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TWN Info Service on WTO and Trade Issues (July 07/01)

1 July 2007


Facts behind the figures in post-Potsdam NAMA controversy

In the blame game in the aftermath of the G4 Ministers’ Potsdam meeting, the United States and European Union went on a public-relations offensive to point to Brazil and India as the culprits for not wanting to liberalise their markets to imported industrial products.

But Brazilian Foreign Minister Celso Amorim stressed that the “rate of exchange” was unfair -- that the EU and US gave each other a “comfort zone” in not having to take on any significant obligations in agriculture, while still insisting on very high industrial tariff cuts in developing countries.

A closer analysis of the data on NAMA shows that Amorim was justified in considering the “rate of exchange” to be inequitable. 

Conducting an exercise of applying coefficient 10 on the US and EU, and coefficient 18 on Brazil and India (i.e. the two coefficients that the US and EU reportedly wanted in Potsdam) yields interesting results.

On average the three major developed country members of WTO (US, U, Japan) would have to cut their average bound industrial tariffs by only a very modest of 24%, should a coefficient of 10 apply to them, as they have proposed.

On the other hand, with coefficient 18, Brazil would have to undertake a steep cut by 63% and India by 66%.

This is far above the average cut of 24% that the three major developed country members have to undertake.  It would be the reverse of the “less than full reciprocity” principle that the WTO members agreed upon for NAMA, i.e. that developing countries undertake lesser obligations than developed countries.

It would mean special and differential treatment in reverse, i.e. for developed countries rather than developing countries.

In order for the less than full reciprocity principle to be adhered to, the percentage cut of developing countries have to be less than that of developed countries.  A coefficient of higher than 160 is needed for developing countries on average.

The fact that such a high coefficient of 160 would be laughed off in the present atmosphere of the Doha negotiations reveals the high extent of non-transparency that exists in the NAMA negotiations, in which the confusion and difficulties involving the Swiss formula have clouded the discussion on the obligations members are being asked to undertake.

Please see the full analysis below.  It was published in the SUNS.

With best wishes
Martin Khor
TWN

Published in the South-North Development Monitor (28 June 2007)

Facts behind the figures in post-Potsdam NAMA controversy

By Martin Khor, Geneva 27 June 2007

In the blame game in the aftermath of the G4 Ministers’ Potsdam meeting, the United States and European Union went on a public-relations offensive to point to Brazil and India as the culprits for not wanting to liberalise their markets to imported industrial products.

But Brazilian Foreign Minister Celso Amorim stressed that the “rate of exchange” was unfair -- that the two major developed country members of the WTO wanted to give each other a “comfort zone” in not having to take on any significant obligations in agriculture, while still insisting on very high industrial tariff cuts in developing countries.

A closer analysis of the data on non-agricultural market access (NAMA) shows that Amorim was justified in considering the “rate of exchange” to be inequitable. 

At Potsdam the US offered to lower its maximum overall trade distorting support to $17 billion, which is above the average level of recent years and significantly higher than the reported $11 billion level in 2006.  And the EU reportedly offered to lower its agricultural tariffs by an average 50-51 per cent, but in effect lower if the lenient treatment of its sensitive products is also considered.

However, in return the US and EU asked Brazil and India to accept a coefficient of 18 for developing countries in the Swiss formula to cut tariffs in NAMA, while developed countries would have a 10 coefficient.

It is difficult for ordinary people, as well as most policy makers and diplomats, to understand the meaning or implications (for example in terms of the percentage cut in tariffs) of different coefficients in a Swiss formula for their countries or their tariff lines. Factors to consider include the initial tariffs (which differ from country to country and from product to product), the coefficients used, and the formula itself.

No wonder it is not easy for officials from developing countries, including Amorim and the Indian Commerce Minister Kamal Nath, to explain to the public why they believe the demands being made on them are too onerous.

In the Swiss formula, the higher the initial tariff, the steeper will be the cut required. Thus, the formula is biased against countries with higher tariffs.  In general, developing countries have higher tariffs than developed countries, and thus for the same coefficient they have to undertake greater reductions.

Also, for any given tariff line or average tariff level, the lower the coefficient, the greater will be the cut.       

If we know the average present bound tariffs of various countries, it is possible to calculate the effects of applying various coefficients on them.

Conducting an exercise of applying coefficient 10 on the US and EU, and coefficient 18 on Brazil and India (i.e. the two coefficients that the US and EU reportedly wanted in Potsdam) yields interesting results.

The EU’s average bound industrial tariff is 3.9%.  Applying a coefficient 10 on this would reduce it to 2.8%, indicating a cut by 28%.  The same coefficient 10 applied to the average US tariff of 3.2% would mean a cut by 24% to a new level of 2.4%.   Japan has an average 2.3% tariff and applying a coefficient 10 would cut this to 1.9% or by 19%. 

