TWN Info Service on WTO and Trade Issues (July 07/10)

20 July 2007

Developing countries upset with modality papers

Published in SUNS #6296 dated 19 July 2007

By Martin Khor (TWN): Geneva, 18 July 2007

Several developing country diplomats have expressed dissatisfaction and even dismay at the modality papers that were issued yesterday by the Chairs of the agriculture and non-agriculture market access (NAMA) negotiations at the World Trade Organisation.

The diplomats, from a range of developing countries, were particularly angry about the comments and biases in the substance of the NAMA paper authored by Ambassador Don Stephenson of Canada.

"We are shocked beyond words by the treatment given to developing countries, and cannot even comment on the NAMA paper right now," said a WTO delegate from a small developing country.

Diplomats, especially from the ACP and African Groups, were also disappointed that the agriculture paper of Ambassador Crawford Falconer of New Zealand had only dealt in detail with certain issues (subsidies and tariff reduction), while not providing modalities for many issues that are of major concern to a majority of developing countries (including special products, special safeguard mechanism, tropical and diversification products, tariff escalation and commodities).

"The agriculture paper contains only partial modalities, and not the full modalities that we have continuously called for," said a leading ACP Group diplomat. "There is thus the danger if the paper is accepted that negotiations will focus and finish on the two issues of subsidies and tariffs, while neglecting our issues which will then be dropped at the end on the excuse that there is no consensus on them."

In a paper presented to Falconer last week, the ACP Group had emphasised that "all issues in the negotiations must be addressed in a balanced and equitable manner and that all modalities and solutions for all issues must be considered and settled simultaneously. The concept of partial modalities' is therefore not acceptable to the Group."

The biggest talking point among developing country delegations since the papers were issued on Tuesday afternoon was the bias in commentary and actual set of modalities in the NAMA paper. "It is totally unacceptable and must be rejected," said a diplomat from one of the countries in the NAMA 11 group.

An initial reading of the paper would support the view of those developing countries who find it biased.

In his introduction, the Chair states that "the mandate directs us to give special attention to the needs of developing countries." However, as pointed out by one diplomat, the paper goes on to do the opposite.

Two of the mandates that developing countries have stressed must be fulfilled is "less than full reciprocity (LTFR) in reduction commitments" (paragraph 16 of the Doha Declaration) and proportionality between the ambition levels in NAMA and agriculture (paragraph 24 of the Hong Kong Declaration).

Stephenson claimed in his Introduction and at a press conference on Tuesday that his paper has fulfilled both principles. But this is disputed by the diplomats and by his own modalities.

He takes the stand that it is hard to assess whether LTFR has been achieved since members' positions are very polarised and there has "never been an agreed definition of reciprocity." With the differences, and "taking all elements into consideration", he states that "I am confident that my proposed modalities satisfy the requirement for less than full reciprocity in reduction commitments."

However, it instead fails the test of the most common-sense and widely used meaning of the term, i. e. that developing countries have to undertake lower percentage cuts in tariff reduction than developed countries.

The Chair's proposed coefficients (in the Swiss formula) are 8 or 9 for developed countries and 18-23 for developing countries.

Using, for example, the 8 coefficient, this translates into a 33% cut in average tariff for the EU (from average tariff of 3.9% to 2.6%), a 29% cut for the US (from 3.2% to 2.2%) and a 22% cut for Japan (from 2.3% to 1.7%).

On average, the three giant developed-country members of the WTO would have to undertake a cut in average NAMA tariffs of only 28%.

On the other hand, if a coefficient of 20 (mid-way between 18 and 23) is used for a developing country like Brazil with an average tariff of 30.8%, there would be a cut in average tariff of 61% (from 30.8% to 12.1%). For India, with average tariff of 34.3%, the cut would be 63% (from 34.3% to 12.6%). For Indonesia, with an average tariff of 36%, the cut would be 64% (from 36% to 12.9%).

Those developing countries which have higher average tariffs would have to undertake even steeper percentage reductions.

In other words, the range of coefficients proposed by the Chair would result in many developing countries having to reduce their industrial tariffs by more than twice the reduction rates of the major developed countries.

