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TWN Info Service on WTO and Trade Issues (May05/10)

22 May 2005


Experts warn of devastating effects of WTO framework on industrial tariff cuts (NAMA)

The proposals at the WTO in the negotiations on non-agriculture market access (NAMA) to slash industrial tariffs in developing countries are inappropriate and, if accepted, would result in devastating effects on local industrial firms and jobs, according to experts at a workshop held in Geneva on 9 May 2005.

In particular, the experts warned, an obligation to cut industrial tariffs across the board on a "line-by-line" basis would remove flexibilities and policy space, and deprive the developing countries of their ability to plan their future industrial development.

The experts proposed that any commitments made on tariffs should be on the basis of the average tariff rate of a country. It would then have the flexibility to choose at which rates to change the tariffs in particular products and sectors.

The workshop on 'NAMA negotiations and implications for industrial development in developing countries', organised by the Third World Network, was attended by 80 participants - developing country diplomats, officials from international agencies, experts and NGOs.

Among the papers preseented were 'WTO negotiations on industrial tariffs: what is at stake?' by Dr. Yilmaz Akyuz, former director of UNCTAD's Division on Globalization and Development Strategies.

Other experts who spoke included international trade expert Bhagirath Lal Das, Cambridge University economist Dr Ha-Joon Chang and UNCTAD senior economist Mehdi Shaffaeddin and War On Want policy director John Hilary.

A final session in the workshop on 'The way forward' heard views by some developing countries' senior officials (including the Ambassadors of Brazil, Tanzania, India and the Philippines) as well as some of the experts and participants on the current state of the NAMA negotiations and the position that developing countries could take.

Below is a report of the experts' presentations at the workshop.

With best wishes
Martin Khor
TWN

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Experts warn of devastating effects of NAMA framework

By Meena Raman, Geneva, 10 May 2005

The proposals at the WTO in the negotiations on non-agriculture market access (NAMA) to slash industrial tariffs in developing countries are inappropriate and, if accepted, would result in devastating effects on local industrial firms and jobs, according to experts at a workshop held on 9 May in Geneva.

In particular, the experts warned, an obligation to cut industrial tariffs across the board on a "line-by-line" basis would remove flexibilities and policy space, and deprive the developing countries of their ability to plan their future industrial development.

The experts proposed that any commitments made on tariffs should be on the basis of the average tariff rate of a country. It would then have the flexibility to choose at which rates to change the tariffs in particular products and sectors.

The workshop on 'NAMA negotiations and implications for industrial development in developing countries', organised by the Third World Network, was attended by 80 participants - developing country diplomats, officials from international agencies, experts and NGOs.

A paper on 'WTO negotiations on industrial tariffs: what is at stake?' was presented by Dr. Yilmaz Akyuz, former director of UNCTAD's Division on Globalization and Development Strategies.

In his presentation, Akyuz said that the conventional view that there are short-term costs and long-term benefits to liberalisation in industrial goods was not true, and the reverse is more accurate. To cut and bind tariffs on a line by line basis has particularly serious implications as the obligations on the sectors would be irreversible.

Akyuz said that the developed countries during their development phase had industrial tariffs that were far higher than the current tariffs in developing countries or LDCs.

For example, the United States had average applied tariffs of 40-50% for much of the century 1820-1920. In comparison, the average rate in 2001 in developing countries as a whole was 8.1% and in LDCs it was 13.6%.

Even in 1950, the average tariff was 14% in the US (with a per capita income then of $9561) and 26% in Germany (per capita income $3881) and 23% in the UK (per capita income $6907).

These compare with the tariffs in 2001 of 8.1% for developing countries (per capita income $3260), 13.6% for LDCs (per capita income $898), 10.4% for Brazil ($5508 per capita income), 12.3% for China (per capita income $3728) and 24.3% for India (per capita income $1945).

[All per capita incomes are in on PPP terms in 1990 prices.]

Akyuz said that in the present NAMA talks, developing countries are asked to cut their tariffs much more rapidly than the developed countries had done in the 30 years after the Second World War.

He said that there is a pattern of optimal tariffs in different sectors (resource-based and labour-intensive; medium technology-intensive; and high technology-intensive products) at different phases of a country's industrial development.

For example, when a country is at the lower end, it may want higher tariffs to protect its labour-intensive industries, but zero or low tariffs on other products which it did not and cannot produce. When the country enters a higher phase, it could reduce its tariffs on labour-intensive products (as it was already competitive there) but may want to now raise tariffs on medium and high-tech products so that it could develop industries in these areas.

Given this pattern of optimal tariffs, the developing countries need a lot of flexibility to lower and raise their tariffs in different products at different times and different phases of industrialisation. To allow, this, the WTO should allow them to bind their average tariff without a line-by-line commitment. This would especially allow them to raise tariffs in future when they were more developed and able to produce more high-tech products.

Akyuz added that the developed countries should have already long ago cut or removed their tariffs on low-end industries in which they were uncompetitive, such as textiles. It would be unfair for them to offer to cut these tariffs in return for developing countries' agreeing to cut and bind their tariffs on medium and higher-end sectors, when the developing countries would need higher tariffs in these sectors to push themselves up the industrial ladder in future.

