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TWN Info on WTO and Trade Issues (Mar05/10)

23 March 2005


North onslaught on South's industrial tariffs in NAMA talks

The latest WTO negotiations on non-agriculture market access (NAMA) took place on 14-18 March. At that meeting, the major developed countries put great pressure on the developing countries to accept drastic cuts in their industrial tariffs, while also seeking to minimise or even remove some of the flexibilities that exist in the main negotiating text.

The United States, the European Communities, other developed countries and some developing countries allied to "high ambition" in NAMA presented papers and proposals calling for: (1) steep tariff reductions (through a non-linear Swiss formula);

(2) developing countries to bind all or almost all their unbound tariffs after the base rates

(to be calculated by an agreed method) are subjected to the same formula cuts; and

(3) the removal or very stringent use of presently proposed "flexibilities" for developing countries in paragraph 8 of the NAMA text in the July package (i. e. that a small percentage of tariff lines can be exempted from the formula cuts or from tariff binding).

Most of the proposals suggest that to achieve a "high level of ambition" in the NAMA outcome, there should be a trade-off for developing countries between the extent of tariff cuts through the formula and the "flexibilities" or exceptions to be allowed.

In the face of these aggressive proposals, several developing countries spoke up to defend their development interests on several points, according to trade diplomats and WTO sources. Some major developing countries (mainly India and Brazil) objected to the proposed use of the non-linear Swiss formula. Some countries (led by Malaysia and supported by Thailand, Philippines and India) also put forward counter proposals on the treatment of unbound tariffs, arguing that the binding of unbound tariffs should be recognized as making a commitment, and the newly bound tariffs should not be subjected to tariff reduction via the formula.

Many developing countries also strongly opposed the suggested trade-off between acceptance of an aggressive formula and their being able to use the "flexibilities". And the African Group and ACP (African, Caribbean and Pacific) Group highlighted the problem of preference erosion faced by preference-receiving developing countries, and proposed some methods to deal with this.

Below is a report of the negotiations took place in the Negotiating Group on Market Access for Non Agricultural Products (NAMA). The report was published in the SUNS Bulletin of 22 March 2005 and is reproduced here with permission.

With best wishes
Martin Khor
TWN

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North onslaught on South's industrial tariffs in NAMA talks

By Martin Khor, Geneva, 20 March 2005

In a week of negotiations at the WTO on non-agriculture market access (NAMA) on

14-18 March, major developed countries piled on the pressure on developing countries to accept drastic cuts in their industrial tariffs, while also seeking to minimise or even remove some of the flexibilities that exist in the main negotiating text.

The United States, the European Communities, other developed countries and some developing countries allied to "high ambition" in NAMA presented papers and proposals calling for steep tariff reductions (through a non-linear Swiss formula); for developing countries to bind all or almost all their unbound tariffs after the base rates

(to be calculated by an agreed method) are subjected to the same formula cuts; and for the removal or very stringent use of presently proposed "flexibilities" for developing countries in paragraph 8 of the NAMA text in the July package (i. e. that a small percentage of tariff lines can be exempted from the formula cuts or from tariff binding).

Most of the proposals suggest that to achieve a "high level of ambition" in the NAMA outcome, there should be a trade-off for developing countries between the extent of tariff cuts through the formula and the "flexibilities" or exceptions to be allowed.

There are variations of the proposed trade-offs: for example, should a less aggressive formula or coefficient of the formula be used by developing countries - then the flexibilities would be reduced or removed; or flexibilities would be allowed only if the developing countries agree to the use of a formula (or its coefficient) that will more severely cut their tariffs; or else countries that agree to forgo the use of the flexibilities can earn "credits" in the form of adjusting the coefficient in the formula to enable them to have a lower reduction rate.

