|
By Prabhash Ranjan
Research Officer, Centad
Negotiations in the World Trade Organisation (WTO) have yet to establish
the modalities for negotiating market access for non-agricultural products. However,
in July 2004, member countries agreed on a framework for establishing the modalities (click here to read the full text of the paper).
Negotiations on industrial tariffs, or Non-Agricultural Market Access (NAMA),
are crucial for developing countries. Hasty tariff liberalisation could impose
harsh adjustment costs on developing countries, such as balance of payment problems,
de-industrialisation and unemployment. This paper looks at the possible
impact of ongoing tariff negotiations on South Asian countries, namely Bangladesh,
India, Nepal, Pakistan and Sri Lanka, at an aggregate level or at the Multilateral
Trade Negotiation (MTN) categories level. It analyses the impact of some of the
submissions and also endeavours to find out the obligations that South Asian countries
may have to fulfil in the ongoing negotiations under NAMA. The key areas
in negotiations on NAMA are tariff reduction, the sectoral component, tariff bindings
and preference erosion.
Drastic import tariff cuts will negatively affect
developing countries. In sub-Saharan Africa, it led to de-industrialisation and
unemployment in some countries. It also leads to a decrease in tax revenue, since
import tariff is an important source of revenue (18.5% in India).
At the
same time, huge benefits will accrue to developing countries if developed countries
reduce their high tariff rates on products that developing countries are interested
in importing. Negotiations on NAMA are, therefore, about resisting hasty liberalisation
in the South and dismantling excessive protectionism in the North. Though
the linear method of tariff reduction would have meant less drastic cuts in tariffs,
the July Agreement pushed for a non-linear method, which India and other developing
countries accept. In this method, India favours the Girard formula with a higher
coefficient of ‘B' for tariff reduction (B = 2). In this formula, the extent
of tariff reduction hinges on the value of the coefficient ‘B'. For a lower value
of ‘B', say 0.5 or 1, the tariff reduction in average bound tariff rates for India
and Pakistan would be huge, especially in areas where tariff rates are high. For
example, in the ‘fish and fish products' category, where India levies a bound
tariff of 100.7, the tariff reduction would be 14.6%, if B = 0.5, and 25.5% if
B = 1. As the value of ‘B' increases, the rate of reduction in the final tariff
rate declines. Developed countries favour the Swiss formula, which involves
very steep tariff reductions that would be disastrous for developing countries.
Adopting this formula would result in India and Pakistan reducing their Most Favoured
Nation (MFN) bound tariff rates on ‘fish and fish products' by 66.8% and 66.7%
respectively. On the other hand, the same formula with the same coefficient
would result in the US and EU reducing their MFN bound tariff rates on the same
category of products by a meagre 9% and 18.7% respectively. If the Swiss
formula is to be even considered, developing countries must be allowed the full
exemption of 15 categories from tariff cuts. There is a provision currently for
partial exemption for just 10% of tariff lines. While the Girard formula
may be the best option, if a non-linear approach is adopted, it would still mean
a steep reduction in tariff rates. India and Pakistan should use their acceptance
of the non-linear method as a bargaining chip and ask for compensation. This
compensation could be in the form of developed countries cutting their tariff
rates, using the Girard formula with a value of ‘B' less than 1, or providing
preferential access to their markets. The paper suggests that the implementation
period for developing countries should comprise five phases, each phase being
for two years, with the tariff rate brought down in equal instalments over the
10-year span. For developed countries, the implementation period should be four
years, in two phases, with the tariff reduction forward-loaded, so that cuts are
higher during the first two years.
The sectoral approach
essentially means cutting or eliminating tariffs on certain sectors, independent
of the tariff-cutting formula followed for other sectors.
Sectors suggested
for tariff-cutting are electronics and electrical goods, fish and fish products,
footwear, leather goods, motor vehicle parts and components, stones, gems and
precious metals, and textiles and clothing. Many of these are big export earners
for developing countries and are also labour-intensive. Developing countries will
benefit hugely if developed countries reduce their high tariffs on these sectors.
