changes, to avoid unnecessarily restrictive technical regulations, and removal of export subsidies in agriculture are some examples of WTO rules that increase transparency and reduce the uncertainty of trade policy to the benefit of members and non-members alike. WTO membership and economic growth Several economic arguments support the view that entry to the WTO fosters economic growth. One is that accession to WTO is designed to reduce barriers to trade and increase international trade. WTO membership has been shown to boost trade and significant evidence exists showing how trade boosts growth. Another argument is that WTO membership can foster growth because it promotes improved governance. Countries often undertake extensive domestic economic reforms as part of their accession negotiations and make legally binding commitments in a wide range of policy areas. They may use WTO commitments to lock in reforms that are beneficial to the business environment, and to signal to other nations their commitment to reform, demonstrating a desire for global cooperation. Furthermore, WTO membership can boost growth by promoting a more predictable trading environment. Uncertainty is detrimental to investment as it may slow down capital accumulation and hence growth, particularly in counties saddled with higher risk premia and weaker business environments. To the extent that trade agreements contribute to enhancing the rule of law, for example, by enforcing market-access commitments, and by deterring new protectionist barriers and fostering transparency and policy convergence among member states, WTO membership can decrease the volatility of trade flows. In one important study, Tang and Wei (2009) found that GATT/WTO membership promoted growth, but only for those members that undertook new commitments. While Tang and Wei found that the growth dividend induced by WTO membership was typically sustained only during the first five years after accession, their work showed that the economy of a country joining the GATT/WTO was on average permanently larger by 20 percent if it undertook commitments as part of the accession process. WTO accession has been associated with an increase international trade of member countries by 72 percent relative to their domestic sales (Larch et al. 2019). Countries joining the WTO gained in terms of welfare by 4.37 percent (Felbemayr et al. 2019; World Bank 2022). Of potential relevance to Timor-Leste, the above effects were found to be stronger for countries that started off with lower levels of institutional indicators, and when the number of commitments was higher. 14 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes Following the Tang and Wei methodology, a recent WTO paper featuring an expanded sample of 17 accessions pursued under Article XII up to end-2020 finds that more recent Article XII accessions have performed better: five years after accession, member countries are found to be 30 percent larger on average, and the impact of WTO entry on growth is seen to persist beyond the first five years (Brotto, Jakubik and Piermartini 2021). Such results are consistent with the hypothesis that taking up more commitments during the process of accession has a positive impact on growth, trade performance and improved governance. 2. Complementary and Sustained Commitment to Reforms Despite the growing body of research documenting entry into the multilateral trading system (Thanh robust linkages between international trade and & Duong 2011; Studwell 2013). In the case of these economic growth, it is important to underscore two countries in particular, WTO accession was Part III that WTO membership by itself does not lead motivated by a desire to ensure that their already to productivity or export growth. Indeed, those competitive export sectors would continue to countries that experienced the strongest post- enjoy secure market access conditions in the face accession export performance, such as China and of mounting protectionist pressures from import Vietnam, were already growing their exports to the competing interests in their leading export markets rest of the world and thus becoming increasingly (Davis 2006), but was not itself a causal factor in competitive prior to joining the WTO thanks establishing their export competitiveness in the to sweeping economic reforms adopted and first place. implemented in the decades that preceded their 3. Potential Economic Gains for Timor-Leste Timor-Leste’s non-energy-related exports (Government of Timor-Leste 2019). The document currently consist almost exclusively of coffee, with further argued that by developing the capacity to the United States, Germany, and Japan accounting compete in the production and export of these for the bulk of this trade. Within ASEAN, Singapore products, Timor-Leste could lay the groundwork and Indonesia are the country’s primary export for greater economic complexity, allowing it to destinations. Various studies, assessments and move into light manufacturing, particularly food- planning documents have identified a number of processing and furniture-making. Moving in this products offering future export growth potential for direction would, in turn, generate a demand for the Timor-Leste. For example, the World Bank’s latest supply of more sophisticated business services. Country Economic Memorandum (CEM) identified vanilla, cocoa beans, coconut oil, raw sugar, fish However, all of the above products face various products, processed fruits and nuts, tapioca, trade barriers in virtually all potential export preparations of cereals, flour, starches, edible markets, ranging from high tariffs to tariff-rate animal by-products, preparations of vegetables, quotas, labelling and packaging requirements, fruits and nuts and beverages as products that and – perhaps most importantly for agri-food could contribute to both the diversification of exports – sanitary and phytosanitary measures. Timor-Leste’s export base and productivity growth For as long as Timor-Leste remains classified as (World Bank 2023). an LDC, its exports can enjoy duty and quota-free access to many markets (as it currently does under By the same token, a 2019 draft Trade and various GSP schemes to 12 major economies), but Investment Policy Statement noted that from Timorese firms will still need to overcome many if the agriculture and fisheries sector, the priority not all of the various other trade barriers its exports subsectors for development include rice face if the country is to both diversify its export and grains, high-value horticulture products, base and increase the market share enjoyed by fisheries, livestock, forestry, and industrial crops such exports. 15 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes For Timor-Leste to achieve export competitiveness To give just one example, if Timor-Leste wishes in products offering the greatest growth potential, to boost its coffee sector (which has repeatedly it will need to make significant investments in been identified as a policy priority), it will need production, quality control, and traceability, while to transition from exporting mostly green beans, at the same time significantly reducing per-unit coffee husks and skins to more value-adding production costs alongside lowered transport and products such as roast coffee. To do so, it can trade costs. Doing so will require targeted policy leverage the accession process to lower import interventions to catalyze such initial investments duties on packaging materials and roasting alongside sustained efforts to strengthen business equipment, while using fiscal and other incentives and regulatory ecosystems allowing them to to attract the necessary technical know-how and flourish and become self-sustaining. skills, imposing conditionalities on training and upskilling the local workforce in the production Timorese policy makers would need to focus on the of more high-end coffee products. If FDI in the Part III full set of benefits that membership of the WTO can roasting and marketing of niche and high-end afford countries such as Timor-Leste in addition to coffee products is secured from firms that are the ways in which both the accession process itself themselves headquartered in