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TWN Info Service on WTO and Trade Issues (Mar07/07)

21 March 2007
 
 
Dangers in the dark alleys of the WTO
 
Below is an analysis of the recent WTO developments by Bhagirath Lal Das, the renowned international trade expert who was formerly Director of Trade at UNCTAD.
 
This analysis was published in the Economic and Political Weekly of India and also republished in the SUNS. 
 
With best wishes
Martin Khor
TWN

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Dangers in the dark alleys of the WTO
By Bhagirath Lal Das, New Delhi 
published in Economic and Political Weekly (India)
 
 
After hectic meetings and consultations among nearly 30 trade ministers in Davos (Switzerland) during the last week of January 2007, the Director General of the WTO has announced full resumption of negotiations on the Doha Work Programme of the WTO.

The talks in Davos on the sidelines of the annual meeting of the World Economic Forum were preceded by intense bilateral talks within the G6 countries (US, EU, Australia, Japan, India and Brazil) following the collapse of negotiations in the WTO in the last week of July 2006.

Some reports indicate that the US and EU would have liked the negotiations to continue within a small group of countries which would then be brought to larger groups in the WTO when some concrete results were achieved. But the developing countries preferred an inclusive and transparent multilateral format of negotiation in Geneva.

Talks have now been resumed in the various negotiating groups, though a parallel process of negotiations in small groups is also reportedly continuing.

The speed of the negotiation is conditioned by the Trade Promotion Authority (TPA) of the US (commonly called the "fast track authority" which enables the US executive to conclude a trade agreement and place it before the Congress for a "yes" or "no" vote without any amendments) that expires on 30 June 2007.

If the agreements are not reached by then and if the TPA is not renewed by the Congress, the US executive will find it impractical to continue with the negotiation. And if the US does not participate in the negotiation, the EU will find little incentive to continue. With the US and EU out of the negotiation, other countries will have hardly much interest in it.

Hence, the time of expiry of the TPA is of critical importance. Already the US President has called upon the Congress to renew it, but the Congress, in its new form, may not be quite obliging.

Reports from the US indicate that some important Congress members are suggesting the inclusion of labour standards and environmental protection in the trade deals which will be highly provocative to the developing countries. They see such measures as new forms of protectionism.

Risks of hurry

With the uncertainty over the renewal of TPA, it is likely that attempts may be made to rush through the negotiations in the WTO to hammer out a deal by the end of June 2007 enabling the US executive to present it to the Congress before the expiry of the TPA.

The pre-Davos activities within the G6, intense though subterranean, are pointers towards such outcome. For example, the Director General of the WTO is reported to have said in Delhi during his visit in January 2007 that something was being cooked by the US and EU and India needed to put in some spice.

It is likely that the developing countries may soon be faced with a boiling pot of results, cooked mainly by the US and EU with the addition of Indian spice and Brazilian flavour. And the developing countries may be hurried into quick assent on the plea that any more delay might result in total disruption of the talks for several years. It may then become politically difficult for the developing countries to say "no".

But such hurried efforts are usually not beneficial to the developing countries. The past experiences of the collapse in GATT/WTO negotiation has been that it is normally followed by results which are detrimental to the developing countries.

The collapse in Montreal (1988) was followed by the inclusion of intellectual property standards in the Uruguay Round negotiations, that in Seattle by the inclusion of the new issues in the WTO agenda in Singapore, Doha and more recently the Cancun collapse was followed by the July 2004 framework where the concerns of the developing countries were almost totally ignored and those of the developed countries almost totally included.

There lies the need for caution and vigilance so that the collapse of July 2006 is not followed by the emergence of yet another set of dangerous results for the developing countries.

As a defense against such possible danger, it is important that the developing countries come out at this stage with their clear stand on what "must be" and what "must not be" in any emerging result. This should follow from an analysis of where the talks were when they broke down in July 2006.

Recent feelers

The final collapse reportedly took place when the US was not prepared to give a better offer in reduction of the total Trade Distorting Subsidy (TDS) in agriculture which is the sum of the amber box, blue box and de minimis subsidies.

The US's offer was US$23 billion against the demand of US$12 billion by the G20 (a group of developing countries having come together in the agriculture negotiation to seek reduction of subsidies and tariff in the developed countries). Now, in the background of the recently resurrected talks, some reports indicate that the US may be prepared to offer a level of US$15 billion.

The EU, through the EC, has already appeared flexible on its tariff reduction, France's stiff and loud opposition notwithstanding. Its offer of TDS reduction during end-July 2006 was already close to the G20's proposal. Now, it is reported to have said in Geneva that it would be prepared to offer a tariff reduction in agriculture by 53 percent against its earlier offer of 39 percent.

So the pressure will now be on the developing countries, particularly India and Brazil, the two developing countries in the G6, to make commitments on a heavy reduction of industrial tariff, significant opening up of their services import and softening the stand on Special Products (SP, to be explained later) in agriculture.

