TWN Info on WTO and Trade Issues (Apr05/11)

26 April 2005

WTO agriculture meeting suspended over AVE issue

The agriculture negotiations at the WTO hit a snag last week when the formal meeting had to be suspended over a "misunderstanding" on what seemed to have been an agreement on how to treat the issue of converting non-ad valorem duties into ad valorem equivalents (AVEs).

Below is an article by Kanaga Raja on this development. It was published in the SUNS Bulletin of 21 April 2005 and reproduced with permission of the SUNS.

With best wishes
Martin Khor


WTO Agriculture meeting suspended over "misunderstanding" on AVEs

By Kanaga Raja, Geneva, 20 April 2005
South North Development Monitor (SUNS) 21 April 2005

A formal meeting of the Special Session of the Committee on Agriculture of the WTO was "suspended" late Tuesday as members tried to resolve a ''misunderstanding'' that developed over the issue of converting non-ad valorem duties into ad valorem equivalents (AVEs).

The formal meeting came at the end of a week-long series of informal meetings of the Special Session, which discussed in greater detail two export subsidy issues of food aid and state trading enterprises and the domestic support issue of Blue Box criteria.

No date has been set for the formal meeting to resume but the next Agriculture Week of negotiations is scheduled for 30 May.

There were behind-the-scenes discussions over the week on the method for calculating ad valorem equivalents (expressed as percent of the value of an import) of non-ad valorem duties (expressed as value per unit such as dollars per ton).

A resolution of this issue is considered a necessary step for negotiations to begin on a tariff reduction formula on imported products.

According to trade officials, the key members involved in the talks thought they had an agreement Tuesday afternoon that they could present to the rest of the membership in the formal meeting. However, about half an hour before the meeting was due to start, it emerged that members had different understandings on how some of the mathematical processes would work.

According to news reports, the agreement was rejected at the last minute by the EU.

At issue is the import price of the product to be used in converting non-ad valorem duties into ad valorem equivalents.

With regards to determining the price of the product, members had generally agreed to find the estimate of the price based on the Integrated Database (IDB) of the WTO. The approximation of the price that is obtained from this is the unit value of the import (total value of import divided and compared by the total quantity of import over a period).

However, some members (such as the agricultural exporting nations in the Cairns Group and the G20) argue that this gives a price that is too high and that they prefer the UN's Comtrade database (which looks at the global trade and an estimate of the world price for a product).

Other members such as those in the G10 are not in favour of the Comtrade database, arguing that the prices are too low (resulting in high AVEs, and consequently, larger tariff cuts through the tariff reduction formula.)

So, what members agreed to was a filter process. The import value per unit calculated from IDB data is compared directly with the world price estimate calculated from the UN's Comtrade database. If the difference is more than 40%, (e. g. the IDB calculation gives $1 kg pound, and Comtrade gives $0.50 per kg, a difference of 100%), then this product's price would be caught in the filter. Products whose difference is less than

40% would pass through, and the IDB calculation would be accepted.

Products caught in the "forty" filter now face another test. The ad valorem equivalents would then be calculated and if the difference is less than 20 percentage points, then the product would pass through. For example if the ad valorem equivalent using the IDB is 50% and the ad valorem equivalent using Comtrade is 65%, a difference of 15 percentage points, then the product would pass through. Only products that remain caught in this second filter would require some adjustment (i. e. by the use of a number that is somewhere between the two).

The unresolved issue related to products caught in the filter, whether (1) to try for a price between the unit values given by the WTO Integrated Database and UN Comtrade data first and then convert to ad valorem equivalents, or (2) to use the two unit values to convert to ad valorem equivalents first and then go for a tariff rate between the two.

Apparently, this could yield significantly different results.

In his assessment, Groser said he had no criticism of the countries involved in the consultations, on the effort they have put into solving this. He said members should take note of the "massive amount of work done". The fault, he stressed, lies in a misunderstanding. But he added that he was "extremely critical" of the membership for losing sight of the bigger picture.

Groser contrasted market access against the other two pillars. Members are making steady progress on export competition (subsidies and related issues), he said. Domestic support shows less marked progress, but a result (a "first approximation" of modalities) could still be delivered in July, he added.