The paper suggests that: - Developed countries must reduce their
tariff rates to zero on all sectors that are of export interest to developing
countries.
- Developing countries must reduce their tariffs on these sectors
with a lower coefficient value of ‘B'. The coefficient value used in the sectoral
elimination approach by developing countries could be smaller than the value of
‘B' to be used for other tariff lines.
- Developing countries must have
the flexibility to decide the number of tariff lines they want to commit to reduction,
in an identified sector.
The implementation period should be such
that it offers enough flexibility to developing countries to pursue their social
and development needs, and, at the same time, realistically fulfil their international
obligations. The paper suggests an implementation period of five stages,
with each stage being for two years. The reduction in tariff rates by developing
countries should be spread over all five phases. It is proposed that 60% of tariff
reduction should take place in the first four stages (equal instalments), and
40% of reduction in the last phase. For instance, assume that the initial
bound tariff rate for a product is 100%, and the simple average of the bound tariff
rate is 35%. The final bound tariff rate, after applying the Girard formula with
B = 0.5 would be 14.8%. The tariff reduction that has to take place is 85.2
percentage points. Sixty per cent of 85.2 should be reduced in the first four
phases, that is, the first eight years (equal instalments) and 40% in the last
phase, that is, at the end of the 10th year.
Two issues are involved in
tariff binding. One is tariff-binding coverage, implying the number of tariff
lines to be bound, and the other relates to the rate at which unbound tariff rates
should be bound.
Developed countries want developing countries and Least
Developed Countries (LDCs) to increase the coverage of tariff binding to 100%
or thereabouts. If they do this, developing countries will be binding more tariff
lines and thus giving up the flexibility of increasing tariff rates on a particular
product beyond a certain point. The impact of this will be felt in the
industrialisation of developing countries and LDCs. Domestic industry could be
discouraged by a low level of bound tariff rates for a particular product because
of the fear of a surge in imports. Since developing countries are not bound
to increase their tariff coverage to such high levels in the ongoing negotiations,
they must ensure that they get adequate gains in return if they do agree. The
paper suggests dividing all countries into four slabs, based on their current
tariff binding coverage. Their respective tariff binding can then be increased
on a graded scale. Thus, countries with less than 30% tariff binding coverage
could increase their binding coverage to 50%; countries with a binding coverage
of more than 30% but less than or equal to 50% could increase their coverage up
to 70% and so on. The rate at which tariff lines are bound could be twice the
bound tariff rate and not the applied tariff rate. The other important
issue is the rate at which unbound tariff lines should be bound. Paragraph 5 of
Annex B states that for unbound tariff lines, the basis for commencing tariff
reductions should be twice the MFN applied rate in the base year. The base year
for MFN applied rates is 2001. The proposal to bind unbound tariff lines at twice
the average applied rate is detrimental for developing countries. It will result
in very low bound tariff rates of unbound tariff lines. The paper suggests
that unbound tariff lines, if bound, should have their bound tariff rates equivalent
to twice the average bound rate, and not average applied rate. This would ensure
enough flexibility to increase applied tariff rates in case there is a surge in
imports. Higher bound tariff rates are also important because the next
stage, after binding tariffs, is to undertake tariff reduction. If developing
countries have smaller bound rates, tariff reduction would reduce them further.
Moreover, it is important to note that South Asian countries maintain lower applied
rates. High bound rates will ensure flexibility if ever applied tariff rates have
to be increased. s
Increasing tariff
liberalisation jeopardises the preference margins that Least Developed Countries
(LDCs) enjoy in developed country markets. If tariff rates were reduced to zero
for developing countries such as India and Pakistan, it would have a negative
impact on LDCs like Bangladesh and Nepal. To offset this, developed countries
should give preferential treatment to the products of LDCs in their markets.
|