In the face of these aggressive proposals, several developing countries spoke up to defend their development interests on several points, according to trade diplomats and WTO sources. Some major developing countries (mainly India and Brazil) objected to the proposed use of the non-linear Swiss formula. Some countries (led by Malaysia and supported by Thailand, Philippines and India) also put forward counter proposals on the treatment of unbound tariffs, arguing that the binding of unbound tariffs should be recognized as making a commitment, and the newly bound tariffs should not be subjected to tariff reduction via the formula.

Many developing countries also strongly opposed the suggested trade-off between acceptance of an aggressive formula and their being able to use the "flexibilities". And the African Group and ACP (African, Caribbean and Pacific) Group highlighted the problem of preference erosion faced by preference-receiving developing countries, and proposed some methods to deal with this.

The negotiations took place in the Negotiating Group on Market Access for Non Agricultural Products (NAMA), mainly through informal plenary meetings and some informal bilateral meetings. At a concluding formal plenary on Friday afternoon, the chair of the Group, Ambassador Stefan Johannesson of Iceland, who previously has shown a clear bias towards the high-ambition approach of the major developed countries, said that most members seemed to have accepted a Swiss or Swiss-type non-linear tariff-reduction formula, but that a few members had objections and that this situation had caused uneasiness and a difficulty for moving forward.

Some developing country diplomats interpreted this as an attempt by the Chair to discourage developing countries from deviating from the "high ambition" line set by the major developed countries. However, the diplomats stressed that it was the right of any member to take its own position, and that developing countries had the duty to preserve "policy space" to enable their future industrial development.

The week's negotiations had mainly focused on areas including the tariff-reduction formula or approach; the treatment of unbound tariffs; the "flexibilities" for developing countries; the issue of preference erosion; and non-tariff barriers (NTBs).

The main framework for the discussions was Annex B of the "July 2004 package" on NAMA. Its Para 4 states that work should continue on a non-linear tariff-reduction formula; Para 5 says for unbound tariff lines the basis for commencing tariff reductions shall be (two) times the applied rate; and paragraph 8 refers to "flexibilities" for developing countries in terms of applying less than formula cuts to up to (10) percent of tariff lines and keeping tariff lines unbound or not applying formula cuts for up to (5) percent of tariff lines. However, para 1 (fought for with great difficulty by developing countries) says that these are initial elements and additional negotiations are required on specifics of some elements, including the formula, treatment of unbound tariffs, flexibilities for developing countries, the sectoral component and preference erosion.

On the issue of a formula for tariff reduction, discussed on 16 March, several papers were presented by members that had "high ambition". These included proposals by Norway (TN/MA/W/7/add. 1) for a modified Swiss formula with two coefficients and a concept of "credits"; the United States with a Swiss formula with two coefficients

(for developed and developing countries); the European Communities with a non-linear formula with a single coefficient but with the possibility of modifying this coefficient with "credits" earned by not making use of flexibilities; and a "concept paper" by Mexico, Chile and Colombia (TN/MA/W/50) proposing different sets of options with each set designed to achieve "high ambition", involving trade-offs (for example, countries that choose a lower reduction rate or lower binding coverage will be unable to make use of flexibilities).

Norway's proposal involves a non-linear formula with two coefficients that includes an element of credits. Credits are earned by members for participation in sectoral components, applying the formula to all tariff lines or having full tariff bindings, and the credits allow the country having them to have lowered reduction rates in the formula.

The US paper proposed a Swiss formula with dual coefficients, with one coefficient for developed countries and another coefficient applying to all developing countries that are subject to the formula (LDCs and members with tariff lines of less than 35% are exempt). In a Swiss formula, the coefficient indicates the maximum level of tariffs after reduction; thus in the dual coefficient approach, developing countries will presumably be allowed a higher coefficient than developed countries.

However, the US paper also places two conditions that limit the advantage to developing countries: the coefficients must be "within sight of each other" (which was interpreted to mean there would not be much difference between the two); and the two-coefficient approach would be an alternative to para 8 (i. e. the paragraph containing flexibilities for developing countries).

