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TWN Info Service on WTO and Trade Issues (Feb08/09)

20 Feb 2008


Please see below my initial analysis of the WTO agriculture and NAMA texts issued by the Chairs on Friday 8 Feb.

This was published as an article in SUNS of 12 Feb 2008.

Reproduction requires the permission of SUNS (sunstwn@bluewin.ch).

Regards
Martin Khor
TWN


Published in south-north development monitor SUNS
# 6412  tuesday  12  february  2008
Imbalances widen in the WTO agriculture, NAMA texts
By Martin Khor, 11 Feb 2008

The new "draft modalities" papers by the Chairs of the negotiating groups on agriculture and non-agricultural market access (NAMA) contain practically the same structure and figures in the major aspects of the papers as compared to the earlier drafts issued in July 2007.

As a result, each of the papers retain the same imbalances within it, while the even more significant imbalances between the agriculture and NAMA texts also remain. The imbalances are mainly between the interests of a majority of developing countries that are affected by the liberalization commitments, and the developed country members of the WTO.

Thus, the strong criticisms of many developing countries when the earlier drafts appeared last year can be expected to be made again when the papers are discussed, starting with an agriculture meeting at the end of this week.

In particular, several developing countries are expected to launch an attack on the NAMA paper by Canadian Ambassador, Don Stephenson. With some minor changes, the revised Stephenson text mainly repeats the modalities and figures of his earlier draft, which had attracted a barrage of withering criticism last July and thereafter.

Even ahead of the distribution of the revised NAMA text by Ambassador Stephenson, Argentina, a NAMA-11 member, appears to have sent a letter to the WTO Director-General, warning that the delegation would be in no condition to accept a revised NAMA modalities text, if the revisions did not modify the coefficients and flexibilities reflecting the disparities in the positions of members, and in particular, the Swiss formula coefficients for developed and developing countries with a 25-point gap between the two (see below).

The key modalities - the coefficients for the tariff-reducing Swiss formula for developed and developing countries, and the flexibilities for developing countries affected by the formula - remain essentially the same.

In an early reaction, one prominent developing-country Ambassador, whose country is subjected to the formula, commented that Stephenson has repeated the same mistake he made in his earlier paper by disrespecting the "less than full reciprocity" principle, and asking developing countries to make more tariff cuts than developed countries.

"I don't see how this approach, which has failed in the past, is going to work," he remarked. "The Chair has not taken the criticisms and objections on board in his text, even after months of consultations. So you can expect another round of criticism against his new text."

The agriculture paper by New Zealand's Ambassador Crawford Falconer contains some significant new material on various issues, especially on export competition, the blue box, sensitive products, special products (SPs) and the special safeguard mechanism (SSM) for developing countries.

However, the main items preoccupying the negotiations - the formula and range of figures for reducing domestic support on the one hand and for reducing tariffs on the other - remain mainly the same. The tough negotiations on exactly where the cuts will be within the ranges will have to go on.

The Falconer paper will however draw additional controversy over his new proposals on SPs and SSM - the two instruments that a majority of developing countries have been championing in the G33 to advance their defensive interests on behalf of food security, farmers' livelihoods and rural development.

The draft falls short of the G33 demands on SPs, a set of products which the G33 requests should have zero or little reduction. And in particular, the paper places so many stringent conditions on the use of SSM as to render the instrument of little benefit to those countries that want or need to use it.

The SSM was conceptualized and proposed by the G33 as an instrument that is to allow developing countries to place additional duties above the bound rates when there is an import surge or when falling import prices threaten local products.

In initial responses to the two papers provided privately by several developing-country diplomats, the main concern they have is that the Chair of the NAMA group has stuck to his main figures for the coefficients in the Swiss formula and the flexibilities for developing countries.

Another sign of the negative reaction of developing countries is the criticism made of the NAMA text by the Federation of Indian Chambers of Commerce and Industry (FICCI), which was published by Indian newspapers over the weekend.

