TWN Info Service on Trade and WTO Issues (July08/44)
28 July 2008
Third World Network

Trade: How anti-concentration clause will harm South's industries
Published in SUNS #6526 dated 28 July 2008

Geneva, 24 July (Sanya Smith) -- Trade union leaders as well as heads of industries in developing countries have come out strongly at the WTO this week against the proposals on "anti-concentration" by developed countries and the Chair in the negotiations on non agricultural market access (NAMA).

They have demanded the removal of the anti-concentration provision in the Chair's NAMA text, and called on developed countries to drop their insistence on having this clause as part of a NAMA deal.

The International Trade Union Confederation has issued a paper showing how developing countries' industries would be damaged in at least three ways by such an anti-concentration clause:

* First, the development of the value chain in an industry would be curbed;

* Secondly, there would be a "substitution effect" in which even protected local products would lose out; and

* Thirdly, local firms that lose out on some of their products will also lose overall competitiveness because they have fixed overhead costs.

Many developing countries have been strongly against having an anti-concentration clause in the outcome of this week's negotiations on NAMA. They are particularly angry that this issue has only emerged in the past month or so, and yet it has been included in the Chair's 10 July text, which makes it easy for the developed countries to insist on it.

The fight over anti-concentration is one of the main sticking points in the negotiations in the Green Room and now in the G7 process this week at the WTO.

The anti-concentration provision is in paragraph 7(d) and only applies to those developing countries which are subject to the Swiss formula cuts on their tariffs. The paragraph is not bracketed, despite objections from developing countries. It says that at least [...] percent of national tariff lines or [...] percent of the value of imports of the Member in each HS chapter must be subject to full formula cuts (i. e. flexibilities cannot be used).

If this anti-concentration provision is accepted, it would mean that developing countries could not protect an entire industry, or even significant parts of a sector, from the application of the Swiss formula, which will cut tariffs in developing countries very steeply.

The inability of developing countries to protect its existing industries (or to shelter future industries) from full formula tariff cuts will give developed countries' firms more market access to developing countries since the firms and industries of the latter would be unable to be shielded from the deep tariff cuts of the formula. It is understood that Germany is particularly insistent on the anti-concentration clause in order to promote the interests of its car manufacturing industry.

The anti-concentration provision only arose in the last version of the NAMA text. The existing mandate (established in the Hong Kong Ministerial Declaration) only specifies that whole chapters cannot be excluded, but this could be satisfied by allowing one tariff line in a chapter to be cut.

By contrast, the EU, backed by some other developed countries, has proposed that at least 50 per cent of tariff lines in a HS chapter (or a sector) must be subject to full Swiss formula cuts. In other words, flexibilities can only be applied to 50% or less of tariff lines in a HS chapter.

According to the International Trade Union Confederation, the biggest trade union grouping in the world, there are three main ways that the anti-concentration clause undermines the ability of developing countries to protect sensitive sectors and maximize employment levels.

Firstly, in order to industrialise, developing countries need industries that have forward and backward linkages to the rest of the economy. Automotive manufacturing is one example where stimulating the production of parts locally generates employment, important skills and work for small and medium enterprises.

Because of this, many developing countries such as South Africa and Malaysia protect strategic and sensitive industries such as automotive manufacturing which are also important for employment.

If the anti-concentration clause is agreed to, only some of the value chain for industries such as clothing and automotive manufacturing could be protected.

Rudi Dicks, labour market policy coordinator at the Congress of South African Trade Unions (COSATU) said: "The anti-concentration clause sneaked in by the Chair takes away any hope of concluding an agreement on NAMA. With the limited flexibilities already in the text, anti-concentration would increase the devastation on jobs."

Secondly, substitution effects due to the anti-concentration clause may even harm those industries that are protected (for example by the use of flexibilities). COSATU gave the example of the textile and garment industry, in which various products such as cotton shirts and polyester shirts are produced.

These two types of shirts which use different fabric materials are substitutes for each other. If the developing country can only protect the manufacture of polyester shirts (but not these plus cotton shirts due to the anti-concentration clause), then tariffs on cotton shirts will be cut by the formula amount, so cheaper imported cotton shirts will enter the market.

Price conscious consumers will buy the cheaper cotton shirts which would mean that domestic polyester shirt manufacturers will lose market share, even though they are protected.

This also applies to fish products which are also subject to the NAMA Swiss formula. 200 million people indirectly make a living from fisheries in South East Asia. If the entire fish HS chapters cannot be excluded because of the anti-concentration clause, substitution effects may threaten these livelihoods.

Thirdly, the anti-concentration clause may make it harder to compete due to fixed overhead costs. Many companies produce a variety of products (for example tinned tuna and sardines) and they have fixed overhead costs (such as rent or mortgage payments on land).

If only half of their production can be protected by tariffs due to an anti-concentration clause, then production of the unprotected half which cannot compete is likely to stop. This may make the factory under-utilised.

Since their overhead costs are fixed, the competitiveness of the remaining half of their production is reduced, as the average costs would rise significantly. This could cause the company to lose a significant part of its business or even to close.

In a briefing note explaining the above three ways in which an anti-concentration clause adversely affects developing countries, the ITUC said: "The clause reduces the flexibilities of developing countries and their freedom to identify which sectors and products are sensitive and need protection. Such sectors are often sensitive to imports and are labour intensive, meaning that the anti-concentration clause could result in significant job losses as well as undermine long term industrial policies."

The ITUC added that on the other hand in Agriculture, developed countries are allowed to identify many sensitive products (to be shielded from full formula cuts) without being restricted by an anti-concentration clause. "Therefore developed countries get the flexibility they need but developing countries do not."

It concluded that the anti-concentration proposal in effect removes the flexibilities in the NAMA modalities and further erodes policy space for developing countries. It advocated that "exclusions from flexibilities should be left to developing countries; which should be able to formulate policies regarding sectors, without having these imposed by the NAMA negotiations and outcome."

Local manufacturers in developing countries have expressed their concern about the anti-concentration clause. Peak industry associations such as the Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce and Industry have demanded that the clause be deleted.

"Indian industry is completely opposed to any caveats on flexibilities. The present text does not reflect development imperatives of developing countries and therefore should be dropped," CII Director General Chandrajit Banerjee said.

The main industry groupings of Argentina, India and South Africa have also issued a joint press release (dated 24 July) attacking the anti-concentration clause.

The Union Industrial Argentina (UIA), Business Unity South Africa (BUSA), and the Confederation of Indian Industry (CII), which also include the Automotive Component Manufacturers Association of India (ACMA) named anti-concentration as one of three major concerns to them in the Geneva NAMA negotiations this week.

According to their statement, the NAMA text will "seriously damage the industrial sector with the attendant loss of jobs and business closures in the three economies." +