At the meeting, the US said the concept of a Swiss formula using dual coefficients is a straightforward and effective approach to address the concerns of developing countries that less than full reciprocity be a visible part of the formula itself. There is nothing in the mandate that suggests developing countries should not have to reduce or eliminate peaks, high tariffs and tariff escalation, as long as less than full reciprocity is provided in some manner.

The EC paper proposes that developing countries be given a choice between two options. Both involve a trade-off between the reduction rate in the formula and the use of "flexibilities". In the first option, there would be a Swiss formula with only one coefficient (for both developed and developing countries) and developing countries can use the exceptions in para 8. In the second option, developing countries can earn "credits" by not making use of the para 8 exceptions, and the credits are used to increase the coefficient (which would thus lower the tariff-cutting rate). "The more a country improves the quality of its current profile, the higher its coefficient", says the paper.

Introducing the paper by Chile, Colombia and Mexico, Mexico said that developing countries should have recourse to alternatives to meet their sensitivities, which vary in nature depending on the country. For example, some Members could face difficulties to bind all tariff lines, while others may face difficulties to fully apply the formula to some sensitive tariff lines.

They proposed a "menu of options" which would represent trade offs. For example, Members who decide not to use exceptions to the formula could have recourse to longer implementation periods and/or a softer coefficient in the formula. If any country takes some advantages or benefits in some areas, this country should pay by giving up advantages or benefits in other areas. Each country thus would have to reach the high ambition level.

Reacting to the different proposals. Brazil said it wished that the members that were asking for high ambition in NAMA would show the same ambition in other negotiation bodies like agriculture. It said that a Swiss formula has a harmonizing effect and does not take into account the different tariff structures of members. If applied with one coefficient it would result in developing countries making bigger cuts than developed countries. That would be "More than Full Reciprocity".

Brazil gave an example: A developing country with an average tariff of 30% applying a reduction formula with a coefficient 8 would reduce its tariffs by more that 78%. A developed country with a tariff average of 5% would reduce it by only 38%. The same would happen even with the use of dual coefficients. Concerning the Norway proposal, Brazil said it can hardly be considered constructive. Members should not negotiate flexibilities against formulas.

India's reaction was that these proposals "will not take us very far in getting consensus." A simple Swiss formula with a single coefficient will not deliver "less than full reciprocity." A simple Swiss formula with dual coefficients would also not deliver unless there is wide divergence between the two coefficients. Also, the use of a single coefficient would have a harmonizing impact, which is not in the mandate and it is not equitable.

India rejected the notion of trading off flexibilities (which relate to special and differential treatment) against the principle of less than full reciprocity in the formula. It said that in the Doha mandate less than full reciprocity is provided for as regards the formula, whereas special and differential treatment (or flexibilities for developing countries) is also provided over and above that.

The two principles are provided for separately and cannot be mixed and merged. India thus rejected talk of credits or the proposed linkages and trade-offs between flexibilities and having different coefficients in the formula. Developing countries should not be asked to make such payments.

Referring to calls by developed countries that the developing countries should offer "real market access," India said difference between the bound and applied rates in developing countries was due to their actions of autonomous liberalization. Thus developing countries should be appreciated for this instead of being penalized. Developing countries cannot be expected to give even more market access without receiving anything from the developed countries, which should be giving more market access to developing countries.

Reacting to the Norway paper, India said it did not see why the proposal linked sectoral participation with the formula's coefficient since the sectoral approach is only voluntary and should be considered only after the issue of the formula is settled.

Argentina supported the position taken by Brazil and India. China also agreed that flexibilities are very important for developing countries and they cannot be traded off against less than full reciprocity in the formula. It added that participation in sectorals should not be used to give credits.

Canada said it prefers a Swiss coefficient with a single formula. But it could consider a dual-coefficients approach. It praised the Norway proposal for its credit system, which gave balance between ambition and flexibility. Japan said that the ideas of dual coefficients and credits were worth further exploration.