The US and EU do not let any multilateral or bilateral event pass without emphasising that the developing countries have to reduce their industrial tariff and liberalise their services import to facilitate liberalisation of agriculture in the developed countries. The latest reiteration of this stand has come on the occasion of the meeting of the finance ministers of seven developed countries in Essen (Germany).

Against this background, the developing countries have to work out their "must be" and "must not be". Most of the former are in the area of agriculture and most of the latter in the area of industrial tariff (formally called non-agricultural market access, NAMA). The area of services will have a mix of the two. The following sections discuss in brief the risks and options in these three areas.

Agriculture

In agriculture, the negotiation has narrowed down to TDS and tariff. The base levels of TDS in the US and EU are respectively US$48 billion and Euro 110 billion (year 2000, the last year of notification). They had offered in July 2006 to reduce the levels to US$23 billion and Euro 33 billion respectively. The G20 had proposed reduction by 70-80 percent which would bring these levels to US$12 billion and Euro 27 billion respectively.

There were expectations that the EU might be flexible. Now with the indication that the US might consider a level of US$15 billion, the gap is not large. Tariff in any case has not been a hard issue, as the EU has been the main target of attention in this regard and the EC, on behalf of the EU, has shown willingness to go up to 53 percent reduction. The proposals of the G20 and of the US in this regard are for reductions of 54 percent and 66 percent. Slightly more flexibility on the part of the EC appears likely.

Thus, the gap between the demand and offer has considerably narrowed down. The point to ponder over is whether this convergence will bring benefit to the developing countries in terms of protection of their farmers in the domestic market and expansion of their export prospects outside.

The fear is that neither of these two objectives will be attained since a vast loophole and a wide escape route has not yet caught the full attention of the developing countries. The US and EU may reduce their tariffs and TDS and, at the same time, increase their Green Box subsidy without limit, thus neutralizing the effects of reduction of TDS and tariff.

This fear is real as is evident from the practices of the US and EU post-1995. They fulfilled their obligations of reduction of reducible subsidies (i. e. the categories of subsidy which they were obliged to reduce) in agriculture but enhanced the subsidies that were immune from reduction.

There is no reason to believe that they will not do the same again and use to their advantage the loopholes and escape routes available in the newly emerging agreement. In the case of the EU, the Common Agriculture Policy (CAP) of 2003 would shift a large bulk (about 75 percent) of the Blue Box subsidy to the Green Box. The latest Five Year Farm Bill of the US stipulates additional payments (about US$5.5 billion over a 10-year period) through the Green Box. Reports from the US indicate that this move is partially aimed at avoiding challenges in the WTO.

The Green Box subsidy is immune from reduction in the WTO as it is presumed to be non-trade-distorting. This presumption is a mistake as the subsidy, even though not strictly in the form of direct market intervention, enhances the staying capacity of the farmer in agriculture by its wealth effect and by assisting the farmers to take risk. It encourages and supports unviable agricultural production and thereby distorts agricultural trade.

A recent analytical and quantitative study done by the UNCTAD India office has come out with revealing conclusions that without the Green Box subsidies in the major developed countries:

* Agricultural exports of the US and EU will decrease by 39 percent and 45 percent respectively, while the exports of the developing countries will increase by 22 percent;

* Agricultural production of the US and EU will decrease by US$20.9 billion and US$53.8 billion respectively, while the production in the developing countries will increase by US$41.9 billion;

* Agricultural employment will decrease in the US and EU respectively by 2.4 percent and 5.8 percent, while it will increase by 4 percent in the developing countries;

* The cost of production will rise in the US by 15 percent and in the EU by 17 percent.

It is thus necessary that the developing countries firmly cast aside the myth that the Green Box subsidies are non-trade-distortive and set about having them eliminated or minimized.

The July 2004 Framework (WTO General Council Decision of 1 August 2004, Annex A, paragraph 16), which elaborates the mandate of the negotiation under the Doha Work Programme, calls upon a review and clarification of the criteria of the Green Box subsidy (of) with a view to ensuring that "they have no, or at most minimal, trade-distorting effects or effects on production".

The G20 has given some proposals on it. But the proposals are not specific in terms of quantitative targets as those on TDS and tariff. Further, the G20 has not so far insisted on integrating the Green Box criteria in the main stream negotiation on agriculture.

In fact, the G20 members in the G6, i. e., India and Brazil, appear to have allowed the G6 negotiation on agriculture to be centred around tariff and TDS without bringing in the Green Box criteria as an essential and compulsory part.

It is important to insist that the Green Box is brought into the mainstream of agriculture negotiation and given the same priority and importance as the tariff and TDS.

While the major developed countries are firmly defending their Green Box, they are trying to weaken the provisions for SP that addresses the food security, livelihood security and rural development needs of the developing countries.

Reports from Davos indicate that there were pressures on the developing countries to dilute their stand on SP, but the G33 (a group of 45 developing countries that have been actively championing Special Products and Special Safeguard Mechanism), with active roles played by Indonesia, India and China, issued a firm warning in Davos that any such dilution would not be acceptable.