sizeable markets for and WTO membership can lend support to the these products, then experience suggests that this domestic reforms needed to address the supply- FDI likewise comes with a promise of expanded side constraints holding back the development access to both the investor’s home market but of a competitive and successfully exporting also to third-country markets with similar levels of private sector. Those championing Timor-Leste’s TBT and SPS measures (Laurujisawat 2011; Chen accession to the WTO should likewise convey the 2020). By the same token, Timor-Leste can use the important message that, while the export gains momentum of the WTO accession process and the from joining the multilateral trading system will accompanying trade-related technical assistance take time to materialize (given the county’s limited to build domestic institutional capacity and human export basket and various supply side constraints), capital in the area of quality infrastructure, a experience has nevertheless shown that the process that has in fact already begun (Section IV improvements in domestic governance and doing of Part 3). business conditions have typically translated into sustained improvements in trade performance and FDI attraction post accession. II. The Services Dimension Key Messages and Takeaways from this Section invest in education and skills to raise domestic human capital relevant to services trade • Although conventional wisdom suggests that uptake. manufacturing-led growth is the primary path • Timor-Leste’s policymakers fully recognize to economic development, recent research the importance of open and competitive and evidence points to services-led growth services markets, and the willingness they to be just as effective in helping countries have signaled to join both the Reference Paper accumulate human capital and move up the on Basic Telecommunications and the Joint development ladder. Statement Initiative (JSI) on Domestic Services • Given the many constraints faced by Timor- Regulation illustrate such a policy stance. Leste, including a relatively narrow export • Timor-Leste could also consider pre- base, the promise of services-led development committing to acceding to the JSI on appears particularly promising, but will require Investment Facilitation to Development, as redoubled efforts targeting improvements in doing so would send a strong positive signal to the business climate to attract FDI, but also to potential foreign investors. 16 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes 1. Services-Led Growth Although the conventional wisdom in the through the resulting human capital accumulation. development literature has for several decades However, this has also been true for some time stressed the quasi-linear nature of economic now in services, notably in transportation and development - from agriculture to manufacturing telecommunications, and is even more prevalent to services, more recent research has shown that for services that allow for novel combinations of services-led development is not only possible but new technologies and semi-skilled labor to interact has been happening over the last three decades, (e.g., business process outsourcing or call-centers). aided in particular by technological change and digitally enhanced services (Gaurav et al, 2021). A third characteristic of manufacturing that made it an attractive engine of economic growth relates The inherent scalability of manufactured goods to so-called spillover effects, with growth in Part III that could be mass-produced, stored, shipped manufacturing output translating into economy- to other markets, and then stored again in the wide productivity gains through knowledge export market, was a characteristic that allowed spillovers, strong input-output linkages, and them to play such an important role in export- positive feedback loops. The fact that services are led growth. However, digitization has also made increasingly recognized as integral to all economic services both more storable and tradable at scale, activity, including manufacturing and agriculture, and digital products – unlike manufactures – can points to their inherent ability to produce positive be duplicated instantly at zero marginal cost spillover effects for the rest of the economy. The (Brynjolfsson and McAfee 2014). dramatic fall in transport and communication costs witnessed in recent decades has ushered in entirely Another aspect of manufacturing-led growth new industries. Meanwhile, the transformative that made it a powerful agent of economic effects of digital technologies have opened up a transformation was the ability to combine large vast array of new business models and avenues for amounts of relatively unskilled labor with capital, value creation (Baldwin 2019). thereby achieving rapid productivity improvements 2. Leveraging Trade in Services to Grow the Timorese Economy The various constraints faced by Timor-Leste in infrastructure, communication services as well as developing its agricultural and light-manufacturing services related skills. sector suggest that services-led development and digital transformation will have to be at the very heart Recognition of the important role that services of policy makers’ priorities for economic recovery, is expected to play in securing Timor-Leste’s poverty alleviation, human-capital accumulation, development ambitions is underscored by its and sustainable long-term economic growth. This, ambitious latest offer, in which the country has in turn, implies that policies designed to optimize scheduled commitments in 11 sectors and 86 outcomes in services and digital trade need to be subsectors covered by the General Agreement on carefully considered. Trade in Services (GATS), more than double the number found in its initial services offer. Timor-Leste The growth and employment potential of trade has further committed to assuming the obligations in services has already been recognized by agreed to by participants in the Joint Statement Timorese policy makers and political leaders. Initiative on Services Domestic Regulation upon The 2020 Economic Recovery Plan affirmed the its accession. Its decision would make it the first critical role that services need to play in raising LDC to do so, affirming Timorese policy makers’ the country’s human capital (particularly health belief that the country’s growth prospects are and education services), as well as in addressing a best served by complying with high standards of number of structural weaknesses and bottlenecks, regulatory conduct in services markets. particularly in transportation, logistics, quality 17 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes Services are yet another area that has been construction as well as education services. To boost identified as a source of potential export growth the country’s supply side capacity, Timor-Leste (World Bank 2023). However, as discussed in the can undertake commitments contingent upon previous section on goods trade, WTO accession foreign service suppliers ensuring the transfer of cannot be expected to generate an immediate skills and knowledge to support the Government’s and strong export response. The impact of WTO human capital accumulation objectives. accession in stimulating services export growth will be limited until and unless the Government A number of the steps proposed by the 2020 addresses the many supply-side and structural Economic Recovery Plan to boost the tourism constraints weighing on the development of a sector could be facilitated by Timor-Leste’s WTO globally competitive services economy. When it (and ASEAN) services offer. These include plans comes to tourism for example, this is a sector that is to boost the availability and quality of tourism- highly competitive regionally, such that its growth focused vocational education and training, with a Part III in Timor-Leste will require significant investments in number of the members of Timor-Leste’s working scaling up tourism related infrastructure alongside party themselves home to world-class providers of efforts at promoting the country’s tourism value these services (e.g., Australia, Thailand, Singapore). proposition. While Timor-Leste is already open