Later, India and Brazil gave further comments. India said it had been asked to provide "real market access." This it had already done. During the Uruguay Round it significantly reduced its tariffs and the applied tariffs were well below the bound margin. This provided real market access while developed countries, in exchange, continued to impose high tariffs and tariff peaks in products of its interest. India added that the Girard formula (i. e. a variation of the Swiss formula proposed in 2003 by a former chairman of the NAMA group) had less of a harmonizing effect and could address better the concerns of developing countries.

Brazil said some members had disputed its claim that there would be negative effects of a Swiss formula on developing countries' tariffs. It gave another example, this time showing that even if two coefficients are used, the developing countries were being asked to cut their tariffs more than the developed countries. It said, "if we apply a formula with a coefficient of 10 to a developed country tariff of 5%, we get a reduction of 35 %. If we apply a formula with a coefficient of 15 to a developing country with a tariff of 30%, we get a reduction of 65 per cent." "This is not less than full reciprocity".

To this, Canada replied that "if we applied a formula with a coefficient 15 to a developing country tariff of 30% it results in a tariff of 10%. If we apply a formula with coefficient 10 to a developed country tariff of 5% we end up with a tariff of

3.3%," which with its proposal for elimination of low tariffs would go to zero. It is not the comparison in percentages terms that matters, said Canada, but the end result.

Brazil said developing countries need policy space with respect to their tariff structure in order that they can make development policies. At the Uruguay Round the developing countries accepted commitments that went very far, including in TRIPS, TRIMS, services, subsidies, etc. They were only left with some space in their tariff structure. "Now, they want us to give up even this space", said Brazil.

Brazil added it could cut its tariffs, but that this had to be done in an equitable manner, keeping in mind the links between actions in NAMA and results in other areas. "If we get benefits in agriculture that are fair, we can balance this with action here, but we cannot accept the perpetuation of the present inequalities in agriculture," said Brazil. Brazil added that a "Girard formula" would be more equitable.

The EC reacted sharply to Brazil's comments, saying it could not accept the "gross accusation" that the EC perpetuated the inequalities in agriculture. It said the EC was the largest importer of agriculture goods from developing countries. Norway disputed Brazil's notion that the Girard formula was more equitable than others, saying that if applied to different developing countries at the same level it would produce a disparity of reductions.

The issue of how to treat unbound tariff lines was also discussed on 16 March. Two papers were presented, one by Canada, Hong Kong China, New Zealand and Norway; the other by Malaysia.

Addressing the issue on how base rates will be set for tariffs that are currently unbound, the Canada paper proposed that a mark-up of 5 percentage points be added to each unbound rate, to get the base rates. The formula would then be applied to the base rates to get the new bound rates. The paper gives examples, such as an unbound applied tariff rate of 3% would have 8% as the base rate, the unbound rate of 15% would have a base rate of 20%, and the unbound rate of 35% would have base rate

40%. The base rates would then be subjected to the formula cut.

This proposed approach is actually even more severe in many cases than the already extreme proposal in the July package text which specifies that the unbound applied rates be multiplied by two (this figure can be negotiated) to get the base rates on which the formula would then apply. In the Canada scheme, the base rate would be twice the applied rate (or 100% above the applied rate) only when the applied rate is

5%. It would be more than twice the applied rate only for unbound applied rates of below 5%.

For all applied rates above 5%, the base rates would be less than twice the applied rate. For example, if the unbound applied rate is now 35%, the new base rate would be 40% (or only 14% above the applied rate). If the US-proposed Swiss formula

(with a coefficient of 8) is applied to this base rate, the new bound tariff would be

6.7%. Thus the actual tariff for that product would be drastically slashed from 35% to 6.7%.

Under such a method, and if a Swiss formula is used, the new bound rates would end up significantly lower than the present unbound applied rates in most cases, except in tariff lines where the unbound rates are at very low levels. The higher the present unbound rates, the steeper will be the cut.

