Draft 21 June 2004
Blend it like Beckham — Trying to read the ball in the
WTO negotiations on industrial tariffs
Santiago Fernandez de Córdoba, Sam
Laird and David Vanzetti[1]
Abstract
The current WTO
negotiations on industrial tariffs have focused largely on a formula approach
to cutting tariffs, but the process of trying to find a compromise that would
satisfy all sides has led to a number of propositions that entail blending
various elements of formulae, sectoral elimination, exceptions for sensitive
products, capping to reduce tariff peaks, provisions for developing and
least-developed countries, provisions for recently acceded countries, and
extending binding coverage at rates that could be determined in different ways.
This blend of approaches is so complex that determing what a country may have
to do and what it might expect from others is rather like trying to read one of
David Beckham’s curved balls. Yet, for
many countries the outcome will determine for them whether the Doha Ministerial
Declaration of the WTO delivers on its development promises. This paper looks
at the various proposals and tries to assess how they measure up against the
objectives of the negotiations.
Key
words: WTO negotiations,
trade, industrial tariffs, development, special and differential treatment, CGE
modelling,
1. Introduction
The WTO
negotiations on industrial tariffs have focused mainly on a formula approach to
cutting tariffs. But various conditions attached to the formulae proposals make
it difficult to assess the overall thrust of the approaches, rather like a goalkeeper
trying to figure out the line of David Beckham’s curved ball! This paper looks
at the various proposals with all their bells and whistles to try to make an
overall assessment of how these approaches measures up to the objectives of the
Doha Declaration, and in particular the development implications. Developing countries in particular will want
to know to what extent the proposals tackle barriers that face their key
exports and the extent to which they may be required to take on new obligations
that could curtail their policy space – the latitude that they have for using
tariffs for industrial development purposes.
The paper is structured as follows. In Section 2 we look at the state of
play on the WTO trade negotiations, describing the various proposals on the
table. In Section 3, we look at the existing level of protection for world
trade, and go on to make some estimates of the implications of the various
scenarios for tariff peaks, tariff escalation and binding coverage. The paper
concludes with an assessment of the extent to which the various proposals
measure up against the objectives of Doha.
2. State of play in the WTO negotiations
In relation to
industrial tariffs, WTO Ministers meeting in Doha in 2001 decided 'by
modalities to be agreed, to reduce or as appropriate eliminate tariffs,
including the reduction or elimination of tariff peaks, high tariffs, and
tariff escalation, as well as non-tariff barriers, in particular on products of
export interest to developing countries. Product coverage shall be
comprehensive and without a priori exclusions' (paragraph 16 Doha Ministerial
Declaration). Full account was to be taken of the special needs and interests
of developing and least-developed country participants, 'including through less
than full reciprocity in reduction commitments, in accordance with the relevant
provisions of Article XXVIII bis of GATT 1994 …'
After two years of intensive
negotiations, the WTO's Cancún Ministerial Meeting was unsuccessful in finding
consensus on non-agricultural market access, although the lack of success may
have reflected other issues that are cross-linked through the ‘single
undertaking’ (“nothing is agreed until all is agreed”). Developed countries
generally considered that there was insufficient ambition in the proposed draft
text presented in Cancún while the developing countries believed that it did
not sufficiently reflect their interests and concerns. Had the Singapore issues
and agriculture been resolved, it seems unlikely that non-agricultural market
access would have been a stumbling block, but the issue has been more difficult
than many expected, given the overall level of industrial tariffs.
The Cancún
Ministerial draft text on non-agricultural products was based on that of the
Chairman of the Negotiating Group on Market Access: Revised Draft Elements of
Modalities (TN/MA/W/35/Rev.1). The Chairman's text proposed a non-linear tariff
reduction scheme similar to the 'Swiss' harmonizing formula with the maximum
coefficient a function of each country’s national average tariff.[2] The proposed
formula would be applied on a line-by-line basis. The Chairman also identified seven sectors for complete
liberalisation: electronics & electrical goods; fish & fish products;
footwear; leather goods; motor vehicles parts & components; stones, gems
& precious metals; and textiles & clothing. In reference to other
issues, such as sectoral tariff elimination and increasing binding coverage,
the draft contains similar proposals as those presented by the Chairman of the
Non-agricultural Market Access Negotiating Group.
The
United States, the European Union and Canada, in a joint contribution during
the summer of 2003, prior to Cancún, had argued for a 'single' harmonizing
formula rather than a country-based average tariff reduction formula in order
to achieve greater expansion of market access in countries with relatively high
initial average tariffs. They also proposed that there would be an increase in
the single coefficient (implying a lesser reduction commitment) if Members were
to bind their tariffs fully and reduce the gap between bound and applied MFN
rates.