to The Government’s plan to strengthen the FDI, including in the tourism sector, it has struggled education sector with a view to supplying a more to attract FDI inflows. A further constraint to the skilled workforce can also be supported by the sector’s growth is the lack of air transportation WTO accession process. Timor-Leste could links to the county, with flights to Dili currently leverage momentum around the new possibilities originating from only three source countries. generated by its accession to both the WTO and ASEAN to incentivize foreign service suppliers and Nevertheless, both the WTO and ASEAN accession investors to begin providing and then scaling the processes as well as the economic reforms and provision of key services in order to meet local and institutional strengthening that these processes external demand. involve, can be harnessed to help better position Timor-Leste to address many of the constraints Further, Timor-Leste could signal its intention to holding back the development of a more diverse join the recently concluded JSI on Investment and competitive domestic services economy. Facilitation for Development. The primary aim For instance, in its recent Country Economic of the Agreement is to promote the adoption of Memorandum (CEM), the World Bank noted that measures that enable investment, encompassing (p. 87): transparency, administrative simplification, international collaboration, and other regulatory Cross-country evidence suggests that for commodity streamlining aimed at lowering the costs and exporters such as Timor-Leste, the most important risks associated with inbound FDI (Jose 2023). By capacities for boosting trade diversification are acceding to and implementing this Agreement, human capital accumulation, followed by improving Timor-Leste would not only bring its FDI regulatory education outcomes at the secondary level, ecosystem into closer alignment with international improving the quality of institutions and developing best practices but would also send a strong and the financial sector. positive signal to potential foreign investors about the country’s willingness to welcome higher 3. Timor-Leste’s Services Offer volumes of sustainable FDI. Timor-Leste’s accession to the WTO and ASEAN both provide opportunities to lock in the widely open and non-discriminatory conditions of access currently governing its domestic market across a number of sectors that can prove critical to the country’s future development. This includes sectors such as telecommunications, financial services, 18 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes III. Leveraging Digital Transformation for Trade Harnessing technological developments, • Policymakers could leverage the WTO particularly the possibilities offered by online accession process to make a set of market connectivity and digitization, will be essential if liberalizing commitments in goods, service, Timor-Leste is to catch up with its partners in the and trade-related intellectual property rights ASEAN region – some of the most tech-savvy and that are of central importance to positioning digitally connected markets in the world. the country’s firms to participate in the digital economy. Key Messages and Takeaways from this Section • Trade-related technical assistance is available not only for the many regulatory and institutional • Preparing to connect with digital value chains reforms that WTO accession requires, but also requires its own set of comprehensive regulatory for addressing the bottlenecks developing Part III reforms, many of which have important countries and LDCs face in their respective synergies with those being undertaken as part digital transformations. of the WTO accession process. 1. Harnessing the Accession Process for Digital Transformation There are various ways in which the WTO accession In terms of tariff-free commitments on ICT-related process can be harnessed to support Timor-Leste’s goods that Timor-Leste could consider are the ambitions in using digital transformation to achieve products included in both the original 1997 ITA (ITA 1) inclusive and sustainable economic growth. One and the 2015 Update or expanded ITA (ITA 2). By way is by binding the tariffs of relevant Information of example, under ITA 1 this would include products and Communication Technology (ICT) goods at such as computers (mainframe computers, low levels, while also providing a commitment to PCs, laptops and servers); telecommunication adhere to the Information Technology Agreements equipment (telephone sets, mobile phones, and upon accession, which Timor-Leste has signaled a related components); semiconductors (integrated readiness to do. Another is by scheduling services circuits), microprocessors, memory chips, as well commitments that are conducive to the further as machinery and components essential to the growth of e-commerce in Timor-Leste. Yet another manufacture of semiconductors; software (pre- important step is for Timor-Leste to adopt the packaged software, operating systems, database pro-competitive provisions found in the GATS management systems, as long as such software is Telecoms Reference Paper and the disciplines stored and transported on some kind of physical contained in the Services Domestic Regulation carrier medium); electronic components (electronic Reference Paper by incorporating them into its connectors, diodes, transistors, sensors, switches GATS Schedule of Specific Commitments as among many others); telecommunication satellites; “Additional Commitments”. Both are actions that digital cameras; and flat panel displays (monitors). Timor-Leste has signaled a readiness to undertake.8 Yet another way in which the accession process Under ITA 2, this would include items such as can be harnessed to support Timor-Leste’s future advanced semiconductors (including multi- integration into digital value chains is through component semiconductors, multi-chip reform of the country’s intellectual property regime, integrated circuits, graphical processing units and something that is already contemplated under hybrid integrated circuits); medical devices and country’s accession-related legislative action plan equipment (such as magnetic resonance imaging but which could also be inspired by some of the machines, computed tomography scanners, WTO+ provisions found in many preferential trade ultrasound machines, and certain types of medical agreements that have been negotiated with the x-ray equipment; Global Positioning System (GPS) specific IP needs of the digital economy in mind.9 navigation devices used for mapping, navigation, 8 The regulatory implications of these commitments and how they can support the economic growth ambitions of the Timorese Govern- ment are discussed in more detail in Section IV (Regulatory Reform, Institutional Strengthening and Trade Facilitation) below. 9 There are various examples of these kinds of provisions to be found in different PTAs. Some of the more common commitments include those on digital rights management (DRM), or those on intermediate liability for internet service providers (ISPs). 