The Malaysian proposal is in great contrast to that of Canada/Hong Kong China /Norway/New Zealand. Malaysia proposed that unbound tariffs be treated differently from bound tariffs. Unbound tariffs are to be bound at a maximum ceiling of 40%, and an average 25% rate. There would be no tariff reduction via the formula. Developing countries could be asked to bind up to 95% (this figure to be negotiated) of their tariff lines.

Malaysia said the offer to remove the flexibilities of keeping tariffs unbound is in itself a commitment, which contributes to the trading system's predictability of the trading system. Malaysia recalled that during the Uruguay Round, developing countries were given the option to offer specific lines for binding while the rest could remain unbound. "Based on the contribution and concession given, tariffs bound for the first time shall not undertake tariff cuts in this round."

The paper added that in line with industrial development policy, sectors currently unbound have been identified for strategic and development purposes. It is important to provide a comfortable level of protection for industries at their initial development stage. Malaysia said its approach is a more feasible alternative for the treatment of unbound tariffs than the twice-the-applied rate proposal in Annex B.

Thailand, Philippines and India supported the Malaysian proposal or aspects of it. Thailand agreed that binding an unbound tariff is already making a commitment. It cited the history of GATT and the Havana Charter on this point. Thus, it said, there should not be reductions applied to the newly bound rates. Thailand criticized the Canadian/Norway proposal for being too severe on unbound tariffs.

The Philippines also agreed that binding is itself a concession, and supported the idea of having a ceiling and average rate. India said the Canada/Norway proposal was too complicated, and the Malaysian proposal on average and maximum rates was more simple. It supported the general thrust of the Malaysian proposal, including the principle of not subjecting unbound tariffs to cuts.

Zambia (which coordinates the LDCs) said developing countries should have the discretion whether to bind their products and the discretion to determine the level of bindings.

Developed countries were not in favour of the Malaysian proposal. Australia said that in line with the July package, "we should only be determining the base rate and not be considering a new approach." The US said there were only 28 countries affected by having many low unbound tariffs, and thus the Malaysian proposal was not suitable. The EC supported the Canada/Norway proposal and was against the Malaysian approach, saying that asking for no reduction on unbound tariffs was asking for a priori exclusion, which is against the Doha mandate.

Several Latin American countries (Costa Rica, Peru, Chile) supported the Canada paper, saying the 5% mark-up approach to get the base rates was adequate, while the Malaysian proposal ran the risk of giving additional flexibilities. Colombia supported the Canada paper and said it was hard to accept that binding is a commitment.

Answering the charge that its proposal was beyond the mandate of what was agreed in Annex B of the July Package, Malaysia said, "we should be looking at Annex B's para 1 (the pre-ambular para which states that the framework contains the initial elements for work on modalities and that additional negotiations are required to reach agreement on elements including the formula and treatment of unbound tariffs) as well as para 5 (that deals with treatment of unbound tariffs)." It said that its proposal was killing two birds with a stone, by looking at both para 1 and 5 at the same time.

Malaysia added that those who had bound 100% of their tariffs had already made the commitment, but for others they would be making new commitments when they bind. Malaysia reminded the group that developing countries fought very hard to include para 1 in the text, and thus it is very unfair to say (as some members had said) that para 5 cannot be reviewed.

Replying to the US point that only 28 countries were affected by the problem, Malaysia said if one country alone could be accommodated in amending the blue box subsidies in agriculture, and if the G10 can have their concerns for sensitive products satisfied in the text on agriculture, then having 28 countries is a sufficient number for their concerns to be taken seriously in NAMA.

There was also a discussion on non-tariff barriers (NTBs) and how to treat them. Some members proposed that discussion on some NTBs be referred to other committees such as those dealing with Customs Valuation, TBT, import licensing, rules of origin, or to the Negotiating group on Trade Facilitation, whilst other NTBs could be analysed at the NAMA group.