Whereas the
Chairman's text envisaged exempting LDCs from tariff reduction commitments, the
joint text proposed that additional provisions for LDCs and those IDA-only
eligible members as well as members with a binding coverage of non-agricultural
tariff lines that is less than 35 per cent. These members would be exempt from
making tariff reductions arising from the application of the agreed formula,
but, with the exception of LDCs, would be expected to bind 100 per cent of
non-agricultural tariff lines at the overall level of the average bound tariffs
of all developing countries after full implementation of current concessions.
While discussions
have inevitably focussed on the Chairman’s text, technically all the proposals,
including those made by China, Republic of Korea, India, South Africa and
Malaysia, are still on the negotiating table, and countries can put forward new
proposals, whether or not based on those already on the table.
In summary, the
differences in the negotiations hinge on the level of ambition and the degree
of special and differentiated treatment that is to be provided to developing
countries. Developed countries have reduced their own tariffs to low levels in
previous rounds and would like to see the developing countries, particularly
the major ones such as Brazil, India and China, follow in this path. Poorer
developing countries, which have little influence on global trade flows, are
caught up in this requirement for significant liberalisation. The absence of
graduation within developing countries is an impediment to progress in the
negotiations.
3. Existing
Levels of Protection
Many developing
and least-developed countries enjoy tariff preferences under the Generalised
System of Preferences and more selective schemes, such as the Cotonou
Agreement, the Caribbean Basin Initiative, the Everything but Arms initiative
of the EU and the African Growth and Opportunities Act (AGOA). Even taking account of the4se preferences,
average import-weighted applied tariffs on exports from these regions to
developed countries are higher than those facing developed countries
themselves. This reflects the composition of imports with different tariffs
rather than higher tariffs on the same item. It also reflects the relatively
weak bargaining power of the developing countries in past rounds of
negotiations in that they were unable to secure tariff cuts on the kind of
goods that they export.
Average tariffs
Table 1 shows
non-agricultural trade weighted applied tariffs, levied by developed and
developing countries on exports from each other. These data include
preferential rates. On average, developed countries impose tariffs of 2.1 per
cent on imports from other developed countries, 3.9 per cent on imports from
developing countries and 3.1 per cent from LDCs. The most significant sectors
contributing to the higher tariffs on developing country exports are petroleum
and coal products and textiles and apparel. In petroleum and coal alone,
developing countries face an average tariff in developed countries of 45 per
cent. On the other hand, developed countries also face higher tariffs when
exporting to developing countries (9.2 per cent) than do other developing
countries (7.2 per cent), partly reflecting the composition of trade and partly
reflecting preferential arrangements among groups of developing countries.
Table 1: Trade
weighted average applied tariffs (inc. preferences) by development status
|
|
Developed |
Developing |
Least developed |
|
|
% |
% |
% |
|
|
|
|
|
|
Source |
|
|
|
|
Developed |
2.1 |
9.2 |
11.1 |
|
Developing |
3.9 |
7.2 |
14.4 |
|
Least developed |
3.1 |
7.2 |
8.3 |
|
Total |
2.9 |
8.1 |
13.6 |
Source:
Computed from UNCTAD TRAINS database.
Tariff peaks
While overall average
tariffs may appear modest, there is a wide range of items with rates that far
exceed these averages. This is why the elimination of tariff peaks on products
of interest for developing countries still remains a priority in the
multilateral trade agenda. There is no unique definition of a high tariff or
tariff peak, but it is now widely accepted among negotiators that a domestic or
national tariff peak is an individual tariff rate that is at least three times
higher than the national average.[3] Although this
exists in many countries, it is more prevalent in developed countries where
nearly 10 per cent of developed country tariff lines are in excess of three
times the national average (Table 2). Tariff peaks are less common in
developing countries as a result of reforms under World Bank/IMF programmes,
which tend to favour flatter tariff structures.
Table 2: Peaks in
bound and applied tariffs as share of total tariff lines
|
Scenario |
Bound
|
Applied |
|
|
% |
% |
|
|
|
|
|
Developed countries |
8.2 |
9.9 |
|
Developing countries |
0.4 |
3.5 |
|
Least-developed countries |
0.4 |
0.7 |
Source: Computed from UNCTAD TRAINS database.