19 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes and positioning services; smart cards (these e-commerce and the internet have not only had are integrated circuit cards, commonly used a dramatic impact on boosting growth, improving for various applications such as identification, efficiency and turbo-charging productivity, but that authentication, and payment systems); the underlying technological developments that semiconductor manufacturing equipment (ITA-2 gave rise to these phenomena (online connectivity expanded the Agreement’s coverage to include and digitalization) have both vastly increased the advanced machinery and equipment used in number of existing services that are tradable across the manufacturing of semiconductors, such borders, as well as giving rise to a new generation as lithography equipment, wafer-processing of heretofore non-existent services (McIntosh equipment, and testing and assembly equipment); & Wunsch-Vincent 2005; Baldwin 2019). Timor- light-emitting diode (LED) lighting products Leste’s approach to services liberalization as part of (including LED lamps and LED display modules). its WTO accession need to reflect this reality, both in terms of the underlying regulatory regime that Part III However, in addition to those covered in the results from accession-related regulatory reforms ITA and expanded ITA, there are many other (i.e., how it fulfills its general obligations under the productivity enhancing goods that will prove GATS), as well as in terms of how it schedules its essential if Timor-Leste’s leaders are to achieve specific commitments. their aspirations of building a more modern and productive digitized economy. These include As outlined in Box 2, the seven pillars of digital all products essential to building and operating transformation comprising of (1) e-commerce modern telecommunications networks, such readiness and strategy formulation, (2) ICT as base stations, network routers and switches, infrastructure and services, (3) trade facilitation multiplexers, optical transceivers and amplifiers and logistics, (4) legal and regulatory frameworks, and many other similar products not explicitly (5) payment solutions, (6) skills development, covered by ITA 1 or 2. and (7) access to financing supported by the transformation of the domestic economy will By agreeing to bind tariffs at zero for all of the be key to prepare Timor-Leste for realizing the above products, committing to facilitating the potential of digital transformation for the domestic import of these items by refraining from imposing economy. restrictive requirements in the areas of conformity assessment, certification and marking and product The next section of this report (IV Regulatory registration, and by allowing their importation free Reform, Institutional Strengthening and Trade from any import licensing procedures, Timorese Facilitation) discusses the changes that can be authorities would make these products and their made to improve economic governance and the productivity-enhancing attributes more readily Timorese business environment. In terms of the accessible to the country’s firms, consumers and kinds of specific commitments Timor-Leste could foreign investors. Although such a policy stance consider, these involve numerous issues. The first appears wholly logical, many economies make is to schedule open market access and national the importation of these and similar products treatment commitments under Modes 1 (cross- subject to multiple levels of complex bureaucratic border supply) and 2 (consumption abroad) for a red tape, mostly for industrial policy or customs range of strategically important service sectors revenue reasons. Such policies amount to a tax capable of enabling and facilitating Timor-Leste’s on productivity and innovation and should not rapid integration into global e-commerce and digital be followed by a government with the stated value chains. These sectors would include basic aim of unleashing the potential of its budding and value-added telecommunication services entrepreneurial class, especially the younger as well as a number of complementary services generation of born-digital natives that Timor-Leste sectors such as distribution, express delivery, is starting to produce. computer services, advertising, as well as certain financial services, but also payment and money With regard to harnessing the accession process for transmission services, trading for own account digital transformation, there are likewise a number or for the account of customers, accountancy of commitments Timorese officials can make in services, computer and related services, logistics the area of services. Today, it is recognized that and related services, and education services. 20 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes Timor-Leste’s GATS offer also affords scope in the area of trade facilitation such as Electronic for securing open market access and national Data Interchange (EDI), National Single Windows treatment conditions for foreign service suppliers (NSWs), and to implement automated risk in sectors of crucial importance in terms of management; (3) keeping de minimis levels on enabling and facilitating e-commerce and digital tariffs at an appropriately low level to foster cross- transformation. However, some important gaps border e-commerce ; (4) the prudent and limited use remain. For example, Mode 1 remains unbound for of data-localization measures, and; (5) striking the both market access and national treatment across right balance between internet openness and the a number of the most traded sectors in the digital online and data security of users (González 2018). economy. This includes accounting, auditing and By the same token, in the context of providing policy bookkeeping services, taxation services, and advice to enhance resilience and preparedness architectural services. In a number of the most following the COVID-19 pandemic, the OECD (2021) important enabling service sectors, both Modes 1 recommended a number of overarching strategic Part III and 2 remain unbound for voice telephone, packet- imperatives to lower costs and increase access switched and circuit-switched data transmission to digital trade, including (1) easing restrictions services, as well as most banking and financial on goods and services that underpin access to services, in addition to important ancillary financial digital networks; (2) reducing barriers to digitally services, such as the provision and transfer of enabled services; (3) promoting policies that tackle financial information, and financial data processing the digital divide; (4) reducing barriers that impede and related software by providers of other financial the delivery of digitally-ordered parcels; and (5) services. However, in other important sectors, employing digital technologies to make border both Modes 1 and 2 remain free of restrictions – processes faster and more efficient. i.e., scheduled with “none” – thereby providing a degree of legal certainty for foreign service Finally, a number of policies in the area of intellectual suppliers. This is the case for online information property protection are likewise essential for and/or data processing services, mobile data laying the groundwork for digital transformation. services, distribution and education services, as Many of these form part of the commitments that well as air and road transport services. any applicant needs to adopt and implement as part of their WTO accession and are generally It bears recalling that specific commitments undertaken in the spirit of fostering economic scheduled under trade agreements are just development, stimulating foreign investment, one part of how services markets are managed enabling the transfer of technology and promoting and regulated, and often only represent a set of an accession country’s integration into the world minimally secure baselines. WTO members are trading system.10 free to provide better access and conditions to foreign service suppliers for discrete sectors if However, even beyond the above goals, and in they wish, as long as they abide by the general addition to the “standard” set of legislative reforms obligations set out in the GATS and observe the countries are asked to undertake in the area of principle of most favored nation treatment (where intellectual property protection, such as drafting no MFN exception has been explicitly scheduled). and implementing laws on patents, utility models and industrial designs, copyright and related What constitutes best practice in terms of rights, geographical indications, layout design regulating services markets to promote digital of integrated circuits, protection of undisclosed trade is generally well understood by now and has information and trade secrets, and plant variety been articulated in a number of policy documents protection, there are other steps countries can by organizations such as the OECD and the World take to promote e-commerce and digital trade Bank. For example, one study that looked at specifically. These include enshrining limitations on some of the challenges facing micro, small, and the liability of internet service providers (ISPs) into medium sized enterprises (MSMEs) in ASEAN set national law in ways that align with two so-called out a number of recommendations, including: (1) internet treaties from 1996, namely the WIPO keeping the price of access to broadband to an Copyright Treaty and the WIPO Performances and affordable level; (2) embracing digital technologies Phonograms Treaty (Meier-Ewert and Guttierez, 2022). This was for example the rationale provided in the case of Cambodia’s accession to the WTO. See, Report of the Working Party (WT/ 10 ACC/KHM/21), para. 167, at p. 36. 