On average the three major developed country members of WTO would have to cut their average bound industrial tariffs by only a very modest of 24%, should a coefficient of 10 apply to them, as they have proposed.

On the other hand, the average bound industrial tariff of Brazil is 30.8%.  Applying a coefficient of 18 would bring this down to 11.4% -- or a steep cut by 63%.   India has an average tariff of 34.3% and the same coefficient 18 would reduce this average level to 11.8% -- or a cut by 66%.

On average the two developing countries would have to cut their industrial tariffs by an average of 64.5% should a coefficient of 18 apply to them, as demanded by the EU and US.

As the average level of bound industrial tariffs is about 30% for developing countries, a coefficient 18 would imply that developing countries with this average and that are affected by the formula would have to undertake a 63% cut.

This is far above the average cut of 24% that the three major developed country members have to undertake.  It would be the reverse of the “less than full reciprocity” principle that the WTO members agreed upon for NAMA, i.e. that developing countries undertake lesser obligations than developed countries.

It would mean special and differential treatment in reverse, i.e. for developed countries rather than developing countries.

In order for the less than full reciprocity principle to be adhered to, the percentage cut of developing countries have to be less than that of developed countries.  If the proportion is two-thirds, then the developing countries’ cut should on average be 16%, compared to the 24% of the three developed country members.

A country having a present average industrial tariff of 30% would require a coefficient of 160 in order to attain a reduction by 16% of the average tariff to 25%.   Countries that now have an average tariff of more than 30% would require a coefficient of higher than 160 to attain a 16% reduction.

The fact that such a high coefficient of 160 would be laughed off in the present atmosphere of the Doha negotiations reveals the high extent of non-transparency that exists in the NAMA negotiations, in which the confusion and difficulties involving the Swiss formula have clouded the discussion on the obligations members are being asked to undertake.

In previous Rounds, negotiations on industrial tariff cuts were conducted mainly on the basis of percentage reductions. And for agriculture, whether in the Uruguay Round or in the present negotiations, the terms of negotiations have also been in percentage reductions.

It would have been far easier and more transparent to be conducting the NAMA negotiations in the usual terms, i.e. the percentage reductions to be undertaken by various groupings of countries.

The developed countries deliberately have not wanted to compare the demands and offers in NAMA in terms of percentage reduction.  They have also resisted the comparison of the ‘levels of ambition’ between NAMA and agriculture.

This is because the inequities in these developed countries’ NAMA proposal would become so much more evident -- not only within the NAMA outcome but also in comparison with what these countries are offering in agriculture.

For the EU-US NAMA proposal is also imbalanced when compared to agriculture – where the offer of the US in domestic support would be only to cut some water, and the offer of the EU would be to cut their tariffs on average by 50% (and in effect lower than that if the lenient treatment for sensitive products is taken into account).

The double imbalance – first, within NAMA itself; and second, between NAMA and agriculture – is what constitutes part of the “unequal rate of exchange”.

There is an even larger meaning to the unequal exchange on the table. The developing countries should not even be asked to “pay” for the developed countries’ efforts in agriculture, even if these  efforts were genuinely to reduce the distortions (subsidies, tariffs and non-tariff barriers) in their agriculture.

This is because the developed countries already enjoyed decades of a major concession by the developing countries, to exclude agriculture from the GATT rules because the developed countries’ agriculture would not have been able to compete. High agricultural subsidies and quantitative restrictions by developed countries were allowed, while they were banned or highly restricted for industrial goods. 

Then in the Uruguay Round there was a “rate of exchange” (even larger than the one now being negotiated in the Doha talks) contracted between North and South -- that the North agree to return agriculture to the multilateral trade rules, and the South agree to bringing non-trade issues (especially services and intellectual property) under the wing and the rules of the WTO.

It later turned out that so many loopholes had been placed in the Agriculture Agreement that the developed countries did not have to undertake liberalisation when they implemented their Uruguay Round commitments, and were able to impose high tariffs, and were even able to increase their domestic subsidies.

The Uruguay Round agreement itself recognised that its Agriculture Agreement was only a starting point, and mandated that further agriculture negotiations had to be carried out, to continue the “unfinished business” of the Uruguay Round  Thus, further removal of distortions in the developed countries’ agricultural markets was on the agenda of the WTO, and negotiations on this would have taken place whether or not there was the launching of a new Round.

The Uruguay Round significantly did not mandate further negotiations on reducing industrial tariffs.  NAMA was added on to the Doha agenda as an “extra”, mainly on the demand of the developed countries, and despite the objections of several African countries. 

There is thus much justification for the argument that removal of agriculture distortions is the major priority of the Doha work programme, and liberalisation of industrial tariffs is an item that is lower on the agenda, not even mandated or foreseen when the Uruguay Round concluded.