FICCI said the new NAMA text again failed to follow the Doha mandate of "less than full reciprocity" in tariff reduction, as it retained the tariff reduction coefficient of 8-9 for developed members and 19-23 for developing countries.

"This set of coefficients, if applied in tariff reduction formula, would result in relatively greater tariff cut for India and other developing members, compared with developed economies like USA and EU," said FICCI Secretary-General, Dr Amit Mitra.

He added that this would be in "complete disregard to the Doha mandate", which has categorically specified that the tariff reduction commitments would be comparatively lower for developing countries.

Dr Mitra also pointed out that the revised draft had not indicated any numbers for flexibilities for developing countries, and stressed that the eventual NAMA outcome must contain adequate flexibilities to take care of the developmental needs and imperatives of India.

The NAMA paper takes the form of a table with two columns. The column on the left provides text on "draft modalities" (covering many aspects including preamble, formula, elements regarding the formula, flexibilities for developing countries subject to the formula and for developing countries with low binding coverage, sectoral negotiations, small and vulnerable economies, LDCs, RAMs (recently acceded members), and non-tariff barriers), while the column on the right contain's "Chairman's Comments" on the items.

Probably the most important detail of the paper is that the Chair retains the two ranges of coefficients that had first been put forward in his July 2007 draft - 8-9 for developed Members and 19-23 for developing Members. Both ranges are placed within brackets.

This proposed set of ranges had led to a storm of criticism last year from the NAMA-11 developing countries (that include South Africa, Argentina, India, Brazil, Venezuela, and Indonesia), supported by several other developing-country groupings including the SVEs, the ACP Group, etc.

The main criticism is that the coefficients violate the "less than full reciprocity" principle as major developed countries are being asked to reduce their NAMA tariffs by less than 30% while developing countries like Brazil, India and Indonesia are asked to cut by over 60% on average. Moreover, a very high "ambition level" is set for developing countries, compared to the ambition level which developed countries have proposed for themselves (and to a large extent endorsed by the Chair) in agriculture.

Stephenson in his Chairman's Comments himself notes that "there is no consensus on the coefficients in the formula", but he claims that "most Members" who will apply the formula have accepted the ranges he proposed as a basis for negotiations. He did not mention that his July 2007 draft had been the subject of intense criticism including through a joint statement of almost all developing-country groupings at the General Council meeting at the end of July 2007.

Stephenson's paper says that WTO members remain divided into three groups (whose membership he did not name): one which wants higher tariff reductions for developing countries and a smaller differential between developed and developing countries; one who proposed ranges very close to his; and the other that wants smaller cuts for developing countries and a greater differential in coefficients (30-35 coefficient for developing countries and a differential of at least 25 points) and who did not accept his ranges as a basis for further negotiation.

The new NAMA draft, like the previous one, says product coverage shall be comprehensive without a priori exclusions, implying that all products are to be subject to the formula cut, including presently unbound tariff lines.

But there is a significant change over the previous draft on the issue of the mark-up to be applied to unbound tariffs to establish the base rates for commencing tariff cuts. The previous draft proposed 20 percentage points, while the present draft puts the figures (20) and (30) within brackets, and in his comment, the Chair favourably notes the Philippines proposal (that the mark-up be 20 points where the unbound rate is greater than half of the coefficient, and 30 points where the unbound rate is equal to or less than half the coefficient).

On flexibilities for developing countries subject to the formula, the Chair's text has removed the figures previously contained in his previous draft. This denotes the lack of agreement on many recent proposals by developing-country groupings and individual developing countries that have asked for greater flexibilities either for themselves or for developing countries in general.

The text in para 7 (a) now reads that developing countries shall be given the following flexibility: (I) applying less than formula cuts for up to [ ] percent of non-agricultural tariff lines provided the cuts are no less than half the formula cuts and these tariff lines do not exceed [ ] percent of total value of non-agricultural imports. Or (ii) keeping tariff lines unbound or not applying tariff cuts for up to [ ] per cent of non agricultural tariff lines provided they do not exceed [ ] percent of total value of non-agricultural imports.