21 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes Other ways to make the domestic regulatory protection measures or who remove or alter regime supportive of increased digital trade any rights management information embedded include establishing an electronic trademark in digital media, or who aid and abet decoding system as well as providing a mechanism to deal an encrypted program-carrying satellite signal with disputes and afford transparency with regard without the authorization of the lawful distributor. to internet domain names. Countries can also Finally, by adopting policies on open public data, provide a legislative framework conducive to governments can likewise support the flourishing promoting the digital economy by establishing civil of a local ecosystem well placed to harness this and criminal procedures that allow rights holders data and build new and innovative tools and to prosecute those who circumvent technological applications around it. Box 2: Preparing to Connect with Digital Value Chains Part III Harnessing technological developments, particularly the possibilities offered by online connectivity and digitization, will be essential if Timor-Leste is to keep up with its partners in the ASEAN region - some of the most tech-savvy and digitally connected markets in the world. In the context of supporting developing countries in their efforts to connect with digital value chains, the United Nations Conference on Trade and Development (UNCTAD) has taken the lead on articulating a set of benchmarks for assessing readiness to engage in global e-commerce, namely the eTrade Readiness Assessment tool. This analytical framework addresses seven so-called pillars of digital transformation, comprising: (1) e-commerce readiness and strategy formulation, (2) ICT infrastructure and services, (3) trade facilitation and logistics, (4) legal and regulatory frameworks, (5) payment solutions, (6) skills development, and finally (7) access to financing. E-commerce readiness and strategy formulation refers to efforts by the government to address the opportunities and challenges posed by e-commerce. This pillar also includes efforts to establish institutional structures and processes - including with actors outside of government – for the formulation and implementation of a national e-commerce strategy. Also relevant are the questions of whether e-government services have been introduced and the extent to which systems have been implemented to measure public data and statistics important to tracking the development of e-commerce and the digital economy. A National Strategic Plan for Digital and ICT Development, entitled Timor Digital 2032, responds to these challenges, setting out a vision of a digitally empowered government and society to be achieved over a ten-year period. Timor Digital 2032 prioritizes a number of “strategic digital pillars”, including governance, inclusive economy, health, education, and agriculture, with an additional horizontal pillar called “Additional Focused Strategies”. ICT infrastructure and services addresses a number of factors governing the availability and affordability of both the hard elements of connectivity infrastructure and the functionality it provides access to. Also important is to measure the degree to which users avail themselves of digital services as well as any disparities in use based on gender and urban/rural divides. Recent data seem to suggest that approximately half of Timor-Leste’s population have access to the internet, a level the International Telecommunication Union’s (ITU) World Telecommunication/ICT Indicators Database places closer to 40 percent, with mobile broadband providing the main avenue through which a majority of Timorese access the internet. However, punitively high costs remain a constraining factor for expanding access to mobile broadband, with a 2023 Asia Foundation report noting that “Timorese pay more for their mobile data than any other country in Southeast Asia” (Arbuckle 2023). Data collected and published by cable.co.uk, indicates that the average cost of a monthly data subscription package in Timor-Leste is equivalent to US$ 107.33, a considerable sum for most Timorese citizens, representing about 65 percent of an average monthly salary. Such costs can be expected to be reduced significantly once Timor-Leste is connected to Australia through submarine cables. Trade facilitation and logistics covers a range of indicators focused on both last-mile logistics (given its intrinsic importance to e-commerce), and how quickly and easily goods can cross borders, thanks to single window procedures, paperless trade and the establishment and maintenance of trade portals etc. Also important is the existence of physical addressing systems and how advanced national postal operators 22 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes are in adopting digital processes and solutions. A 2019 Readiness Assessment for Cross-Border Paperless Trade: Timor-Leste by UNESCAP found that although some positive steps had been taken, “Timor-Leste has made limited progress in implementing trade facilitation measures in the past two years” (UNESCAP 2019). However, in March 2023, UNCTAD announced that Timor-Leste had adopted its Automated System for Customs Data (ASYCUDA) solution, succeeding in connecting eight government agencies involved with import and export procedures to the country’s National Single Window (UNCTAD, 2023). Various elements of Timor-Leste’s legislative action plan and institutional reform program (discussed in the next section) focus on adopting a large number of the trade facilitating measures that WTO accession encompasses (transparency, predictability, rule of law), such that continued progress on the cross-border elements of this aspect of e-trade readiness can be expected. Legal and regulatory framework refers to the body of laws and regulations that a country has adopted specifically to facilitate e-commerce and online/digital transactions and to build confidence on the part of consumers and businesses in what is a relatively new form of business that obviates the need for buyers and Part III sellers to physically meet. This generally requires countries to enact laws and implementing regulations on such matters as electronic transactions (including online payments), consumer protection (including online fraud and scams), data protection (including privacy), and cybercrime (including identity theft and hacking). It also involves achieving legislative equivalency in terms of the legally binding nature of paper (i.e., off-line) and electronic or online contracts. A February 2023 update to Timor-Leste’s legislative action plan, in the context of its WTO accession negotiations (WT/ACC/TLS/6/Rev.6), shows that a planned Decree Law on E-Commerce was to be submitted to the Council of Ministers in the second quarter of 2023, with implementation scheduled for later the same year. Otherwise, in February 2020, a new initiative was launched, with funding from the Asian Development Bank among others, to establish a unique identifier system (Unique ID) of Timorese citizens. In the context of a 2021 public consultation, such a scheme was identified as integral to ongoing administrative reform efforts, essential to reduce identify and financial fraud, but also as “the basis of e-government and ‘online’ transactions” (Government of Timor-Leste 2021). In addition, in January 2021, a draft Cybercrime Bill was tabled as a tool to help protect Timor-Leste citizens from online crime and scams that have arisen with increased internet penetration. Apart from the above efforts, and changes to the Customs Law in the context of implementing paperless trade, large gaps remain in the legal and regulatory frameworks of Timor-Leste that need to be filled for both e-commerce to take