Market access has always been by far the most sensitive and it would be "inconceivable" that the membership could accept a document in July that contains a "massive hole" for the market access pillar, he cautioned.

Members are waiting to discuss a long list of issues such as tropical products, sensitive products, special products, etc, but before they can even start to do so, they need a basis for starting to negotiate the tariff reduction formula. And that, Groser said, requires "comparing apples with apples" (comparing all tariffs on the same basis, i. e. ad valorem).

To illustrate the problem, imagine a formula with two tiers, the Chair said: (1) tariffs

99% or below, and (2) 100% up. And imagine a product has a specific duty of $600 per ton. Suppose the agreed reduction is 25% in the lower tier and 75% in the higher tier. For importers and exporters there could be a big difference between the two. If the conversion to an ad valorem equivalent (AVE) puts the product in the higher tier, its duty will be cut by three quarters, leaving $150 per tonne, which exporters would prefer. But if the ad valorem equivalent is below 100%, the reduction is only one quarter, leaving a tariff of $450 per ton, which a defensive importer would prefer.

At the same time, all have understood that there is no single correct method, he said. "We'll never find a precise answer." But until an answer of a kind is found, the talks cannot move forward (on market access), he said.

Groser said he had held nine consultations with about 15-16 delegations in Room F

(one of the smaller rooms in the WTO, used for smaller group consultations). He said he relied on the delegations to keep others informed, including other members of their alliances, and they had done this reasonably well. There had been numerous other private discussions such as dinners, phone calls, emails, etc. According to trade officials, on 19 April a group of about 30 delegations (hosted by the Canadian mission) met and thought they had an agreement that could be put on paper, and Groser thought he could put it to the formal agriculture meeting for adoption. But in the afternoon, about half an hour before the formal agriculture meeting began, the misunderstanding emerged, he said.

From the start there were always two price indexes, Groser said: the WTO Integrated Database (IDB) and the UN's Comtrade data. Members also accepted as "reasonable" the proposal that products that are more processed should have ad valorem equivalents that are closer to the value given by the IDB, he added.

Groser then outlined the "filters", which he described as a "relevancy test", (i. e. a test to see how relevant the WTO IDB data is for each product by comparing it with Comtrade). If the difference is not too great, members would use the WTO IDB data. Groser described this as a result slightly weighted in favour of "defensive interests".

For products caught in the filter, the negotiators agreed that the calculations for processed products would be closer to the WTO IDB calculations, and for more basic products it would be closer to the UN Comtrade calculations, Groser said. He explained that they then agreed that broadly the processed products would be those in Chapters 18-24 (i. e. products whose code numbers begin with 18 to 24 under the Harmonized System of classification, which includes prepared food, confectionary, etc), and the basic products would be those in Chapters 1-17, except for a handful of more processed products.

It was only after all of this was agreed, that the misunderstanding emerged, he said. It involves the adjustment for products caught in the filter. Some negotiators understood that the adjustment would be made by taking a price estimate (a "unit value") between the WTO IDB and UN Comtrade values first (according to an agreed approach), and then using that to calculate the ad valorem equivalent. Others understood that two ad valorem equivalents would be calculated first, using the IDB and Comtrade price estimates, and then the appropriate value between the two would be used.

Groser asked members to analyse the situation and resist the temptation to throw away the agreement. He urged them not to lose sight of the bigger picture, which he said includes the likelihood that members will adjust their approach to the tariff formula negotiations according to the outcome of the ad valorem equivalent calculations. If the calculations favour those with exporting interests, the importers will be less willing to liberalize, and if they favour defensive importing interests, the exporters will be more aggressive, the Chair argued.

He said it was too soon to say what the significance of the blockage is. But, if common sense doesn't prevail, "what do you expect me to do? Flip a coin?"

No country spoke up during the meeting except for Bulgaria which expressed concern over the fact that it was not part of the consultations.

However, speaking to the media later, the US expressed its disappointment saying that it thought that the issue would be resolved Tuesday.

Codoaldo Hugueney, a Brazilian trade official, remarked that members have been spending months on this technical issue, holding up other issues in the process.