This is a clear and gross violation of the LTFR principle. An attempt by the Chair to explain this away through the complexities of definitions is not likely to succeed.

On the formula, the Chair states (in para 15) that there is an "almost unanimous view" that a simple Swiss formula with two coefficients should be adopted. He adds that "recent proposals to supplement or replace the Swiss formula with a linear cut or average cut in order to facilitate convergence on the formula were greeted with considerable concern by most Members - developed and developing - who view the Swiss formula as the principle achievement of the NAMA mandate."

It is non-transparent and unwise for the Chair to claim near unanimity and attribute these views to "most members", unless an objective vote has been taken.

What is known is that many developing countries are so unhappy with the Swiss formula and so afraid of its de-industrialising effects that they have attempted to escape from it by asking to be excluded from its application.

These countries include not only the LDCs but also the countries with low bindings, and small and vulnerable economies.

The G90 countries at a Ministerial meeting in July 2004 had protested against the Swiss formula for its ability to wreck de-industrialisation onto their economies, and protested against the then NAMA Chair, the Ambassador of Iceland, for insisting on including it in his July Framework draft. However, despite these protests, the "non linear formula" (which later became the Swiss formula) became the centrepiece of the July 2004 framework.

The Chair is thus wrong to claim that most Members view the Swiss formula as the "principle achievement" of the NAMA mandate. It may of course be true that the developed countries see the Swiss formula as the crowning achievement, for them, not only of NAMA but also of the whole Doha negotiations to date.

The NAMA 11 countries in their June paper have justifiably asked that the coefficients chosen for developed and developing countries must be such that they put into effect the LTFR principle, that developing countries undertake lower tariff reductions than developed countries.

Far from the NAMA 11 position being isolated, it is supported by the majority of developing countries, grouped in the G90 Plus. In their Declaration on Development Concerns (WTO document WT/L/687 dated 12 July), the G90 Plus said: "We support the position expressed by the NAMA 11", including the principles of double proportionality (LTFR and balance between NAMA and agriculture negotiations) and the need for expanded flexibilities for developing countries.

It is thus quite incredible that the NAMA Chair can claim "near unanimity" and the support of "most members" for his views.

On flexibilities for some developing countries, the paper produces modalities for small and vulnerable economies (SVEs) that have generated more than disappointment with the SVE diplomats.

The Chair's proposal is that the SVEs not use the formula but cut their average tariff to 14%, 18% or 22% depending on which tier they are in (i. e. countries with present average bound tariff of below 30%, 30-50% or above 50% respectively).

Several diplomats from SVE countries say that this is far too steep a cut for their countries to endure, and they are worried about the de-industrialisation effects.

The countries with present bindings of less than 35% are also unhappy that the Chair's modality proposes that they bind 90% of their tariff lines at an average of 28.5% or less. These "para 6 countries" have asked for 70% binding.

On the principle of balance between NAMA and agriculture modalities, the Chair says that the ambition in his text is consistent with the agriculture outcome, which remains a moving target. He admits that some Members may disagree and find the agriculture offer insufficient. In this case, the Members should focus to improve the ambition "elsewhere rather than reducing it for all in NAMA."

This appears to be shifting responsibility for any calibration or alignment to agriculture, with the Chair insisting that his modalities should remain intact. Having failed the first test (LTFR within NAMA), he is about to fail the second test (balance between NAMA and agriculture).

The agriculture draft modalities themselves have, in the view of some developing country diplomats and some trade analysts, given "comfort" to the major developed countries, while not satisfying the offensive or defensive demands of developing countries.

The paper's figures on overall trade distorting support (OTDS) implies that the US will have a bound level of $13 to 16.4 billion. This is above the present level of $11 billion for 2006, thus providing considerable "water" for increases. It also compares with the G20 proposal of $12 billion and the African Group proposal of $10-12 billion.

The OTDS level for the EU is implied at 16.6-27.6 billion Euro. This compares with the G20's estimation that at the end of the CAP reform in 2014, the EU's OTDS level is scheduled to drop to 12 billion Euro. Thus, the proposed level is also comfortable for the EU, with "water" to spare.

