TWN Info Service on WTO and Trade Issues (Jun05/5)

16 June 2005

Divergences over modalities for tariff reduction in NAMA talks

At the negotiations over non agricultural market access (NAMA), there was a heated debate over the moadilities on the tariff reduction formula and other aspects such as the treatment of unbound tariffs.

The first report (Jun05/4) highlighted the explanation by Argentina, Brazil and India on their proposal. The second report (below) is on the reactions to that proposal and to the alternative proposal (having a simple Swiss formula) put forward by the US and other developed countries.

This report was published in the South North Development Monitor of 9 June.

With best wishes
Martin Khor


Divergences over modalities for tariff reduction in NAMA talks

By Goh Chien Yen (TWN), Geneva, 8 June 2005

A joint proposal by Argentina, Brazil and India (referred to as the ABI proposal) drew strong reactions when weeklong negotiations (6-10 June) on non-agricultural market access (NAMA) resumed at the WTO on 6 June.

Developed countries including the US, the EU, Norway, Australia, New Zealand and Japan reacted emphatically against the ABI proposal, which deals with the formula for tariff reduction, the treatment of unbound tariff lines and special and differential treatment (SDT) for developing countries.

During discussions Tuesday under the socalled 'Room D' process (meeting in a small room)over the formula for tariff reduction, Japan criticized the ABI proposal (see article above) of using the average bound rate in the formula as being "not equitable", as this does not "redress the tariff disparities among Members."

"A formula with average bound rate will not create for some Members new trade flows for development which the DDA (Doha Development Agenda) aims for," Japan said.

Joining in this line of argument, Norway said that "Japan's presentation of the ABI proposal pinpointed why after so many years of negotiations, a Girard-type formula cannot be accepted."

Norway added that the ABI proposal would lead to "arbitrary discrimination among developing countries." Hence, it is necessary to "get rid of the ABI proposal and get a formula which requires poor developing countries to reduce less than the richer developing countries," Norway said.

According to trade diplomats following the talks, New Zealand echoed the sentiment saying that the ABI proposal would have inequitable impact on developing countries, with developing countries with low tariff rates having to undertake deeper cuts.

The US and the EC more candidly stated their opposition to using average bound tariff in the formula as the ABI proposal has done. "Nothing is to be gained in terms of real market access if we do not cut into applied rates," the US stressed. "End rates are of primary importance for EC companies," the EC said.

As far as the EC was concerned, any formula which does not lead to real market access will not be supported by them. "Lack of ambition is not for the EC," it said.

Developed country members are also concerned that the ABI proposal would not reduce the existing applied tariff, given the difference between bound and applied tariff rates.

India pointed out that if some members insisted on going beyond the applied rates, developing countries could raise their existing applied rates to bound levels.

Australia and Canada supported a simple Swiss formula over the ABI proposal on the grounds of transparency, predictability and simplifying the negotiations. Canada said that this is a "complex negotiations and therefore we would need a simple formula and not the ABI."

On the other hand, many developing country members reiterated the important function of tariffs in their economies and development efforts. They urged a more flexible approach towards the reduction of their tariffs that would retain their policy space.

Guyana said that members should not refer to inequities and reminded them that under the previous round of tariff negotiations, many present here "did not want to adopt a Swiss formula."

Guyana pointed out that "bound tariffs play an important role for the Caribbean countries and the only reason why we can sustain low applied tariffs is because we have higher bound tariffs."

"We should be conscious of progressive liberalization and cannot undermine the purpose of bound rates," Guyana added.

Jamaica said that the "formula should allow small, open economies policy space. Maintaining flexibility in their tariff structures is very important for these developing countries, which have fledging and vulnerable manufacturing sectors."

Antigua and Barbuda, speaking on behalf of St. Kitts and Nevis, St. Lucia, Grenada and Dominica, highlighted the importance of tariffs to small developing countries. They pointed out that small industries require protection and tariffs are also needed for public revenue generation and building resilience to external shocks. For these countries, Antigua and Barbuda said that the "formula that takes into account the average bound tariff operationalises the principle of less than full reciprocity."

Trinidad and Tobago said that "there must be different coefficients if the formula is to deliver on less than full reciprocity and at this juncture, the use of average bound tariff is a useful starting point."