In the previous draft, the figure 10 was placed (without brackets, indicating agreement) in the place where the first two brackets now are, while the figure 5 was in the place where the third and fourth brackets now are.

In his Comments, the Chair notes that increased flexibilities are being requested in several proposals, including a proposal by a group (NAMA-11, though not named by the Chair) to expand the number of tariff lines and removal of trade volume limitations and the ability to use a combination of options (I) and (ii); as well as the separate proposals by SACU, Mercosur, Philippines and Venezuela.

In his previous text, the Chair also proposed that developing countries that do not use the flexibility in para 7 (a) can have an extra 3 points in their coefficient. In the present draft, he has expanded that to 3-5 points, which are placed in brackets; the whole of this proposal is also bracketed.

On flexibilities for developing countries with low binding coverage (i. e. less than 35% of tariff lines are currently bound), the formula shall not apply to these countries, who should instead bind a certain percentage of their tariffs at an average not exceeding 28.5%. In the previous draft, the Chair had put 90 as the percentage of tariffs to be bound; in the present draft, he has changed that to 70-90 placed in brackets.

This is presumably in view of the continued insistence of the relevant 13 countries (which include Kenya, Nigeria, Sri Lanka, Cameroon, Zimbabwe, Ghana, and Cuba) that they are prepared to increase their binding coverage to only 70%.

A significant change has been made on the treatment of small and vulnerable economies. As in the previous draft, they are not subject to the Swiss formula, but are to cut their tariffs to an average level, according to different rates for three categories of countries.

Category (I) are SVEs with a bound tariff average of 50% or above; they shall bind all their NAMA tariffs at an average not exceeding an overall average of [22-32] per cent (this has changed from only 22% in the previous draft).

Category (ii) are SVEs with a bound tariff average of 30-50%; they shall bind all the tariffs at an overall average not exceeding [18-28] per cent (this has changed from only 18% previously).

Category (iii) are SVEs with a bound tariff average of below 30%; they shall bind all the tariffs at an overall average not exceeding [14-20] per cent (previously 14%).

In addition, category (iii) SVEs shall have a line-by-line tariff cut of a minimum of [5- 10] on [90-95] percent of all NAMA tariff lines. In the previous draft, this was to apply to all categories of SVEs.

The Chair also comments that Bolivia (which is an SVE) submitted a proposal that in view of their exceptional economic circumstances, they should be granted the flexibility to preserve their current bound tariff rates, but there was little opportunity to assess their support.

On recently acceded members (RAMs), the Chair's text proposes that RAMs applying the formula shall have a grace period of [2-3] years (previously only 2 years) before starting implementation and an extended implementation period of [2-5] years (previously only 2 years).

The new draft also has some new text on market access for LDCs and on non-reciprocal preferences, and it retains its text on some other sections such as non-tariff barriers and environmental goods.

In the agriculture paper, there are several issues where texts have been fleshed out or new texts are provided, as compared to the July 2007 draft.

These expanded sections include the blue box (in domestic support); tariff escalation, tariff simplification, tariff quota administration, special agricultural safeguard, special products, special safeguard mechanism, treatment of SVEs and RAMs (in market access); texts in annexes on export credits, state trading enterprises, food aid (in the export competition pillar); and a proposed new article on Monitoring and Surveillance (in an annex).

The so-called "headline numbers" in the two crucial areas - overall trade distorting domestic support (OTDS) and the tariff-reduction formula - have been retained. The ranges remain in brackets, and the expectation among WTO members is that the choice of the ultimate numbers will be political and will be taken at the "horizontal process" and probably by a group of Ministers, in a "Mini-Ministerial" that may or may not be held (depending on whether there are sufficient grounds for such a meeting).

On the OTDS, the key ranges that remain are the following:

-- In category (b) where the OTDS base level is $10-60 billion, the reduction shall be [66-73] per cent. The US, whose OTDS base level is $48.2 billion, falls in this category. After the cut, its maximum bound OTDS is estimated in the range of $13-16.4 billion.