He characterised as an "unfair bargain" if developing countries were asked to give up on their prospects of moving up the industrial ladder in exchange for short-term benefits arising from the developed countries' promise to phase out tariffs on low-end products that they should have unilaterally given up long ago.

Any line-by-line binding of product tariffs, and tariff reduction line-by-line, would undermine the WTO as a multilateral organisation as this could cause damage and conflict that should be avoided., Akyuz said. The problem of preference erosion could be handled by allowing affected countries to subsidise their affected exports temporarily until they are efficient, he added.

Chakravarthi Raghavan, editor emeritus of the SUNS bulletin, said that the theories of WTO and World Bank economists that more trade liberalisation would solve development problems had been contradicted by many recent empirical studies showing that liberalisation does not necessarily produce more growth, leave aside poverty reduction. The studies show that in fact when some developing countries have trade barriers, they seem to have higher growth. Trade is at best one element for ensuring growth, development and poverty reduction.

Thus, the developing countries should be cautious about accepting the liberal, free trade orthodoxy. Towards the end of the Uruguay Round, a GATT study had claimed that there would be $250 billion gains from the Round, but after the Round was concluded, a World Bank study estimated an $80 billion gain globally, with large part of the gains to the developed countries and many developing countries losing out. The developing countries were then advised to liberalise even more in order to develop!

Raghavan said manufacturing was essential for the developing countries not only for technology and capital accumulation and catching up with the rich countries as Akyuz had brought out, but in large heavily populated poor countries, manufacturing and industrialization was needed to provide jobs with decent wages for millions of unemployed in urban and rural sectors. No information technology and service sectors could fill this role. The developing nations therefore need an active state and selective protection to their industries to encourage their establishment and for maintenance and fostering of the manufacturing sector.

Raghavan also challenged the notion that it would be a disaster if the Doha Round is not concluded, and soon. If there was development in the content of the Round, then there is a good case for concluding the Round, he said.

But in the Doha Round as of now, "development exists only in rhetoric". There is no development content in the July package - whether in agriculture, NAMA or other areas. If there is nothing concrete on development, it may be good if there is no result at the Hong Kong ministerial meeting; the negotiators would then be forced to look again and negotiate, he said.

In another session, international trade expert, Bhagirath Lal Das said the main conclusions from Akyuz's presentation, with which he agreed, were that developing countries need tariff protection for industrial development; that during the industrialisation process a country may require low, high and then low tariffs at different times on the same products; and taking up the production of a new product will be difficult if the option for raising its tariff is lost.

These points are valid for LDCs as well as more advanced developing countries, as they are all very far behind the industrial leading countries. He made a distinction between liberalisation as a domestic policy which is for each country to decide on, and a binding obligation in the WTO, which the country cannot go back on. The country should maintain the option to raise tariffs on particular products at a later date, which cannot be done if the tariffs are already bound at zero or low levels.

Das added that Akyuz's paper also shows that there is an optimum level of tariffs at different stages of industrialisation for different products. It would be dangerous for developing countries to lose the option of varying the tariffs to meet the optimum.

He added that developing countries are still able to keep their options as the process of working out modalities is still going on. The present tariff levels are what the developing countries have established by negotiations and is a right that they could maintain. They could choose to give up some of the rights if they get adequate new concessions in return.

The current framework (Annex B of the July package) does not bind the developing countries to a line-by-line tariff reduction, Das pointed out. This is because Annex B is not binding, as its first paragraph, stipulating that these are only initial elements and more negotiations are required, is an overarching provision for the annex.

Das proposed that for unbound tariffs, any commitment agreed to by developing countries should only be on the basis of average tariff, and the calculation of this should also not be based on current applied tariffs. The new average tariff should also be higher than the current bound tariff rate, as it would result from a new obligation.

On tariff reduction of bound tariffs, Das said any non-linear Swiss formula would not be appropriate for developing countries. Moreover, any line-by-line approach, even if it is tied to a linear formula, would be dangerous.

He said that by agreeing to a Swiss formula, developing countries would be giving up tremendous space, and similarly if they agree to a line-by-line approach. If developing countries are to agree, what are they getting in return from the developed countries, for this great concession, he asked?

Das added that developing countries should propose that the approach be taken for tariff reduction on an average basis, and not line-by-line. If some developing countries feel they could offer more than this in order to obtain something more from industrial countries, they could agree to the general approach, and then enter bilateral negotiations with the industrial countries on a product basis.

Martin Khor of the Third World Network recalled that in the history of GATT and WTO up to now, developing countries had never been subjected to a tariff-reduction formula, nor to any rules on binding currently unbound industrial tariffs. He said that this flexibility should continue, and it would be ironic if the 'Development Round' were to end this flexibility that developing countries require for their industrial survival and growth.