Tariff escalation
Another aspect of
the bias in protection against developing country exports is tariff escalation,
the increase in the level of tariff rates with the stage of processing (UNCTAD,
2003). Tariff escalation makes it
harder for exporters to develop export-oriented processing industries, e.g. by
increasing domestic value added to their base commodity production. The
increase in tariffs down the processing chain particularly affects the
intermediate stage, as illustrated in Table 3.
Table 3: Tariff
escalation: trade weighted applied tariffs by stage of processing
|
|
Primary |
Intermediate |
Final |
|
|
% |
% |
% |
|
|
|
|
|
|
Developed |
0.4 |
3.0 |
3.4 |
|
Developing |
6.0 |
9.1 |
8.0 |
|
Least-developed |
6.9 |
18.0 |
12.0 |
Source: Computed from UNCTAD
TRAINS database.
Binding coverage
WTO tariff negotiations are not merely about cutting tariffs, but also about “binding” tariffs, that is, locking in tariff rates so that they cannot be increased unilaterally by a WTO Member but only as a result of the renegotiation of bindings under GATT Article XXVIII. Figure 1 shows the existing bound and applied rates for non-agricultural products for developed, developing and least-developed countries (LDCs).[4] The bound rates are the basis for the current negotiations but changes in applied rates determine the economic impact. For most developed countries applied and bound tariffs are the same, with applied tariffs at 2.9 per cent. In developing countries, the average of applied rates is 8.1 per cent, substantially below bound rates as a result of unilateral reforms under World Bank-IMF reform programmes.
Figure 1: Weighted average tariffs for non-agricultural products
Source: Computed from UNCTAD TRAINS database, latest
year available.
Note: The method of import weighting appears to suggest
that the average applied tariff exceeds the average bound tariff for developed
and least-developed countries, but in fact simply reflects the composition of
trade, and does not imply that the applied rates exceed bindings for any particular
item.
While the binding of tariffs is an
important, valid, legal commitment, there is also an economic significance, in
that binding, even above applied levels, provides greater security to trading
partners. Binding may also be seen as a sign of the predictability of trade
policy more generally, thereby providing security for investments that can
drive economic growth.
Most developed countries have almost all
(on average 98.4 per cent) of their tariffs bound as a result of negotiations over
the last 50 years. For developing countries binding coverage is much lower
(78.2 per cent, compared with 22 per cent prior to the Uruguay Round) and for
least-developed countries it is quite low (33.1 per cent). The reason for the
lower binding coverage in developing countries and LDCs is essentially because,
prior to the Uruguay Round, few demands were made on them to open their
markets, which were not perceived as being very important.
Our analysis shows that, under all the
non-agricultural proposals on the table in the current WTO negotiations, there
would be an increase in the binding coverage of developing and least-developed
countries. For many tariff lines, the final bound level would be below the current
applied level, reducing the overall average applied tariff. However, for other lines there would still be
a margin between the applied and bound rates, allowing some scope for
increasing the applied rates. This could be used, for example, instead of invoking
anti-dumping duties or safeguards. Developing countries may also see this
margin as providing for some degree of policy space through the use of tariffs
for industrial development purposes.
Figure 2: Initial binding coverage for
non-agricultural products
(% of total tariff lines that are bound)
Source: WTO's Consolidated Tariff Schedule database (CTS).
4. How would current WTO negotiations affect tariffs?
As noted earlier,
a large number of proposals have been made in the WTO negotiating Group on
Non-agricultural Market Access (NAMA), of which six proposals had a formula as
a core element.[5] Of these, the
Chinese, EU, Korean and Japanese proposals resemble the Swiss formula used in
the Tokyo Round in that they all were intended to cut higher rates by a greater
percentage than lower rates. In the Tokyo Round, the Swiss formula used a
single coefficient of 16, which became the maximum rate for all affected
tariffs in all participating countries, and was therefore harmonizing across countries.
A number of the current formulae proposals are intended to reduce tariffs
within rather than across countries, and may therefore be seen as “harmonising”
within individual countries. The first phase of the initial US proposal was
similar, but the US also proposed universal free trade after 10 years.
One problem being
faced by negotiators and analysts is that a number of parameters are not
specified but are left to be determined in the negotiations. For example, the
Indian proposal included unspecified linear cuts with a lesser reduction by
developing countries. One illustration
of how this might work was for a 50 per cent tariff reduction by developed
countries and 33.3 per cent by developing countries. In the proposal by the
Chairman of the Negotiating Group, there is an unspecified multiplier (or
divisor) that could deepen or lessen the depth of cuts and could even be
applied differentially across groups of countries.