off, but also for the country’s ambitions in terms of digital transformation. This situation offers Timor-Leste an opportunity to harness its post-accession participation in the WTO Joint Statement on E-Commerce and any resulting trade-related technical assistance that can be secured for developing countries and LDCs under this future plurilateral agreement. Payment solutions is an area that is essential to the development of e-commerce and an online economy. As successful national e-payments schemes have demonstrated in both developed and especially developing countries, the main constraints here don’t necessarily need to be financial or technological, since even Kenya’s now-famous M-PESA scheme was a 2G technology that came to play a significant role in the country in a pre-smartphone era (Kyule et al. 2018). This is essentially a matter for policymakers, who can enact the appropriate legislation and issue the required licenses to e-payment providers. This can also be a key prong in efforts to bring an increasing share of economic activity into the formal economy, moving the vast majority of day-to-day transactions away from cash-based exchanges. This is an area where Timor- Leste lags its peers, but many countries, investors and companies stand ready to support such efforts, provided this comes with market access for foreign e-payment companies. Skills development encompasses both the skills that entrepreneurs and businesses require in order to scale up digital products and solutions online, but also digital literacy in the general population that allows the powerful network effects underlying digital technologies to take full effect. The development and rollout of digital literacy initiatives in Timor-Leste, particularly targeting the younger generation, has been a prominent feature of the government’s response to the Covid-19 pandemic. The “Eskola Ba Uma” or “School Goes Home” program was launched by the Ministry of Education, Youth and Sport, in collaboration with the United Nations Children’s Fund (UNICEF), when schools were closed in late March 2020 as part of a series of lockdown measures. Since then, various other initiatives have been launched under the mantra of Digital Skills Development and Technology Accessibility (United Nations Timor-Leste, 2022). This is clearly something that is top of the policy agenda for the Timorese authorities, given their stated commitment to 23 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes upgrading the island nation’s human capital and the dangers, economically, of allowing the country to fall further behind. Access to financing covers how easily digital entrepreneurs and start-ups enjoy access to finance and credit, something that is repeatedly identified as problematic, particularly from the banking sector, which relies on collateralized business models which digital startups often fail to comply with. Private sector led initiatives can help fill the gap, but so too can appropriate government policies such as innovative lending guarantees, tax incentives, supportive business laws, or the establishment of business parks offering preferential leasing rates for digital entrepreneurs. Incubators or accelerators that also combine financial support are yet another way in which some developing countries have helped bridge financing gaps (UNCTAD 2020). This is an area where tentative steps appear to have been taken in Timor-Leste, notably through the establishment of the United Nations Development Program’s (UNDP) Accelerator Lab. 2. Aid for Trade and Trade-Related Technical Assistance for Digital Transformation The Aid for Trade (AfT) initiative was launched confluence of both developed and developing at the end of 2005 at the WTO’s sixth Ministerial country members. And it is these negotiations Conference (MC6) in Hong Kong, China, and that offer some of the most promising potential quickly emerged as the central platform for both outcomes for developing countries and LDCs to identifying the various constraints besetting secure commitments from developed countries developing countries and LDCs in their efforts to and the international donor community to help better connect with international trade flows, as them both bridge the digital divide and connect well as formulating and coordinating responses with the global digital economy in commercially by the donor community to the constraints thus meaningful ways. identified. Over time, a series of biennial reviews of global AfT activities and outcomes emerged One way that has been proposed to do this would and – starting in 2013 – were grouped around be to make developing country acceptance of the different thematic issues. In the 2017 Global Aid e-commerce JSI provisions contingent on their for Trade Review, the main organizing theme was receiving the trade-related technical assistance “Promoting Trade, Inclusiveness and Connectivity needed to implement associated regulatory for Sustainable Development” (WTO/OECD, 2017). reforms and build the necessary digital domestic This arguably marked the moment at which the capacity (Lacey 2023). Such an approach would issue of digital transformation and the need to replicate the path already taken with notable support developing countries and LDCs in their success under the WTO Trade Facilitation efforts to connect with digital trade flows made it Agreement (TFA) (Hallaert 2015). on the WTO radar screen (Lacey 2021). By joining JSI negotiations, Timor-Leste can It is thus no coincidence that the same year (2017) position itself to influence any negotiated saw the launch of a Joint Statement Initiative on outcomes, including those on Trade-Related Electronic Commerce at the WTO’s 11th Ministerial Technical Assistance (TRTA) and capacity building Conference in Buenos Aires, Argentina. The as well as – more importantly – receive TRTA and initiative was launched by a group of seventy-one capacity building in areas of vital importance to developed and developing country members with bridging the digital divide and positioning its firms a view to exploring and subsequently launching to better connect with regional and global digital plurilateral negotiations on a WTO e-commerce value chains. For example, some of the TRTA and agreement that reaffirmed “the importance of capacity building outcomes liable to result from global electronic commerce and the opportunities the WTO e-commerce negotiations may include it creates for inclusive trade and development”.11 commitments by developed-country members to These negotiations were subsequently launched provide co-financing or credit-support facilities for in early 2019 and have to date been driven by a developing countries and LDCs to put in place the 11 See Ministerial Conference Eleventh Session Buenos Aires, 10-13 December 2017, Joint Statement on Electronic Commerce (WT/ MIN[17]/60) dated 13 December 2017. 24 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes necessary connectivity infrastructure such as fiber- uptake of digital payment platforms, or to finance optical cables, internet exchange points, land- and support the establishment of e-government based networks and data centers. It might also services or digital literacy programs, all of which include technical assistance to implement needed constitute the myriad of elements essential for the legislative and regulatory reforms that support digital economy to take root and a vibrant domestic the adoption and recognition of e-signatures, the e-commerce ecosystem to emerge. implementation of paperless trading, and the IV. Regulatory Reform, Institutional Strengthening and Trade Facilitation The Diagnostic Trade Integration Study (DTIS) that • WTO accession offers a chance to tap TRTA in Part III was prepared for Timor-Leste in 2010 identified order to improve and strengthen the institutions several constraints to export growth, few of which at the center of Timor-Leste’s NQI, in particular have been comprehensively addressed since the the National Quality Control Institute (NQCI). study was completed. These include the legal • In an era of regional and global value chains, uncertainty surrounding land ownership and the importance of lowering trade costs has the resulting lack of access to land, low