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TWN Info Service on WTO and Trade Issues (Oct06/1)

6 October 2006


The WTO: What Next? 

Below is a paper by Bhagirath Lal Das, who is an international trade expert and former Director of UNCTAD's Trade Division, on the situation at the WTO after the suspension of the Doha negotiations. 

The paper cautions developing countries to be ready for moves by the developed countries to resume the talks at an early opportunity, and for renewed pressures to conclude the talks on modalities.

It also outlines some of the critical issues that will re-emerge in the negotiations and provides proposals on positions to adopt in these issues, especially agricultural domestioc subsidies and NAMA.

We hope you will benefit from this paper.

With best wishes
Martin Khor
TWN

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The WTO: What Next? 

By Bhagirath Lal Das

31 July 2006

The collapse of the WTO negotiations following the Doha Work Programme has caused widespread concern. News reports and editorials have declared the talks virtually dead.

Though the General Council of the WTO did not take a formal decision on the talks, there is a de facto suspension.  But the GATT/WTO system has given surprises in the past and it is more than likely that the negotiations may start once again in full steam soon.

The developing countries will be well advised not to be complacent with the suspension but to be prepared for an early resumption. The following article gives reasons for this anticipation and also gives some suggestions what the developing countries should do.

CRESCENDO TO COLLAPSE 

This latest collapse of the WTO negotiations was not totally unexpected. The negotiating process had been accelerated by raising a crescendo of expectations and creating an air of crisis and tension. Unreal targets were fixed from time to time and mini-ministerial meetings of various sizes were held too frequently.

Perhaps the strategy was to push the ministers into tight schedules so that they would hurriedly soften their positions. But the stakes and interests are too complex and diverse for such tactics to be effective. What is needed is a meeting of minds in cool atmosphere rather than crashing of heads in artificially created turmoil.

The process generated frustration among those that had assumed the role of prime-movers: the ministers of Australia, Brazil, Japan, India, the US, and the commissioner of the European Commission, representing the European Union (EU), (jointly called “G6” in the WTO parlance).

They decided to suspend their joint deliberation. Other countries appear to have accepted this position, though not approving it formally. And yet it is very likely that the negotiations may be resurrected in not too distant a future, may be even in early autumn. There are three reasons for this assessment.

EARLY REVIVAL LIKELY

First, the major developed countries, particularly the US and European Union (EU), have within their grip some significant concessions from the developing countries that they would not like to slip away.

The developing countries are agreeable to near-total binding coverage of industrial tariffs, implying that they will put an obligatory and enforceable tariff ceiling on almost all their industrial products. 

A coefficient of 20 for the developing countries in the Swiss formula for industrial products (with the consequence of capping the industrial tariff at 20 percent) and 35-45 percent reduction in their agricultural tariff on average are within the reach of the developed countries, in their calculation.

Besides, liberalisation in several services sectors through sectoral plurilateral negotiations is very much on the cards. The resulting opportunities for enhanced market access in goods and services in the developing countries may be too tempting for the major developed countries to sit back in sullen inaction after the recent collapse of talks.

Second, the fast negotiating track authority given by the US Congress to the US Executive expires at the end of June 2007 and it is unlikely to be extended. Hence the motivating factor mentioned above is likely to spur the major developed countries to restart the talks in such a way as to catch this deadline. And the following brief examination of the time table indicates that it is practicable.

The US Executive is required to present the resulting agreement to the Congress at least ninety days before end-June 2007. Assuming that the Executive would take about a month to prepare the presentation, the agreement along with various schedules should be ready in its final form by end-February 2007.

The preparation of schedules by governments and their mutual verification will be an arduous task; but, presuming intense work under time-pressure, a period of three months can be considered adequate for this exercise.

This brings us to end-November 2006 for a complete agreement on modalities in agriculture and NAMA. Other substantive subjects of negotiations too can go on concurrently until end-November 2006. And some remaining subjects can be handled even later until end-February 2007. To achieve the end-November deadline, the talks should be resumed early in autumn.

Third, the gaps in the positions in G6 on the three priority issues that they took up for resolution are really not so large as to be totally unbridgeable, as will be explained later.

PRIORITY ISSUES

We may recall that the focus in the recent negotiation within the G6 was the priority resolution of three elements: (i) total trade distorting support (TDS), i.e., the sum of amber box, blue box and de minimis subsidies in agriculture in the US, (ii) tariff in agricultural products in the EU and (iii) industrial tariff in the developing countries.

Though the differences within G6 had considerably narrowed down, an agreement could not be reached and the talks collapsed.  The differing positions, as reported, are briefly given below.

The US reportedly offered to reduce its total TDS to the level of US$ 23 billion. The G20 (where Brazil and India are influential members) had wanted it to go down to US$ 12 billion while the EU expressed satisfaction if the level was brought down to US$ 15 billion.