Barbados added that the formula for tariff reduction should "take into account I) trade profiles of members, ii) ability to offer further concessions and iii) ability to accommodate differences between trading partners. Therefore, in the context of less than full reciprocity, the formula should take into account the average bound tariff and substantially varied coefficients." In this respect, Barbados said that "a simple Swiss formula would not conform to our expectations and requirements of less than full reciprocity."

Guatemala, speaking on behalf of Honduras and El Salvador, pointed out that none of the coefficients used in the developed country members' proposals addressed their needs. "As small developing country economies, they would face great challenges in absorbing tariff cuts and any formula adopted must take into account the tariff structures of members," Guatemala argued.

Indonesia, in commenting on the US proposal for a simple Swiss formula, said that the US proposal "needs to further accommodate developing countries' concerns and the principle of less than full reciprocity should be substantially incorporated into the formula and there should be substantially different coefficients" in this regard.

China informed members that it had joined the consensus on a Swiss formula at the APEC Ministerial meeting (held in Korea on 1-2 June) on the understanding that a sufficient gap be left between the coefficients for developed and developing countries and that attention be paid to the needs of newly acceded Members. From its point of view, China said that the formula must take into account market access and policy space for developing countries.

Mauritius pointed out that the proposals so far have not captured all elements of Annex B of the July Package, and that "preference erosion cannot be treated as a stand-alone issue."

"It must be factored into the formula," Mauritius said, adding that "adequately differentiated coefficients for developing countries should provide sufficient policy space."

"We cannot be guided by market access considerations alone if development is to be our goal."

With respect to a system of credits to be considered in relation to tariff reduction commitments, Jamaica proposed that "i) credits could be built into the formula in respect of tariff revenue dependency, ii) existing level of trade openness as measured by trade to GDP or import to GDP ratio, iii) macroeconomic vulnerability, and iv) autonomous liberalization measures, though not bound, undertaken in the context of regional trading arrangements as well as through structural adjustment efforts."

Jamaica stressed that this system of credit "should not be a substitute for less than full reciprocity."

With respect to the issue of special and differential treatment (SDT) and flexibilities for developing countries, Members disagreed on whether the current flexibilities for developing countries contained in paragraph 8 of Annex B should be linked to how ambitious the formula for making tariff reduction would be. Developed country members have tried to narrow developing countries' recourse to SDT contained in paragraph 8 in their proposals.

During the informal open-ended meeting, Trinidad and Tobago said that the flexibilities contained in paragraph 8 is "sacrosanct and represents the core elements of special and differential treatment," especially when it is not a least developed country or a paragraph 6 country. (Paragraph 6 of Annex B exempts countries with less than 35% of their tariff lines unbound from making tariff reduction commitments under the eventual formula.)

This was supported by most developing countries including Indonesia, Bolivia, Guatemala, Barbados, Jamaica, and the Philippines.

Barbados made clear that "with regards to SDT, paragraph 8 is an absolute minimum and cannot be made conditional." Guatemala in sharing this view, said that "these are minimum flexibilities and developing countries might forward others."

The US, however, was far more circumspect on this issue of SDT. The US said that "we need to evaluate relevant equivalents of paragraph 8 to the formula." The US is concerned that if some members put their highest tariff rates in paragraph 8, this would mitigate the level of ambition they would like to see with the simple Swiss formula. From their point of view, "paragraph 8 is not insignificant."

On the treatment of unbound tariffs, several countries including Korea, the US, New Zealand, Switzerland and Australia want to see all unbound tariff lines bound and then be subjected to formula cuts. According to Korea, "binding per se is not a concession and unbound tariffs must be cut."

In relation to how these tariff lines are to be cut, India reiterated the ABI proposal that it should not be done on a line-by-line basis, but as an overall target reduction. Switzerland and Japan, however, voiced their opposition to the ABI proposal. The US and Australia insisted that the formula for cutting unbound tariffs should apply on a line-by-line basis. The US added that they are willing to support a substantial mark up of low unbound tariffs.

Pakistan supported Malaysia's proposal on unbound tariffs. According to the Malaysian proposal, unbound tariff lines are to be bound at an average of 25% with a maximum of no more than 40% for each of these tariff lines. Furthermore, "no tariff reductions in this round" are to be made "for new tariff bindings."

Despite the disparity of views, some developed country members were quick to see a convergence of opinions. Japan felt that members "were achieving consensus on the Swiss formula" and all were in agreement that "cuts would result in adequate market access." Japan also concluded that "all agreed that we want the shape of the formula before summer break." Japan's list of commonalities was also shared by the EC.