levels of gained widespread currency in trade policy workforce skills, an underperforming business circles. Here again, the TRTA commitments climate in addition to inadequate essential embedded in the WTO Trade Facilitation trade-related infrastructure such as roads, ports, Agreement offer Timor-Leste an important customs clearance facilities, etc. The process of opportunity to improve and streamline the WTO accession and WTO membership can be management, processes and infrastructure of leveraged to address, either directly or indirectly, a its borders to the benefit of domestic firms, as number of the identified constraints holding back well as current and future foreign investors. the development of a more competitive, diversified • The many reforms that WTO accession entails, and inclusive Timorese economy. in both the regulation of cross-border trade in goods and the domestic regulation of services, Key Messages and Takeaways from this are highly conducive to producing a better Section: business environment and a more welcoming investment climate. Commitments that form • Because of the elevated incidence of non-tariff part of a country’s WTO accession package barriers (NTBs) in international trade today, the can also have powerful reform signaling importance of national quality infrastructure effects, e.g., a pre-commitment to adhere (NQI) has likewise become an important to the WTO Joint Statement Initiatives on consideration at the interface between Services Domestic Regulation and Investment domestic regulation and trade policy. Facilitation for Development. 1. Leveraging WTO Accession and Membership to Improve Quality Infrastructure One critically important example of where this can achieving its mandate, particularly in regards to be done relates to quality infrastructure and the elaborating and implementing standards on such National Quality Control Institute (NQCI) of Timor- basic legislative prerequisites as food safety or Leste (Instituto para a Qualidade de Timor-Leste), having the physical infrastructure and technical which was established in 2018 by Decree Law expertise to run a laboratory for testing imported 10/2018 and serves as the national regulatory body food products (Martins 2021). This in turn represents for qualification, standardization and metrology a major constraint for implementing the WTO TBT and whose development benefited from support and SPS agreements. The Aid for Trade initiative from the United Nations Industrial Development and donor funded TRTA programs have been Organization (UNIDO). However, even the successfully remedying such capacity constraints government of Timor-Leste itself recognizes in several developing countries and LDCs since the acute capacity constraints the NQCI faces in the initiative was launched in 2005. 25 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes The Standards and Trade Development Facility capacity evaluation tools, preparation of feasibility (STDF), which brings together experts from the studies and/or formulation of project proposals WTO, the Food and Agriculture Organization (FAO), to address specific SPS capacity building needs World Bank, World Health Organization (WHO), linked to trade” (STDF 2023). It also provides up to the World Organization for Animal Health (WOAH), US$ 1 million grants for projects “that improve food the Codex Alimentarius Commission (Codex) safety, animal and plant health capacity to comply Secretariat and the International Plant Protection with international sanitary and phytosanitary (SPS) Convention (IPPC) Secretariat has a strong track requirements”. record of supporting governments and other stakeholders in developing countries to meet Upgrading both the physical infrastructure and international food safety, animal and plant health technical capabilities of the NQCI and related standards and other trade requirements, opening institutions in Timor-Leste will bring benefits the way for firms in these countries to connect with not only to Timorese consumers but also firms, Part III global and regional markets. What is more, the who will be able to demonstrate conformity with STDF regularly funds projects that it deems will international food safety and other technical help it achieve these goals. For example, the STDF standards and thereby better position themselves awards up to US$ 50,000 for project preparation to tap into and scale new export opportunities on grants that “involve the application of SPS-related regional and global markets. 2. Reducing Trade Costs through Trade Facilitation Improvements Full implementation of the WTO Trade Facilitation the World Bank as partners. A number of other Agreement (TFA) can bring much-needed policy priorities in the area of customs clearance and and legislative guidance but also material assistance reducing trade costs are identified, such as support to Timor-Leste, representing a tangible benefit for in developing Timor-Leste’s National Single the country as it prepares to join the global trade Window, a long-term development priority with body. The TFA is structured such that many of the funding and assistance earmarked from USAID commitments requiring major reforms of domestic and UNCTAD. customs agencies and procedures can be made conditional on the receipt of corresponding TRTA. Progress in expediting customs clearance and What’s more, structured mechanisms exist to implementing related reforms that lower trade ensure that the demands of developing countries costs entail various economic benefits. They and LDCs for such assistance are addressed. For can be a catalyst for expanding both export and example, the Trade Facilitation Agreement Facility import volumes. By the same token, the successful and its Trade Facilitation Agreement Database implementation of these reforms can boost offer resources and data on implementation gaps competitiveness, as they allow local businesses and how to address them. The Global Alliance to respond with more agility and greater cost for Trade Facilitation, a public-private partnership efficiency to changing market demands. They that brings together key players in international also boost economic growth by paving the way trade logistics, is another source of funding and for local businesses to access a wider range of expertise to support Timor-Leste as it makes inputs and intermediate goods, which in turn needed improvements to its hard and soft logistics enables them to produce more efficiently and at infrastructure with a view to reducing trade costs. lower cost, thereby driving economic expansion, increasing productivity, and creating employment The fact that Timor-Leste faces considerable opportunities across the board. Trade facilitation challenges in this area has not gone unnoticed reforms can also help to attract FDI, since smoother by Timorese officials themselves and WTO customs processes encourage foreign companies, Working Party members. An April 2023 update particularly those whose business model or value to the country’s Matrix for Development Partner proposition involves moving goods across borders, Coordination lists the implementation of the WTO to establish operations or expand their presence in Accession Agreement as a medium to long-term the country, creating new economic opportunities development assistance priority, with USAID and for Timor-Leste. In addition, simplifying and 26 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes harmonizing trade-related procedures results in business environment. Finally, trade facilitation a range of additional transaction cost reductions measures have been found to improve revenue and related efficiency gains, such as a reduction collection, even in an environment where tariffs are in paperwork, greater transparency and being reduced, since efficient customs clearance accountability, enhanced cooperation among procedures, by expediting trade transactions, can relevant stakeholders from both the public and help prevent fraud, smuggling, and other illicit private sectors. All of these ancillary benefits not activities that ultimately reduce official customs only lower trade costs but also improve the overall revenues. 