In agricultural tariff, the EU reportedly offered to reduce its average tariff by 51 percent. The G 20 and the US had asked for reduction by 54 percent and 66 percent respectively.

In industrial tariff, the EU has reportedly suggested the coefficient of 15 for the developing countries in the Swiss formula. The US wanted a lower coefficient, while Brazil and India appeared to be agreeable to 30.

Among these subjects, the agricultural tariff does not appear to have been the hard bone of contention. Even though France had openly opposed going beyond the offer of 39 percent reduction that EU made earlier in October 2005, the EC Commissioner appears to have sensed the overall mood in the EU countries and offered 51 percent reduction. Perhaps EU might not have found it too difficult to move slightly higher to match the G20 expectation of 54 per cent.

The really hard issues were the other two: domestic subsidy in agriculture in the US and industrial tariff in the developing countries.

In the area of domestic subsidy, the G20 had asked for 70-80 percent reduction in the total TDS in the developed countries. With the levels of the US and EU of respectively US$ 48 billion and Euro 110 billion (year 2000, the last year of notification), the G20’s expectation of the reduced values were respectively US$ 12 billion and Euro 27 billion (after reduction by 70-80 percent,).

Against it, the US and EU offered to reduce the levels to US$ 23 billion and Euro 33 billion. Perhaps there was some indication that the EU might be finally willing to go down to the level suggested by the G20. Hence, the main target in this respect was the US that refused to offer any further reduction.

In respect of the industrial tariff, Brazil-India (members of a coalition of eleven developing countries, commonly called NAMA11) perhaps appeared to be moving towards a coefficient of 25 in the Swiss formula, but the demand from developed countries was for 15.

After the protracted course of negotiations since 2001, passing through various vicissitudes, these differences would not appear to be such as to cause a total break down.

For example, there was a scope for the US to come down slightly lower in its TDS, say US$ 19 billion, which is near its current applied rate. The freedom to raise the green box subsidy and thus neutralise the effect of any reduction in the TDS would have tempered its hesitation. Similarly, considering the current trends in the negotiating positions of Brazil-India, going slightly lower in the coefficient in the Swiss formula in NAMA does not appear impossible.

Indeed, the differences among G6 did not really appear unbridgeable. But the environment was not propitious. Also, the whole exercise had been given a high profile and visibility that partly contributed to the hesitation of the ministers to appear too soft.

With some reflections in the summer and following some informal contact among the main actors, that has already started, it is likely that the corridors of the WTO will not remain quiet very long. And that is the scenerio for which the developing countries must remain fully prepared.

POINTS OF CAUTION:  (1)   Domestic subsidy in agriculture

The developing countries have got some time now to reflect on the implications of the various figures that emerged in the recent negotiations and had some chance of acceptance in the G6. There are grave risks in them.

Let us first take the domestic subsidy in agriculture in the US and EU. Even if the EU reduces its total TDS to Euro 27 billion and the US to, say, US$ 15 billion, will it be an effective safeguard against the possible damage to the developing countries’ farmers due to the subsidised agricultural imports from the US and EU? And will it expand developing countries’ market access in the US and EU?

The answer is a clear “no” because of two factors: (i) the green box subsidy and  (ii) the possible concentration of the reduced total TDS on a limited number of products.

Green Box:  There is a massive escape route for the US and EU through the green box subsidies, i.e., those given under the cover of Annex 2 to the WTO Agreement on Agriculture (AOA).

These are not under discipline so far on the presumption that they are not trade-distorting. But enough evidence is now available to indicate that the green box subsidies can distort production and trade.

These subsidies have wealth effects and also improve the risk-taking tendency of the farmers. They enhance the staying capacity of the farmers in agriculture and support their unviable agricultural production.

Some forms of the green box subsidy cause serious concern, particularly the decoupled income support, insurance against income loss and investment aid, given respectively under paragraphs 6, 7 and 11 of Annex 2 to the AOA. Any amount can be given through these routes without limit, resulting in limitless distortion of production and thereby of trade.

These open and unrestrained provisions have been variously used by the US and EU from year to year. For example, the amount for decoupled income support in the US was US$ 4 billion in 2001 and that for investment aid in the EU was US$ 5.7 billion in 2001-2.

After reducing their total TDS to an agreed level, the US and EU can easily enhance the amount given under these provisions of the green box, thus nullifying the effect of reduction. All they have to do is to make changes in their legislation and that will be entirely their internal process. Thus obtaining a commitment for reduction of total TDS without closing the escape route of the green box can be very much an infructuous exercise.

We have the past experience of the Uruguay Round, where the major developed countries utilised the escape routes in agriculture and textiles. They fulfilled their commitment of reducing their amber box subsidy, but enhanced their total subsidy in agriculture. In textiles.  They fulfilled their obligation of liberalisation in four phases without actually bringing about any effective liberalisation up to the end of 2004.