However, some developing countries objected to this. Kenya insisted that all NTBs related to industrial products should be treated at the NAMA Negotiating Group. To send them somewhere else would be an "abdication of responsibility". What would happen, asked Kenya, if the committee to which an NTB is sent does not have a negotiations mandate? Kenya was supported by Rwanda, which coordinates the Africa Group.

The chair, however, said that for some NTBs there is the possibility of addressing them at the Trade Facilitation group. For other NTBs, there is the possibility for the Trade Negotiations Committee to give the mandate to other committees to address them.

The issue of preference erosion was the main topic on the first day (14 March). The meeting examined two papers, one by the African Group entitled "Treatment of non-reciprocal preferences for Africa" (TN/MA/W/49) and the second by the ACP Group.

The African paper says that trade preferences play a crucial role in Africa's development and concludes that liberalization of products enjoying preferential market access should be given special treatment on the current negotiations. Kenya said that "the loss of preference margins will result in increased competition in their traditional export markets leading to contraction in domestic manufacturing with its attendant consequences". The paper proposes the use of a "correction coefficient" to improve on the preference margins for products benefiting from preferential market access, and also longer implementation periods.

Mauritius made a statement on behalf of the ACP group, defending the need to address the erosion of preferences that will result from the reduction of tariffs. Mauritius said that given the narrow range of products that involve preferences, these cannot undermine the broader multilateral trading system. But on the other hand "trade preferences have been instrumental in lifting millions from poverty and the shackles of marginalisation". The ACP group proposed a methodology to identify the products that would be affected by preference erosion and what countries could be considered vulnerable.

Reaction to these papers was diverse. While many recipients of preferences (mostly in Africa and the Caribbean) defended the advantages of them for the poor countries and showed concern about the increased competition they will face, other countries, mostly Latin American, including some recipients of preferences, said that these preferences are by definition temporary and is not fair to pretend to make them permanent. They also said that the preferences are given at the expense of other developing countries and go against the principle of non-discrimination that is the cornerstone of the WTO.

Colombia, for instance, said that it is inconsistent to pretend there is generally a reduction of tariffs if at the same time some countries maintain tariff preferences for some others. Peru had serious difficulties with the proposal to establish an index of vulnerability to identify countries that would suffer from erosion of preferences, and also with another proposal to establish a correction coefficient in the formula for those countries. Peru said this principal goes against the multilateral liberalization and against an ambitious round. Ecuador said, "we cannot pay for the advantages that others get. A system that is perverse and unjust should not be perpetuated".

The US, Norway and India asked for more data and a list of products that the proponents of maintaining preferences would consider. India said they remained very sensitive to the problem but the solution should not affect adversely other developing countries. The EC said that preferences have been generally beneficial.

Two other papers were also introduced but not discussed: a proposal for elimination of low tariff rates made by Canada and Norway (TN/MA/W/52) and a paper from US and Canada on "how to create a critical mass sectoral initiative".

On 17 March, several bilaterals and small group meetings were held. For example, Japan organized one with 13 other countries on participation in sectoral elimination of tariffs in the electronic industry. Korea held a meeting on NTBs affecting the electronic industry with 8 countries. New Zealand organized two meetings, on NTBs in the forestry industry, and on market access for fisheries.

On 18 March, at a concluding formal plenary meeting, the NAMA Group chairman made some concluding remarks. According to WTO sources, he said that there was a marked change in the dynamics of the process and "we are finally in the negotiating phase." The key challenge in the formula discussions continues to be achieving the right balance between ambition and flexibility, and it will be important to deal with both parameters adequately in order to have progress, he said.

On the discussions on the formula, he said it appears that the NAMA Group is willing to move forward on the basis of a non-linear formula, and to explore further a Swiss or Swiss-type formula. A large number of Members seemed to favour this approach, with the main differences being over the coefficients and flexibilities.

However, the Chair also remarked that some key delegations (referring to India and Brazil) did criticise these proposals and this led to a situation of unease and difficulty to move forward, said the WTO sources. It is imperative that these delegations submit their own proposals in advance of the next meeting (starting on 25 April). +

 


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