TWN Info Service on WTO and Trade issues (Feb08/08)

11 Feb 2008

Attached please find my paper on the unequal exchange of the Doha Round (mainly on the "rate of exchange" between  agriculture and NAMA, and also between North and South).

It was presented at the UNDP-TWN workshop on trade policy held in Penang in Dec 2007.

I hope you find it useful

Best wishes
Martin Khor

By Martin Khor, Third World Network  (17 December 2007)

In the continuing impasse in the Doha negotiations, there is a continuous stream of statements from the developed countries, particularly the United States and European Union, attempting to put pressure on the developing countries by blaming them for not  being cooperative, or for attempting to “wreck the Round”, or even for being like teenagers at an exclusive adult dinner and not knowing how to behave.

It is a repeat of the blame game that took place at the failed G4 Ministers' Potsdam meeting in June 2007 when the US and EU United States pointed to Brazil and India as the culprits for not wanting to liberalise their markets to imported industrial products.

But the Brazilian Foreign Minister Celso Amorim stressed then 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.

Since then the modalities draft papers of the Chairs of the agriculture and NAMA negotiations have been issued in July and intense talks have proceeded in September to December 2007. 

An analysis of the proposed modalities in the papers, and in the proposals of the US and Japan shows that the "rate of exchange" is still unequal, and is becoming even more so.

The agriculture modalities draft (July 2007) proposes that the US reduce its allowed overall trade distorting support to a range of $13-16.4 billion.  The US has indicated it can consider the upper part of that range (which is close to the $17 billion it had already offered in Potsdam).

This is significantly higher than the reported $11 billion level in 2006.  So there is a lot of “water” between the allowed and the actual level of OTDS.

The US has explained that if the OTDS level the US was offering had been applied in the last nine years, it would have led to real cuts in 5 to 7 of those years. What the USTR said is only partially true. In 5 recent years the United States' applied OTDS level was above $17 billion (1999, 2000, 2001, 2004 and 2005).

But the US did not reveal that at the start of the implementation period of the Uruguay Round, the OTDS level was very much below - at $7 billion. The agriculture domestic support simulations paper (JOB(06)/151 dated 22 May 2006) prepared by Canada shows that the applied OTDS of the US was $7.7 bil in 1995, $7.1 bil in 1996, and $7 bil in 1997. It then shot to $15.1 bil in 1998, $24.3bil in 1999, $24.1 bil in 2000, $14.9 bil in 2000, $10.2 bil in 2003, $18.6 bil in 2004 and $19.7 bil in 2005.

Thus, an offer of a cap at $17 bil or at $16 billion or even at $13 billion does not reflect a decrease especially when compared to the 1995-1997 levels of a decade ago, and also allows for a large amount of "water" if the 2006 level was $11 bil.

As` for the EU, the Chair’s text proposes that its allowed OTDS be reduced by 75-85 per cent to the range of Euro 16.5 – 27.6  bil.     The EU had offered a level of allowed OTDS of Euro 33 billion.  But this is far above what it had already planned in its CAP reform, under which the actual OTDS would be Euro 26.8 billion in 2008 and Euro 12 billion in 2014.

In September 2007, at a Room E (Green Room) agriculture meeting, the EU indicated it would retain its position of offering to cut by 10 percentage points more than the US.  The EU expected that this meant it had to cut by at most 80%, or to a level of allowed OTDS of Euro 22 billion.

This is still far higher than the expected Euro 12 billion in 2014, when the implementation period of the Doha commitments could end (i.e. if the Round completes in 2008).  There is still a lot of “water” for comfort.

The EU like the US are shifting from the amber and blue boxes to the Green box, where there are no limits and where the disciplines are lax enough to allow trade-distorting support to take place even though the Green Box is supposed to be not trade distortive or minimally trade distortive, as recent studies have shown (UNCTAD-India 2006; Marita Wiggerthale 2007).  In effect, the reductions in allowed OTDS or even in applied OTDS do not mean much or anything if the subsidies continue in another form, and enable production and exports to be maintained or to grow.

However, in return, the US and EU have asked the developing countries that come under the Swiss formula for tariff reduction to accept a coefficient of 18, while the developed countries would have a 10 coefficient. 