The USTR Susan Schwab and the EU Trade Commissioner Peter Mandelson, in the aftermath of Potsdam, projected the view that Brazil and India were acting in their own selfish interests in not agreeing to a low NAMA coefficient, as most other developing countries want a drastic cut in the emerging markets’ tariffs so that they can sell their industrial products there.

However, on 21 June, the same day of the Potsdam collapse, the G90-Plus (an alliance of the ACP, LDC and Africa Groups plus Bolivia and Venezuela) issued a Development Declaration which clearly spelt out that they were not in favour of proposals that asked developing countries to undertake significant liberalisation in NAMA.

The G90-Plus comprise the majority of developing countries in the WTO, and thus their views can be taken to be more representative of developing countries than those of other groupings.

In a section on NAMA, the Declaration states:  “We insist that the principle of “less than full reciprocity” is fully respected and adhered to in the modalities and the outcome of negotiations.  We will not accept any modalities and outcome of negotiations that will lead to de-industrialisation in developing countries.”

The Declaration supports the flexibilities and special treatment to be accorded to paragraph 6 countries (those with binding coverage of less than 35% of tariff lines), to small and vulnerable economies (SVEs), and to LDCs, as proposed by these groupings. Most paragraph 6 countries, SVEs and LDCs are part of the G90-Plus.

Significantly, however, the Declaration also voiced support for the proposals of the NAMA 11 developing countries, most of which are bigger developing countries (including India, Brazil, Argentina, South Africa, Indonesia), that are not part of the G90-Plus.

The NAMA 11 has proposed that there be at least a 25 point difference between the coefficient for developed countries and the coefficient for developing countries.  For example, if the former is 10, the latter could be 35.

At Potsdam, when Brazil and India indicated that coefficient 18 for developing countries was far too low, and that 30 to 35 was the more reasonable figure to put on the table, the US and EU reportedly angrily rebuked the two developing countries for such ‘ridiculous’ numbers.

 

The two developed countries may not have got what they wanted or expected, but it was disingenuous of them to claim that the smaller and poorer developing countries also wanted Brazil and India (and by implication the developing countries in general) to liberalise by much more.

The G90 Plus Declaration states: “We support the position expressed by the NAMA 11 group of developing countries in TN/MA/W/86 dated 8 June, including the principles of “double proportionality” (less than full reciprocity principle and balance between NAMA and agriculture negotiations) and the need for expanded flexibilities for developing countries.”

Thus, it is misleading for the EU and US to portray India and Brazil (which are members of the the NAMA 11) as having NAMA positions opposite to those of a majority of developing countries.

After the Potsdam failure, on 26 June, 8 developing countries issued a paper that seemingly supported the US-EU case that the developing countries should do more in NAMA.

The paper, ‘Some elements towards a possible middle ground solution in NAMA’, proposed that the developed country coefficient be ‘less than 10’ while the coefficient of developing countries  be ‘between the upper teens and the low twneties.’

The paper also proposed that the brackets around the current figures in the flexibilities for developing countries (in paragraph 8 of the NAMA framework) be removed, indicating an acceptance of the proposed flexibilities (that are still being negotiated).

The proposal is at variance with the NAMA 11 position that there be at least 25 points’ difference between the two coefficients and that the paragraph 8 flexibilities be expanded.

The paper was sponsored by Chile, Colombia, Costa Rica, Hong Kong, Mexico, Peru, Singapore and Thailand.

Several diplomats were of the view that the paper was being issued now with the intention that the Chair of the NAMA negotiations, Ambassador Don Stephenson of Canada, can make use of it to claim that a coefficient of around 20 is the ‘middle ground’ or compromise coefficient since a group of developing countries themselves are asking for it.

However, it would be misleading to claim that coefficient 20 is a ‘middle ground’ when a majority of developing countries have asked either for a 25-point difference between the developed and developing countries’ coefficients (implying coefficient 35 for developing countries if the developed countries’ coefficient is 10) for those that are subjected to the formula, or for far more lenient treatment for developing countries do not fall under the formula undertaking.

“It is interesting to note that the countries sponsoring the paper either have no tariffs or have had their industrial tariffs already reduced to very low levels through bilateral FTAs with the United States,” said Chakravarthi Raghavan, a renowned analyst of multilateral trade negotiations. 

“Thus they may think they can afford to ask that developing countries undertake very steep cuts in their industrial tariffs.

“Or some of them may think they can get some concessions on agriculture from the developed countries in exchange for a lower NAMA coefficient.  But in fact the present agriculture offers from the EU and US are worth very little.  And in any case these developed countries should not be asking anything in return as they did not keep to their Uruguay Round claim of liberalizing their agriculture.”

 


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