Trade has been one of the most important processes for facilitating the exchange of resources, technology and goods. It reduces distance and brings places closer. The developments during the Uruguay Round, and subsequently the formation of the World Trade Organisation (WTO), were a landmark in bringing the world together on a common platform.

The Agreement on Agriculture (AoA) was another breakthrough as it marked the beginning of the eventual integration of agricultural trade of diverse countries into the global trading network. This integration raises fears in negotiating countries that they have given away the protectionism of the ‘sensitive’ class of farming occupation, which supplies the food needs of their country and, on the other hand, have to maintain the livelihood of agrarian workers. Most advanced countries have a very low percentage of workers employed in agriculture and related activities and the contribution of this sector to the overall gross domestic product is marginal. But countries with huge agrarian populations like India, Pakistan, Bangladesh and Sri Lanka are at a disadvantage as they have to meet their food needs and shoulder the burden of sustaining a huge agrarian mass with a very poor capital base. Giving the same consideration to developed countries and developing countries would therefore be unjust.

Comparison of South Asia with selected advanced countries: 2003

Source: Computed from WTO website (Time series database) and FAOSTAT database

One of the most important pillars of the AoA is ‘market access’, without which the trade process would be incomplete. Article 4 required all members to make their boundary restrictions into ‘ordinary customs duties’, except those under the safeguard mechanism. Members are to accede market concession in accordance with the schedule of commitments. The process of reducing barriers to facilitate agricultural trade was initiated through the gradual reduction of tariff barriers within a time frame and with due consideration to the stage of development of the country (for example Least Developing Countries are not obliged to reduce their tariff barriers). For developed countries, ordinary tariffs and those resulting from ‘tariffication’ had to be reduced during a six-year period starting in 1995 (10 years for developing countries). The tariffs had to be reduced by 36 per cent (24 per cent by developing countries), calculated as a simple average across all agricultural tariff lines. Furthermore, the minimum tariff reduction for each tariff line (with some exceptions) was 15 per cent for developed and 10 per cent for developing countries.

The Uruguay Round Agreement on Agriculture (URAA) changed the form of protection in international agricultural trade. Prior to the AoA, most barriers to trade were through non-tariff measures (NTM) which were non-transparent and whimsical, based on restrictions in the form of quantities. The conversion process initiated through URAA was sometimes referred to as ‘dirty tariffication’ on account of the low level of international prices prevailing in the base year 1986-88. The URAA had ‘differential’ provisions for different circumstances. India, Pakistan and Sri Lanka had converted their non-tariff measures as ceiling bound rates as base level. A binding is "ceiling" if the applied duty is lower than the bound duty. Many other countries gave minimum access in-quota commitments and many others maintained or moved to ad valorem equivalents. Among the major distortions in trade, tariffs (including NTBs) account for a 52 per cent increase in world agricultural prices. If all three forms of distortions viz. domestic support, export subsidies, and high tariffs are removed, world prices would increase by 12 per cent (Gibson et al, 2001). The increase in prices might be good for the producers but the impact it can have on the combined effect of subsidy tipped products to flow with lesser duties will be unfair on non-subsidised producers.

Growth in agricultural trade of Asian countries
There is a general feature that short-term effects of liberalisation need not be positive and openness to international trade (in low-income countries) and limited government intervention (everywhere) do not correlate with growth. However, ‘it is necessary to widen’ the basic IMF prescription for ‘growth of openness toward international trade, macroeconomic stability and limited government intervention in the economy so as to include measures aimed at correcting endogenous distortions in income distribution and in the capital market’. No doubt trade liberalisation is beneficial in the long term, but the results also point up the importance of governance (UNCTAD, 2003).

WTO (2005) overall trends indicate good performance of agricultural trade by developing countries. Between 1990 and 2003 exports of developing countries rose by 77 per cent, exceeding world agricultural growth of 66 per cent. However, their share of exports still remains less than half per cent of world trade and the incremental share is to the tune of 3 per cent. The redeeming feature is the phenomenal growth rate seen in developing countries that have expanded by 3 per cent, 6.5 per cent and 15 per cent respectively in the years 2001, 2002 and 2003. Leaders in the process of growth in the developing world are Asia, Latin America and the Caribbean. Among the Asian countries, Malaysia has experienced the greatest increase in the export share, rising from 10 to 15 per cent of all developing countries. The situation in South Asia has not been that impressive compared to other Asian economies. The growth rate of exports of most South Asian countries has declined in the post WTO period.

Growth rates of exports (excluding fish and marine products) of South Asian countries

Source: Computed From FAO Trade Database

The situation in imports is a little different. Imports have risen at a faster pace as compared to exports and the growth rate of specific countries like India has consolidated.

Growth rates of imports of South Asian countries

Source: Computed From FAO Trade Database

The trade balance in South Asian countries has moved unfavourably. While in the initial years, 1994-96, there was spectacular growth buoyed by the trade balance in agriculture in India, since then the South Asian net trade has fallen drastically.

Trade balance of South Asian countries (million dollars)

Source: Computed From FAO Trade Database

In the light of this, it is necessary to look into the causes of the poor export performance in the South Asian region and to understand the current market access conditions, both in the developed world and in South Asia, as access to the former has a lot to do with improved market access. One of the most important features of this region is the level of development. Two countries in the region are classified as Least Developed Countries (LDCs), and both India and Pakistan are designated low income developing countries and positioned very low (beyond 100) in the Human Development Index (HDI). The reason often cited for this is the high population level, low literacy level, poor access to health care facilities and the high level of rural population dependent on farming. The development edge that trade is supposed to impart has not made a mark in this region. With the Doha Development Agenda in mind there is a need to understand why, despite growing global trade volumes, growth has been impeded in some developing countries. It is also necessary to understand how to increase the effective participation of these countries and identify new areas where possible differential correction can be made with special reference to agricultural market access.