-- In category (a) where the OTDS base level is over $60 billion, the reduction shall be [75-85] per cent. The EU, whose OTDS base level is Euro 110 billion, falls in this category. After the cut, its maximum bound OTDS is estimated to be in the range of Euro 16.5-27.6 billion.

A wide range of developing countries are demanding that the US agree to accept a maximum OTDS "in the low teens" (recently taken to be $13 billion) because in the past one or two years its actual or applied OTDS level had reportedly been around $11 billion. The US has indicated that it can live with the range of $13-16.4 billion.

As for the EU, there are projections that its planned actual OTDS would be Euro 26.8 billion in 2008. And an estimate by the G20 is that by 2014 the EU had planned for an OTDS level of Euro 12 billion in 2014 at the end of its CAP reform. This would also be around the same year the Doha implementation period ends, if the Round were to conclude in 2008 or 2009. Thus, given these estimates, the EU could comfortably accept the lower end of the Chair's range (i. e. a cut of 75% in its OTDS).

Moreover, the US and EU have increasingly taken recourse to the "Green Box support", which has no limits attached nor adequate disciplines. Recent studies have shown how trade-distorting these "non trade distorting" subsidies really are. The Green Box constitutes a huge escape route by which the developed countries can continue to maintain or even expand their domestic support, while showing a reduction in OTDS and claiming that the domestic subsidy level has dropped.

The latest agriculture text has included a few new paragraphs to amend the section of the Agreement on Agriculture that deals with the Green Box, but these amendments are mainly to expand the use of the Green Box for developing countries. They do not impose limits to the levels in developed countries, and they are inadequate in terms of disciplines to plug the "escape route."

In other words, there would be little or no "pain" for the two major developed country members, even if the most ambitious end of the Chair's range for OTDS cuts are accepted. Yet the two majors have been holding back, and insisting that the developing countries have to make heavy concessions, particularly in NAMA, services as well as agriculture market access.

On the tariff formula, the tariff bands and reduction ranges remain the same in this paper as compared to the July 2007 draft. What is new however is a new para (63) that imposes a minimum average cut of [54] per cent that developed country Members shall be required to undertake.

For developing countries, there was a maximum overall average tariff cut, which was in the range of 36-40 per cent in the previous draft. The present draft makes it only 36%, still in brackets.

The G20 and other developing countries had criticized the July 2007 draft for being more lenient on developed countries and too strict on developing countries, in terms of the formula, and in comparison with the proposals of the developing country groupings, including the G20's own formula which it says is the "middle ground." It remains to be seen if the G20 will retain this criticism.

There is a change in the wording of the treatment of SVEs in relation to tariff reduction. The previous draft is rather confusing on this. Its para 52 says SVEs will be entitled to moderate the tariff cuts by developing countries (in the tiered formula) by a further [10] points in each band. Should application of this formula result in an overall average cut higher than [24] percent, the SVE can apply lesser reductions at its discretion to keep within such an average level.

And its para 53 states that where an SVE has ceiling bindings or homogeneous low bindings and application of the above approach still places an "unsustainable burden" upon it, the member "shall not be required to make a tiered reduction but would be subject only to the overall average reduction."

Given these paragraphs, many SVEs and other countries eligible for this treatment, have taken them to mean that they can choose to opt out of the formula and take the "overall average 24% cut" approach.

In the new paper, this treatment for SVEs has been split into two different sections of the paper. Under the section on tiered formula, para 66 states that SVEs (and others eligible) shall be entitled to moderate the cuts (in the formula) by a further [10] percentage points in each band.

And in another section, on special products, para 124 states that SVEs can choose to apply moderated tariff formula in para 66, plus the special product entitlement.

"Alternatively, they may simply deviate from the tiered formula cut for as many tariff lines as they choose to designate as a Special Product provided that they meet the overall average cut of 24 per cent." The tariff lines they designate as SPs need not be subject to any minimum tariff cut and this designation need not be guided by the SPs indicators.

The above treatment for SPs in the two sections still cause confusion in reading the texts. Clarification of how these options will work in practice can be expected to be a significant part of the consultations ahead.