They used the escape routes that had found their way in the respective agreements. There is no assurance that they will not do the same once again. An effective safeguard can come only by disciplining the criteria of the green box which is already mandated by the July 2004 Framework. G20 has already given some proposals which need being further amplified and specified, as suggested later.

Product concentration of TDS:  The second risk relates to the concentration of the TDS on a limited number of products. The total TDS in the US and EU, even at their reduced levels, can be highly injurious to the developing countries if they are concentrated on a small number of products. It can infuse high competitive strength to the particular products.

Hence it is necessary to prescribe product ceilings for the total TDS. The US and EU have been giving very high subsidies for some products in the past and there will be a natural tendency to prescribe ceilings based on such historical period. This will not be proper as now the objective is to have effective reduction in subsidies.

(2) Industrial tariff (NAMA)

In NAMA, the current figures under consideration for the coefficient in the Swiss formula are: 20-30 for the developing countries and around 10 for the developed countries. Taking 30, i.e., the highest, as coefficient for the developing countries, their average tariff of 28, which is their average tariff, will be reduced to 14, i.e., by 50 percent.

Taking 10 for the developed countries, their tariff of 4, which is their average tariff, will be reduced to 3, i.e., by 25 percent. This will be clearly a reversal of the agreed principle of “less than full reciprocity” for the developing countries and will be extremely unfair.

The Hong Kong Ministerial Conference has decided to use the Swiss formula for tariff reduction in industrial products and now one has to work within this frame. The choice of the coefficient in this formula is crucial in determining the extent of tariff reduction. Hence it is necessary that the choice of coefficients is such that they result in “less than full reciprocity” by the developing countries.

The most appropriate manner in which the principle of “less than full reciprocity” can be followed is by the developing countries opening their market for the developed countries less than the developed countries opening their markets for the developing countries.

One way of achieving it is for the developing countries to effect lesser reduction in their absolute tariff numbers than the developed countries. For example, if the developed countries reduce the tariff from 10 to 4 (thus having a reduction of 6 in absolute tariff number), the developing countries should reduce their tariff from 35 to 31 (thus having a reduction of 4 in absolute tariff number). The respective coefficients in the Swiss Formula for the developed countries and the developing countries could be worked out accordingly.

If the developing countries are more accommodating, “less than full reciprocity” could be accomplished by a differential percentage reduction in tariffs. For example, the developed countries could reduce their tariffs by, say, 60 percent, while the developing countries reduce their tariffs by 40 percent. Again, the respective coefficients could be worked out suitably.

In any case, considering simple numerical parity between the coefficients applicable to the developed countries and the developing countries (for example, 10 for the former and even 30 for the latter) will not be conforming to the agreed principle of “less than full reciprocity”.

SOME SUGGESTIONS:   (1) Domestic subsidy in agriculture

Green box subsidy:  Any agreement for reduction of the total TDS will be ineffectual if there is no discipline on the green box by defining specific criteria.

An effective way to stop green box subsidies from being trade-distorting is to prohibit these payments altogether. If that is not possible, these payments, if otherwise necessary, should be kept at a minimal level in order to make the trade-distortion minimal.

Some criteria for eligibility of the farmers for payments and some ceiling on payment are therefore called for. For example, as an initial step to ensure that the green box subsidies are non-trade-distorting or minimally-trade-distorting, the following criteria may be established.

Payment should be made only to individual farmers. The corporate entities should be totally excluded from such payment.

Even among the individual farmers, there should be some criterion of eligibility that could be based on income, in recognition of the fact that comparatively richer farmers do not need this support. For example, only those farmers having annual income from all sources up to 10 percent of the average annual income in the country should be eligible for the payment.

There should be a ceiling on the amount of annual payment to an individual farmer, say, US$ 5,000 to 10,000.

Product specific ceiling:  In order that the total TDS is not concentrated on a small number of products resulting in high subsidisation of such products, it is necessary to fix product specific ceilings.

As the subsidies on some products have been high in the past and now the objective is to have low subsidy, the past levels of subsidies must not be the basis for fixing ceiling. It will be more rational to fix the product specific ceiling on the basis of a certain percentage of the annual production of the particular product, say 10 percent of production.

           

(2) Industrial tariff (NAMA)

The primary target should not be the coefficients in the Swiss formula, rather it should be the percentage reduction in tariff. Then appropriate coefficients should be worked out in order to have such tariff reduction.

For illustration, let us take an example. A decision may be taken that the developed countries and the developing countries are to reduce their tariff respectively by 60 percent and 40 percent. For such reduction in their respective tariffs of 4 and 30, which are close to their respective averages, the coefficient for the developed countries works out to 2.7 (or 3, after rounding off) and that for the developing countries is 45. 

 

 


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