This proposal has been echoed by the Chair of the NAMA negotiations which proposed a coefficient of 8-9 for developed countries and 19-23 for developing countries.

It is difficult for most people 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 a coefficient 8 on the US and EU, and coefficient 20 on developing countries shows interesting results.

The EU's average bound industrial tariff is 3.9%. Applying a coefficient 8 on this would reduce it to 2.6%, indicating a cut by 33%. The same coefficient 8 applied to the average US tariff of 3.2% would mean a cut by 29% to a new level of 2.2%. Japan has an average 2.3% tariff and applying a coefficient 8 would cut this to 1.7% or by 22%.

On average, the three major developed country members of the WTO would have to cut their average bound industrial tariffs by only a very modest 28%, should a coefficient of 8 apply to them.

On the other hand, if a coefficient of 20 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%).

The average cut for these countries is 61-64%.  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 Less Than Full Reciprocity (LTFR) principle (i.e. that developing counties undertake lesser obligations. An attempt by the Chair to explain this away through the complexities of definitions has not succeeded.  The draft has been very strongly criticized by a majority of developing countries.

The Chair’s proposal 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 19.4%, compared to the 28% of the three developed country members.

A country having a present average industrial tariff of 35% would require a coefficient of 140 in order to attain a reduction by 20% of the average tariff to 28%. Countries that now have an average tariff of more than 35% would require a coefficient of higher than 140 to attain a 20% reduction.

The fact that such a high coefficient of 140 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 that 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 within the NAMA outcome but also in comparison with what these countries are offering in agriculture.

The EU-US NAMA proposal and the Chair’s July 2007 text are 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 in the 1950s 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, intellectual property and investment measures) 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, eight 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 twenties."

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).

It would appear that the Chair of the NAMA negotiations took on board the proposals of this group.

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.

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.

Meanwhile in the services negotiations, the developed countries have pressed to have a “services text”, even though Annex C on services in the Hong Kong Ministerial Declaration already services as a modalities text, together with the earlier Guidelines on Services Negotiations. 

And the US in mid-November 2007 proposed that services market access ambition must be comparable to the ambition in agriculture and NAMA.  Most developing countries argue that agriculture is the leading factor driving the Round, with NAMA to follow, and services only a third factor, at least in terms of sequencing. The US paper is an outright attempt to put services on the same basis as agriculture and NAMA.

In its key operational demands, the US paper also asks that a services text sets  "guidelines instructing Members" to positively respond to bilateral and

plurilateral requests with a view to achieve higher liberalization, and reducing or eliminating adverse effects on services trade as a means to provide effective market access by offering commitments to: (a) reflect current levels of market access and national treatment; and (b) provide new market access in sectors where trade impediments remain.

At an informal services meeting on 15 November, Brazil made a lengthy and detailed criticizing the US proposal.

In contrast, ten developing countries (India, China, Brazil, Philippines, Thailand, South Africa, Indonesia, Pakistan, Argentina, and Morocco) in fact issued a document Room setting out their "possible elements of a services text",  which mainly reaffirmed Annex C and the GATS development flexibilities, while asking that improved and significant commitments in sectors and modes of interest to developing countries be reaffirmed.

Most developing countries remain skeptical and reluctant to have a text, while several developing countries such as Venezuela and Bolivia have made clear that they oppose any text at all. But in the past week, even those countries that had agreed to go along have become upset at the way the developed countries have aggressively upgraded their demands on the developing countries.

Thus, in exchange for doing something in agriculture which does not amount to anything significant, the developing countries are asked to pay the heavy price in agriculture itself (as some developing countries are asked to cut their tariffs through a formula that results in more drastic cuts than in the Uruguay Round);  in industry through NAMA;  and in services.

"In fact, the present agriculture offers from the EU and US are really worth nothing,” according to Chrakarvarthi Raghavan, a renowned analyst of the WTO negotiations.   “And in any case, developing countries have paid a price thrice over in advance in return for the promises and commitments of the developed countries that they would reverse course in agriculture and carry out a reform programme; the developed countries should not be asking anything in return. In agriculture, they have in fact been regressing since Marrakesh."