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Developing country status: South Korea shows why WTO rules need to evolve

Published 05 November 2019 | 5 minute read

On October 25, 2019, South Korea announced that they would no longer seek special treatment as a WTO Developing Country in future WTO negotiations. This development shows why WTO rules need to evolve.

On October 25, Finance Minister Hong Nam-Ki acknowledged that the South Korean economy had grown significantly since the country first joined the international trading system and announced that they would no longer seek special treatment as a WTO Developing Country in future WTO negotiations.

This announcement is significant in the context of US President Donald Trump asking for a revision of WTO rules to prevent countries such as China from self-certifying as a WTO Developing Country to obtain privileges.

This article discusses the need for WTO rules to evolve in this regard.

South Korea is no longer a developing country by any definition

South Korea joined GATT in 1967 when the country was indisputably poor – one of poorest in the world, in fact.

South Korea’s GDP per capita passed the global average in the late 1980s. By 1995, when the World Trade Organization was founded, Korea’s GDP per capita ranking had already put the country in the top tier of nations. In 1996, South Korea was admitted to the “rich man’s club” of nations to become an OECD member. In 2018, South Korea’s GDP per capita was over USD 31,000 – about three times the global average.

Korea is now the 11th largest economy in the world and the 5th largest exporter. Its GDP per capita ranking is now 28th or 29th depending on whose data one uses – ahead of Spain and Greece. Furthermore, its world rankings do not differ meaningful if one uses a nominal dollar measure or a Purchasing Power Parity (PPP) measure.

Additionally, South Korea ranks highly in other non-monetary measures of economic progress. Korea’s education system is often top of various international comparison tables and the country registers large numbers of patents. Korea is simply not a developing country anymore and has arguably not been so since the 1990s – almost a generation ago.

Self-designating as a WTO developing country is illogical

Why does any of this matter?

WTO members are free to designate themselves as “WTO Developing Countries”. This designation comes with various advantages under WTO rules pertaining to trade, such as extended periods for implementation of trade agreements and some protection from WTO cases filed by other members against it.

South Korea, the home of Samsung Electronics and Hyundai Motor, is a self-designated developing economy as far as WTO rules are concerned. It uses its WTO Developing Country status to protect its domestic agriculture industry, for example.

South Korea has announced that, going forward, it will no longer use its self-certified WTO Developing Country status to extract advantages in future WTO negotiations.

This is not quite the same as abandoning the status entirely as historic concessions will be retained, it appears. Nevertheless, South Korea’s decision represents a positive step, and is a modest victory for the Trump administration and for advocates of WTO reform.

Critically, it shines a spotlight on the issue of what is fair when it comes to international trade and how the WTO, in its current construct, has failed to evolve to reflect the new economic reality.

Objective criteria would be preferable to self-certification

In July this year, the US administration voiced its anger at the high-income countries that are abusing the self-designating system.

In particular, it highlighted the fact that many big beneficiaries of the international trading system were abusing what was supposed to be a concession to help emerging countries open up to trade in a controlled and manageable way – reaping the benefits of free trade while protecting and fostering the development of their domestic industry.

Seven out of the top ten countries in the global GDP per capita ranking in PPP terms are claiming WTO Developing Country status, as is the second largest economy in the world – China.

The US has proposed an alternative to “self-certification”: objective criteria. The proposal is that the WTO Developing Country designation will not be available to any country that meets one of the following four criteria: a) accounts for more than 0.5% of world trade; b) is an OECD member; c) is a G20 nation or d) is classified as a high income country by the World Bank.

While the appropriateness of the above criteria is debatable, most observers would agree that the notion of self-certification is ludicrous and that related WTO rules need reform. If the WTO Developing Country status bestows meaningful benefits, then countries that do not exhibit one of the four criteria should not claim those for themselves. If such status does not bestow meaningful benefits, then the classification should be abandoned altogether.

While there might be a degree of unanimity in agreeing that high income countries should not be claiming the status, the issue becomes more contentious when considering large countries with large economies and considerable geo-political power but that are poor on a per capita basis.

India, for example, is the fifth largest economy in the world in nominal dollar terms and the third largest on a PPP basis according to the IMF, yet ranks a mere 142nd in terms on nominal GDP per head. It is hard to argue that India is not a poor country. Its economy’s size is a mere function of its population size. India is surely a developing country given a per capita GDP of about USD 2,000, which is about 20% of the global average.

“Developing country” is a relative term inviting a comparison to an average

It could be argued that the best criteria on which to determine WTO developing country status is with reference to the global average GDP per capita.

Suppose for example, that the WTO Developing Country status was automatically granted to countries with a real GDP per capita less than 80% (or some such percentage) of the world average, and that graduation out of the category happened once a country had surpassed that threshold for a number of consecutive years. A transition period might be agreeable during which the benefits of developing status were phased out. Such a system would certainly seem fairer than the current one, although it would not be without its problems.

Some have argued that having a significant number of people living below the poverty line is a reason to claim WTO Developing Country status. The counter point is that once a country has, on average, reached a point in its development where per capita income is a multiple of the poverty threshold, then the existence of poverty is a matter for internal economic policy, and should therefore not be a consideration of WTO.

China, for example, has millions of people living below the poverty line as defined by the World Bank. Yet with a real GDP per capita of USD 10,000 per year, such poverty results from economic development choices that have created imbalances, and this is not something the WTO should consider when granting special and differential treatments for China in trade.

A test for WTO’s ability to reform

Korea’s move and Singapore’s recent similar commitment (yes, Singapore has WTO Developing Country status) create an opportunity to progress the discussion about ways to create better WTO rules for increasing the fairness of the international trading system.

This will test the ability of the WTO and its members to reach a consensus on ways to formalize the designation of a WTO developing country.

Relying on individual countries to surrender the benefits that stem from their developing country status out of guilt, altruism or diplomatic pressure, is surely no better than the self-certification process that gave birth to the issue in the first place.

A rules-based international trading system requires rule after all.

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Stewart Paterson

Stewart Paterson is a Research Fellow at the Hinrich Foundation who spent 25 years in capital markets as an equity researcher, strategist and fund manager, working for Credit Suisse, CLSA and most recently, as a Partner and Portfolio Manager of Tiburon Partners LLP.

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