In this section
we analyse the effects of four alternative scenarios of trade liberalisation
for non-agricultural products based on proposals made from Member states in the
WTO Working Group (Table 4). The
scenarios presented (“Free Trade”, “Hard WTO”, “Soft WTO” and “Simple Mix”) have
been selected to facilitate a comparison of the spectrum of the proposals on
the negotiating table, and to demonstrate the sensitivity of the outcome to the
precise parameters that might be negotiated.
The first scenario,
free trade, draws from the December 2002 proposal by the United States of
America to the WTO Working Group. For this scenario all countries bind their
non-agricultural tariffs and reduce them to zero.
The second and
third scenarios, so-called Hard and Soft WTO, are two variations from the
Chairman of the WTO Working Group proposal for non-agricultural tariff
reductions. These two scenarios cover the following elements:
1. Tariff reduction
formula
2. Sensitive items
3. Binding coverage
4. Level of binding
5. Sectoral
elimination
Both the Hard and Soft approaches are
based on the WTO proposed harmonizing formula:
where ta is the
national average of the base rates, T0 the initial rate, T1 the final rate, and B
is the coefficient, yet to be negotiated, reflecting the level of ambition.
This formula reduces tariffs
according to a Swiss formula. The maximum coefficient is equal to the current
national import-weighted average, achieving the progressive effect of
proportionately greater reductions in higher initial tariffs. This coefficient
in the Swiss formula represents the maximum tariff after the application of the
tariff reduction formula. In previous applications B and ta were
represented as a single coefficient common to all members. The Swiss formula
used for industrial products during the Tokyo Round with a maximum coefficient
of 14 per cent.
In the WTO Chairman's
proposal the B coefficient would be common to all countries. B set at 1 implies
the average bound rates become the maximum. The so-called Hard version of WTO
proposal builds upon a B coefficient equal to 0.5. Under this scenario,
developed and developing countries with the same average initial tariffs would
make the same percentage reduction. In this sense, the proposal does not
contain any specific and differential component. However, an element of special
and differentiated treatment for developing countries would exist where
developing countries have higher initial tariffs than developed countries, as
is often the case.
In
contrast to the Hard WTO scenario in which B equals 0.5, the Soft scenario
incorporates a B coefficient would be differentiated between developed and
developing countries. B takes two values, 1 for developed countries and 2 for
developing countries (although these could obviously be differentiated more or
less strongly). This differentiation of the B coefficient is based on the
principle of special and differential treatment and less than full reciprocity
concept for developing countries mandated in paragraph 16 of the Doha
Ministerial Declaration.
Both WTO
scenarios include a special clause that allows sensitive items to remain
unbound, and excluded from any tariff cut obligations. For our purposes, we
define sensitive products as the 5 per cent of the unbound tariff lines
generating the most revenue, or, alternatively, all unbound lines, whichever is
less. In other words, we assume that unbound tariff lines gathering the
greatest amount of tariff revenue are excluded first. These items have either
high tariffs, high trade flows or, most likely, a combination of both. For
these tariff lines, WTO Members neither bind nor cut their tariffs.
Both
Hard and Soft scenarios specify that 95 per cent of the tariffs be bound.
However, in the former scenario, the binding would be at twice the applied
rate, and in the latter scenario, at either twice the applied rate or 50 per
cent, whichever is higher. In the Hard scenario tariffs are bound and then the
tariff reduction formula is applied. In the Soft scenario tariffs are only
bound (up to the 95 per cent level) and are not subject to reductions.
The
Hard WTO scenario includes sectoral elimination. This implies the elimination
of tariffs for electronics & electrical goods, fish and fish products,
textiles, clothing, footwear, leather goods, motor vehicle, parts and
components, stones, gems and precious metals. The Soft scenario includes
sectoral elimination for developed countries only and presumes that developing
countries will not carry out the elimination of tariffs in these sectors.
The last
scenario, 'Simple' mix, draws from a linear cut formula with a cap for tariff
peaks and escalation. This capping element harmonizes tariffs and has a similar
effect as the Swiss formula. It is therefore particularly useful for reducing
tariff peaks and tariff escalation. The capping formula specifies that no
tariff will be higher than three times the national average. This scenario does
not include sectoral elimination of tariffs. As in the Soft WTO scenario, in
the 'simple' mix scenario 95 per cent of tariffs are bound at either twice the
applied rate or 50 per cent, whichever is higher. No tariff cutting formula is
applied to tariffs after binding them.