The developing countries must continue to remain firm on two essential elements in SP: adequate coverage of the SP and adequate protection for them. The G33 has given specific proposals which need to be pursued with full determination.


NAMA

In the area of NAMA, the developing countries are feeling strong pressure from the major developed countries for drastic reduction of industrial tariff.

They have already made a significant concession in the Hong Kong Ministerial Conference in December 2005 by accepting the Swiss Formula which will result in tariff reduction on each product, a significant departure from the past practice of reducing only the average of industrial tariff whereby the developing countries retained the flexibility to spread the average over the whole range of tariffs in consonance with their respective development needs.

The Swiss formula connects the initial and final tariffs by a coefficient in such a way that the adoption of a lower coefficient results in greater tariff reduction. Further, all final tariffs are lower than the coefficient.

The EC has proposed a coefficient of 15 for the developing countries. There are some suggestions for 10 as the coefficient for the developed countries. There were some reports in the intense phase of the negotiation within the G6 during end-July 2006 that the coefficients for the developing countries and the developed countries would be 30 and 10 respectively. It is relevant to examine the implication of these coefficients in terms of tariff reduction.

Taking 30 as the coefficient for the developing countries, their tariff of 28, which is their average tariff, will be reduced to 14, which represents a 50 percent reduction (from 28 to 14). Taking a coefficient of 10 for the developed countries, their tariff of 4, which is their average tariff, will be reduced to 3, representing a reduction of only 25 percent (from 4 to 3). This is clearly a reversal of the agreed principle of "less than full reciprocity" for the developing countries and will be extremely unfair.

It is unfortunate that the developing countries have allowed the negotiation to be centred around the coefficient in the Swiss formula. The negotiation should, instead, be on the respective reduction of tariffs by the developed countries and the developing countries and then the appropriate coefficients should be calculated to achieve the agreed levels of reduction.

Adhering to the agreed principle of "less than full reciprocity" for the developing countries, one alternative is to have an appropriate differential in respect of tariff numbers.

For example, if the developed countries reduce the tariff from 10 to 4 (thus having a reduction of 6 in the absolute tariff number), the developing countries could reduce their tariff from 35 to 31 (thus having a reduction of 4 in the absolute tariff number). The respective coefficients in the Swiss formula for the developed countries and the developing countries then work out as 6.7 and 271.

A second alternative may be to have differential rates of tariff reduction for the developing countries and the developed countries. For example, the developed countries and the developing countries may reduce their tariffs respectively by 60 percent and 40 percent. In order to have such reduction in their respective tariffs of 4 and 30 (which are near their respective average industrial-tariff levels), the coefficients for the developed countries and the developing countries respectively should be 2.7 and 45.

These examples show that the pairing of coefficients as 15-10 or even as 30-10 (for developing and developed countries respectively) is totally inappropriate and grossly unfair. The negotiation must be reoriented in a basic way. The primary focus should not be the coefficients in the Swiss formula; rather, it should be the reduction in absolute tariff numbers or the percentage reduction in tariffs. Then appropriate coefficients should be worked out in order to have the desired reduction.

Services

In Services too, the developing countries have lost a lot of ground in the Hong Kong Ministerial Conference. The decision of this conference has fixed the base levels for liberalization across the board in all sectors.

It stipulates that there will be commitments at existing levels of market access in Mode 1 (supply of service by the service provider of a country to a consumer located in another country) and Mode 2 (supply of service in a country to a consumer coming from another country).

Further, it calls for enhanced levels of foreign equity participation and elimination/substantial reduction of necessity criteria in respect of Mode 3 (supply of service through the commercial presence of a foreign firm).

This decision has taken away the current flexibility available to the developing countries in the General Agreement on Trade in Services (GATS) which permits the developing countries to choose the services sectors to be liberalized and also to impose conditions and limitations on market access and national treatment in these sectors. In particular, the GATS stipulates that the developing countries shall have the flexibility to liberalize fewer sectors and fewer transactions.

The main interest of the developing countries in the services area is in liberalization in Mode 4 (supply of service by movement of persons) and in respect of qualification and quality standards in the developed countries. It is important for them to ensure that they get commensurate benefits in these two areas to balance their commitments which benefit the developed countries.

It is useful for them to establish a mechanism for assessing such balance, taking into account both tracks of the services negotiations, i. e., the request-offer track and plurilateral track.

Conclusion

In conclusion, the developing countries should remain vigilant and cautious against being hurried into unfavourable and unfair agreements. In agriculture, the Green Box criteria should be brought into the mainstream of negotiation along with TDS and tariff and the provisions for SP should be effective and useful.

In NAMA, the negotiation should shift from the coefficient in the formula to the targets of tariff reduction in the developed and developing countries.

In services, there should be a careful balancing of benefits to the developing countries with the obligations they undertake.

(* Bhagirath Lal Das is a prominent international trade expert and formerly Director of International Trade Programmes in UNCTAD. This article first appeared in the Economic and Political Weekly and is published here with permission.) +

 


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