3. Legislative and Regulatory Reforms to Improve the Business Climate and Attract FDI Part III The many regulatory reforms associated to the this context are those that promote competition, WTO and ASEAN accession processes bring pro-competition regulatory reforms and market with them an important set of ancillary benefits liberalization, because these can, among other in terms of improving the business climate and positive spillover effects, stimulate innovation, attracting FDI. This section first discusses the major productivity, and investment (Nicoletti and reforms that underpin tangible and measurable Scarpetta 2003). improvements to the business climate as well as the main drivers of inbound FDI. It then concludes In the context of drivers of inbound FDI, it is by connecting the dots between these and various worth recalling what the key motivations are for aspects of the policy, legislative and regulatory the largest FDI providers, namely multinational reform process set in motion when a country opts corporations (MNCs), since an understanding of to accede to the WTO. these factors can guide policymakers seeking to attract more FDI. For example, market-seeking Improving the business environment involves FDI is often focused on accessing new customers, a range of cross-cutting and often mutually expanding market share, or increasing sales. This reinforcing reforms but also can be complex due to kind of FDI is attracted to larger markets that are the sheer number of different bureaucratic actors either highly populated or affluent (or both), which and potentially competing interests involved (Xu et is not currently the case of Timor-Leste but is the al. 2021). For this reason, it needs to be championed case of the region in which Timor-Leste is situated, at the highest level of political leadership. One which strengthens the case for ASEAN accession. important aspect of this work involves streamlining Another motivation that drives MNCs to invest and simplifying business regulations, licensing in foreign markets is the presence of important procedures, and administrative processes, which natural resources, raw materials, or other key can all contribute to lowering compliance costs, inputs that are scarce or unavailable in either their and improve the ease of doing business. Yet home country or elsewhere (so-called resource- another aspect of reforms directed at improving seeking FDI). This has been the most important the business climate involves strengthening the driver of inbound FDI in Timor-Leste since the rule of law, bolstering governance frameworks and country’s independence, with a great deal of institutions, promoting transparency, combatting international interest in offshore petroleum and corruption, and ensuring the predictable and natural gas reserves in the Timor Sea. But Timor- fair application of the rule of law, including by Leste is endowed with many other resources protecting property rights and enforcing contracts which could, if exploited sustainably, offer new (Dam 2006). Further, such reforms cover border sources of prosperity generating inbound FDI. This management practices such as improvements to is notably the case of sectors such as minerals, customs procedures, reducing clearance times forestry, fisheries, and water resources, with the and other trade facilitation measures. One final latter having the potential to form the basis of set of regulatory reforms that are important in future hydropower investments. 27 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes Efficiency-seeking FDI involves investments made or a number of East Asian bilateral and multilateral to achieve cost efficiencies, improve productivity, donors (Japan, Korea, ADB). A pre-commitment to or reduce production costs, and are typically accede to the JSIs on Investment Facilitation for sought in locations with lower labor costs, Development and Services Domestic Regulation favorable tax environments, better infrastructure, can provide strong and positive signaling to the or more efficient supply chains to enhance their WTO membership as a whole. competitiveness. This is an area that could hold potential for Timor-Leste if improvements were WTO accession also provides an important made to its human capital and trade infrastructure. signaling function to investors about a government’s commitment to maintaining a The policy, legislative and regulatory reforms predictable economic policy environment and associated to WTO accession (and subsequently be bound by the many disciplines imposed by membership of ASEAN) can support efforts to both WTO rules, including those on the protection of Part III improve the business climate and attract FDI in a intellectual property rights that are increasingly number of direct and indirect ways. For example, relevant today in the modern knowledge-based many of the obligations contained in a range of and technology-driven global economy. Further, WTO agreements, such as the GATT, the Import the rule-based WTO system is not only relevant Licensing Agreement, the Agreement on Technical at the domestic but also at international level, Barriers to Trade and the Agreement on Sanitary as small countries such as Timor-Leste depend and Phytosanitary Measures, as well as the Trade on the application of international law to defend Facilitation Agreement contain substantive, their trade interests and to make their voices to institutional and procedural provisions that enhance be heard in an increasingly unstable and volatile transparency, predictability, and can have a international setting. Timorese experts could significant impact on reducing regulatory burdens, leverage the dispute settlement system of the transaction costs and streamlining bureaucratic red WTO agreements, even for non-litigious cases. tape. Similarly, the GATS and related commitments such as the two references papers on telecoms and services domestic regulation, both of which Timor- Leste has pledged to incorporate into its schedule of specific commitments, have the potential – if properly implemented – to generate impactful improvements in domestic economic governance and the business climate. The regulatory reforms that countries undertake as part of their WTO accession commitments should also provide positive spillover effects for their trade and investment promotion efforts in the form of upgrading both institutional frameworks and needed human capital. This is another area where a number of donors have a particularly strong track record in providing TRTA, such as the World Bank 28 TIMOR-LESTE AND WTO ACCESSION Harnessing Momentum to Support Development Outcomes CONCLUSION Harnessing Momentum and Managing Expectations Conclusion Timor-Leste is approaching the finish line of its In the context of Timor-Leste in particular, facing as WTO accession negotiations. The much more it does the imperative of diversifying its economy, challenging task facing Timor-Leste’s leaders now the process and outcome of WTO accession can is converting the promise of WTO membership be viewed as important milestones in supporting into tangible improvements in the country’s efforts to decarbonize the economy and encourage growth trajectory and thus in the lives of its investments into and raise competitiveness in citizens, through more economic opportunities for sectors of the economy outside of the hydrocarbons its workers and firms, as well as a steady climb up sector. the development ladder. WTO accession will also lay the foundation and pave The accession process is one that is inevitably the way for the next major trade and investment characterized by a flurry of reforms, both to policy choices that will drive and support Timor- regulatory institutions and legislation. Too often, Leste’s broader and deeper integration into other the momentum that this generates can show important regional architectures, particularly signs of abating once accession negotiations are ASEAN and any future bilateral, regional or mega- completed, leaving many reforms inadequately regional PTAs Timor-Leste may decide to join. implemented. This is a risk to avoid lest WTO accession fails to translate into tangible This further reiterates an important point about improvements in economic governance. 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