The paper's sections on Special Products and Special Safeguard Mechanism are bound to be the subject of considerable controversy in the days and weeks ahead.

On SPs, para 123 states that developing countries shall be entitled to self-designate Special Products guided by indicators based on the criteria of food security, livelihood security and rural development. There shall be a minimum entitlement of 8 per cent, and a maximum entitlement of [12] [20] per cent, of tariff lines available for self-designation as Special Products. Under this provision, there is an entitlement to [6] per cent of tariff lines which shall take a tariff cut of [8] [15] per cent. A further [6] per cent is available with a cut of [12] [25] per cent. [[A further] [8 per cent of] [no] tariff lines shall be eligible for no cut.]

A footnote 15 also states that where a member finds it would not (after guidance by indicators) be entitled to any additional SPs beyond the minimum, that member may in effect "transfer" any unused Sensitive Products entitlement to obtain additional Special Products, subject to two conditions that are specified.

On Special Safeguard Mechanism, the paper imposes many restrictive conditions for its use. It would seem the Chair has joined those WTO members that really do not like the SSM and that would like to have so many conditions and limitations that would severely reduce its effectiveness.

Among the restrictions are that the price trigger for the price is very problematic as the price has to drop by 30% before the trigger can be activated and the SSM can be applied.

The treatment is very restrictive. First, it does not allow full offset (to enable the depressed import price to be raised to the trigger price). Second, the additional SSM duty must be such that it must not exceed the pre-Doha tariff rates (i. e. those set during the Uruguay Round). Further, it even has a bracketed option that the new SMS duty can only go half way between the pre-Doha and the Doha bound rate.

Also, the SSM can be used on only 4 to 8 tariff lines at 6 digit level (para 126 and footnote 16) in any one year. Some important products have many tariff lines attached to it (eg rice). So it may not even cover a single product. Moreover, the SSM will be in force for only the Doha Round implementation period.

All these restrictions make the SSM instrument very difficult to use or when used to have any significant effect, thus contradicting the objective of establishing this instrument. The G33 and its members who have championed the SSM can be expected to fight against this part of the text.

Meanwhile, the letter submitted to Mr. Pascal Lamy, the WTO Director-General, on 8 February and copied by Argentina to over 30 other delegations (including some of the key demandeurs), appears to have been widely shared among many developing country delegations, and so to say became the talk of the town last Friday.

The letter is in Spanish. A copy seen by SUNS showed, in unofficial translation, that Argentina had drawn attention to the fact that after the submission of the first version of NAMA modalities on 17 July 2007, many members including Argentina had been forced to reject its terms due to the fact that the coefficients and flexibilities in that draft did not properly reflect the disparities in the positions of members.

Specifically, complained the Argentine letter, the 17 July text left aside the requirements of an important group of developing countries, the NAMA-11, as well as the legitimate needs of the Small and Vulnerable Economies and of the Recently Acceded Members. Naturally, this had impaired the negotiating capacity of such members for the subsequent stages of the negotiations.

"Under the current circumstances, Argentina is compelled to warn that it will be in no condition to accept a revised version of NAMA Modalities, if these misrepresentations are not duly rectified.

"Particularly, a revision is demanded to include Swiss formula coefficients for developed and developing countries with a 25-point gap according to what was proposed by NAMA-11, as well as wider flexibilities, in line with those considered in the negotiations on Agriculture."

The letter added that such a revision will respond not only to the need of equity in the negotiating process, but also to the compliance with the principle of less than full reciprocity established in the Doha Mandate, and the objective of a comparably high level of ambition in market access in Agriculture and NAMA as set forth in paragraph 24 of the Hong Kong Ministerial Declaration.

While reassuring its commitment to reach a result out of the negotiations based on the previous principles, the letter added: "Argentina demands that the documents to be submitted effectively contribute to the consensus building process, aware of the fact that special efforts will be required from developed countries so as to comply with the Mandate and the development dimension of the Doha Round." +

 


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