On the reform of the Green Box, the Chair has taken on board several suggestions for expanding its use for developing countries. But on the crucial issue of placing more effective disciplines on developed countries, there are hardly any amendments proposed by the Chair.

This opens the road to continuing "box shifting", whereby the developed countries can maintain high domestic subsidies by shifting from the categories (Amber, Blue and de minimis) where there are maximum limits placed, to the Green Box whose subsidies are supposed to be non or minimally trade distorting and thus have no limits.

On the tariff reduction formula, the Chair has made use of the G20's thresholds for the tiers. However, the cuts proposed are more lenient than those suggested by the G20 with respect to the developed countries - but more strict than the G20 figures for the developing countries, who thus have to cut by more.

This is also symbolized by Falconer's proposal that developing countries will have a maximum average reduction of 36-40%. This is higher than the G20 proposal of a maximum of 36%, and far higher than the ACP and African Group proposals of a maximum 24% for developing countries.

It is also far higher than the 24% average reduction that developing countries were obliged to undertake under the Uruguay Round. Thus, they have to pay a higher price in this Doha Round - while hardly obtaining any benefits in agriculture in exchange. And on top of this, they also have to pay a very high price in NAMA.

There is also disappointing news for LDCs. In his Challenge paper, issued weeks ago, Falconer proposed that developed countries which could not fulfill the commitment to give duty and quota free market access to LDCs for all products (and could thus exclude up to 3%) could be asked to implement this remaining 3% of their commitment by the end of the implementation period of the Round.

However, the modality paper pointedly does not include this suggestion.

Another major criticism that the agriculture paper is already attracting from many developing countries is that it focuses on subsidies and tariff cuts but leaves out key issues of developing countries.

It thus contains partial modalities (only the two parts of the "triangle of issues" that the WTO Director General Pascal Lamy has been claiming is key to the Round) but not full modalities.

The draft has not finalized modalities on the following issues - tariff escalation, commodities, Special Products (SPs), Special Safeguard Mechanism (SSM), tropical and diversification products, and preference erosion.

The Chair says that there is not sufficient agreement yet on them. The countries that consider these to be priority issues fear that they will eventually drop off the agenda, if they are not settled at the same time as the other issues.

On Special Products, the draft places many conditions on indicators and their use: (1) There must be quantification of concepts such as "significant proportion"; (2) The data must be open to verification - with data that is international or national, but in a form accessible to all members.

This runs the risk of the selection of special products being "directed by" rather than "guided by" the indicators. The mandate is that countries can self-designate SPs, to be guided by indicators.

On the number of indicators, the Chair gives two options: (1) that there be no specified number of SPs that a country can choose; (2) that a number is provided, as a certain minimum percentage, whatever number of products is thrown up by the use of the indicators. This big issue will thus be subjected to negotiations.

On SSM, the Chair repeats his Challenge paper notion that its use is for "special" circumstances. This is counter to the historical evolution of the use of the word "special" and the need for special safeguard for agriculture.

"Special" in the existing special safeguard (SSG) refers to the special circumstances in agriculture (for example, that there are many producers, and it is difficult to identify the source of injury) which thus require this sector to have special safeguard rules as the normal safeguard rules are not suitable.

As a result, the paper imposes onerous conditions for use and treatment of the SSM. For example:

-- Para 100 restricts its use only to domestically produced products and substitutes.

-- Para 103 says that the SSM cannot be used "scores or hundreds of times". There is no such restriction in the present SSG.

-- Para 104 says that it cannot be used in normal circumstances such as normal fluctuations (of prices, volume).

-- Para 109 says that the duty cannot be increased above the Uruguay Round bound rates. This is very restrictive and will impair the usefulness of SSM.

There is no ground for this argument as neither the existing normal safeguard agreement nor the SSG has such a condition.

The Chair says in Para 105 that the SSM must not be complicated or burdensome for developing countries to use, but the above points in fact make it difficult to use.