He said that the concept of 'reciprocity' should be interpreted as a country receiving a growth in exports equal to a growth in imports. 'Less than full reciprocity' in obligations for developing countries (which is an agreed principle in the NAMA mandate) should thus be translated into 'more than reciprocal' benefits in trade balance terms. The obligations in tariff changes should be worked out to produce this outcome, especially if the development principle is to be upheld.

He suggested that instead of the non-linear line-by-line formula mentioned in the NAMA framework, the Uruguay Round approach could be adopted, in which developing countries were asked to reduce tariffs by an overall target, and were free to choose at which rates to reduce particular product tariffs. They should also be free to choose at which rates to bind their unbound tariffs.

Cambridge University economist, Ha-Joon Chang, said that if the developed countries' NAMA proposals were adopted, the developing countries would be subjected to truly drastic tariff cuts, bringing their industrial tariffs to their lowest levels since the days of Unequal Treaties in the 19th and early 20th century. They would also be lower than rates that prevailed in any of today's developed countries until the Second World War, with a few exceptions for brief periods. The effects on developing countries would be "truly monumental", he said.

Chang said the proposed formulae would reduce the tariffs of developing countries much more in proportionate terms as well as in absolute terms, compared to tariffs of developed countries. It was worrying that many developing countries do not seem to realise how devastating the cuts can be.

He added that harmonisation of tariffs between industrial and developing countries was inappropriate and unfair, as such a so-called level playing field would be equivalent of asking a schoolboy football team to take on the national team.

Chang also challenged the limited notion of 'flexibility' being mooted in the WTO negotiations. This concept of flexibility should not be taken to mean only that developing countries could exclude a few sectors from the tariff reduction formula. He said that "this is a peculiar notion of flexibility." For, once a sector is liberalised, there is no going back. There is a belief that a tariff should never rise above the bound rate.

"If developing countries were to have real flexibility, developing countries should be allowed to unbind tariffs, if there is reasonable ground. What is happening is the reverse. Instead of allowing the countries that have overdone trade liberalisation to raise their tariffs, the developed countries are trying to lower them even more."

Chang said the developing countries should wake up as there may be no more industrial development in the developing world in the near future if the NAMA proposals are accepted. This may sound a drastic conclusion, but is the only realistic assessment.

In response to a question, he added that although the NAMA negotiations are done in the name of development, in reality the developed countries were conducting the negotiations in their own mercantile interests. "Let us not pretend that there is some benefit for developing countries," he said.

It was important to stress the need for flexibility, he said. For instance in the 19th century, bilateral free trade agreements had exit clauses and lasted for 20 years. "Now the agreement binds you forever even it may result in the destruction of industry, poverty and the end of development."

UNCTAD senior economist, Mehdi Shaffaeddin, speaking in his personal capacity, said that in all cases, with one or two exceptions, all industrially successful countries had used tariff protection. He added that infant industry protection should be for a temporary period. Most developed countries had also protected in a selective way.

He said that an UNCTAD study on 50 developing countries showed that only 20 that liberalised their imports had managed to expand their manufacturing exports to any significant extent, and of these only 10 expanded their manufacturing value-added as well. Half of the countries surveyed experienced deindustrialisation. There was little evidence they could upgrade their industries.

He added that the implications of NAMA should be understood in context. The industrial countries were already industrialised, with advanced supply capacity. When they get the developing countries to liberalise, they will get market access. By contrast, even if developing countries get access to developed country markets, that may be of benefit to products they presently make, but it would not benefit them for future products that they can potentially make (as the developing countries' tariffs on these would have been lowered).

"Thus developing countries may be sacrificing their future for a bit of market access for the present," he said. He warned developing countries against hoping to get some benefit for their labour-intensive industry, and in return giving up their future potential for high value-added industry. This would be the end of their industrialisation, he said.

John Hilary, Policy Director of War on Want, a UK-based development agency, said that European NGOs were angered by their governments' hypocrisy, when they talk publicly about the WTO Development Agenda, while acknowledging in private that they are really only looking out for their companies' interests in opening up markets in the South.

When pressed further about the Development Agenda, the government officials told the NGOs that the time for nice words about development is over, and what they the EC governments are after frankly are their commercial interests.

The NGOs are confronting their elected officials, who say they are for development and tackling poverty, with the reality that the rich countries' NAMA proposals would lead to a loss of jobs, income and increase in mass poverty.

Hilary said that however the EU and US officials recognise the strong argument raised by developing countries about 'less than full reciprocity', but have been unable to give an answer. The EU also recognises that the current proposal on treatment of unbound tariffs is asking the developing countries to pay twice, once in binding and the second time in cutting the tariffs.

He said that it was important not to be "rushed" into agreeing with an artificial deadline. The EU and US are forcing the pace by rushing to get modalities by July. This was a deliberate attempt to get a result favourable for their commercial interests. The developing countries should be able to step back and resist the forcing of the pace.

A final session in the workshop on 'The way forward' heard views by some developing countries' senior officials (including the Ambassadors of Brazil, Tanzania, India and the Philippines) as well as some of the experts and participants on the current state of the NAMA negotiations and the position that developing countries could take.

 


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