Access impediment in agricultural trade
One of the major impediments remaining in agricultural trade is the level of protectionism given by importing countries through tariff walls. ‘Fair access’ is far from the reality. Protectionism is a major barrier to trade as it insulates a poor country from the benefits of trade. The major impediment to growth in agricultural trade remains the high level of protection and support given to agriculture in the developed countries (UNCTAD, 2003). Huge subsidies enable agribusinesses from developed countries, especially the USA and the European Union (EU), to export agricultural commodities below their full cost of production – a practice defined as “dumping” in the WTO.

The Doha Declaration and subsequent negotiations give a clear mandate to discipline these subsidies, but this is complicated by the provisions in the Agreement on Agriculture, which classify domestic support measures in different categories/boxes and conceal the alleged trade-distorting effects. This in a way reneges on the Uruguay Round Agreement on Agriculture. The promising part of trade negotiations under Article 20 of the AoA was a fresh negotiation round that would improve upon the existing weaknesses and the DDA was a bold initiative to correct these distortions, with special and differential treatment remaining an integral component of domestic support in the schedule of concessions and commitments. Most countries taking the ceiled binding level have less room for the special safeguard mechanism and will be limited to special products, leaving big countries like India with a gradual reduction formula for the bound tariffs.

Tariffs are taxes imposed on the import or export of goods, and more contextually referred to as import duties charged at the time of importing goods. Tariff imposes additional cost on the product thereby relatively reducing the cost of domestically produced goods. It also generates revenue from the goods imported and helps in managing the balance of payments.

Tariffs have many effects on the domestic economy. It increases the domestic price of the commodity which in turn induces domestic producers to increase the supply, and this in turn increases the price to the consumer. The tariff structure can also have an impact on international prices if the importer is big. It can lead to reduced volume of imports and damp down prices at the international level. The beneficial impact of tariff on the domestic producer can penalise the producers of other countries and this phenomenon can distort the trade mechanism.

The world average bound tariff for agricultural commodities is 62 per cent and the MFN applied tariff is 17 per cent. These are much higher than the tariffs on industrial products. The level of protectionism in world agricultural trade is ridden with concealed formats of tariff level which seriously impede market access. Most tariffs are expressed in ad valorem terms as a percentage of import value, but a significant portion is expressed in terms of specific or non-ad valorem terms. The specific tariffs are charged as duties per unit of import items. Specific tariffs suit the importing country as it is administratively convenient and has less risk of being under-invoiced. The tariff can also be a mixture of ad valorem and specific duties. The level of tariffs can be so complex that the comparison of tariffs across countries and commodities becomes difficult. And the process of breaking the import quantity to different tariff rates in quotas makes countries compete for the quota and complicates access severely.

Tariffication in South Asia
Developing countries had the provision of converting their tariffs as they existed in the base year before the end of the year of implementation, 2005. India, Sri Lanka, Pakistan, Bangladesh and Nepal in South Asia have converted their tariffs as ceiling bound rates as base level. Pakistan and Sri Lanka converted by 1995. All South Asian countries have been able to cover all tariff lines as MFN bound tariffs. The agriculture coverage in terms of tariffication is fully complete in South Asia except in Pakistan. Contrarily, the level of commodities in the non-agricultural sector is relatively incomplete with geometric mean of tariffication at less than 30 per cent.

Final MFN Bound tariff coverage in South Asia

The extent of coverage of ‘only tariffs’ does not reflect the transparency and improved market access in agricultural trade. The extent of tariffication is gauged by the mean value of all tariff lines and the values emerging from this region indicate that the highest protection tariffs in agriculture lines are set by Bangladesh. The compulsion of high tariff is more to do with the balance of payment problem and the level of development. The least protection is maintained by Sri Lanka and the average tariff in the South Asia region comes to 87 percent; excluding Nepal and Bangladesh the tariff marginally climbs to 98 percent. The differentials on account of level of development does not make any substantial difference in bound and actual market access in this region.

Simple MFN Bound and Applied average tariff in South Asia and Quad Countries

In the case of South Asian countries the applied tariffs are much lower than the bound level while in the case of the EC the applied tariff exceeds the bound tariffs. Undoubtedly, tariffs in the South Asian countries are very high but this has to be evaluated in the context of the general tariff structure in the world and the strength and sensitivities of domestic agriculture.

India has maintained a uniform band of tariffs which more or less reflect an over-cautious nature, in which it has ceiled the tariff to specific groups of commodities. In the case of applied tariffs in India, there are only 2.5 per cent of tariff lines that are zero. Bangladesh has the highest percentage of tariff lines - at 10 per cent - which are at zero. In the case of Quad countries this percentage is high, with Japan maintaining the highest percentage of tariff lines at zero percent. The extent of higher percentage of zero tariff lines in advanced countries in a way brings down the overall level of tariffs. In India, there is lot of difference on account of the types of crops and products and the dependence of small and marginal farmers on these products. These farmers cannot be displaced or threatened in the event of any surge in imports. The level of diversification is an important factor in the differing structure of tariffs. In most advanced countries the extent of specialisation is high with large scale production per farm.

Duty free subheadings in South Asia and Quad Countries

Where advanced countries such as the US, Canada, Japan and EC have freed many tariff lines at zero level, South Asian countries have restricted their boundaries without giving any such concessions. The opposite situation persists in the percentage of non-ad valorem duties. These duties, as said earlier, are whimsical and include specific duties on products. They are difficult to quantify in terms of value terms of imports. These duties are not included in the calculation of the average tariff levels.

Non-ad valorem duties in South Asia and Quad Countries

A comparison shows that the level of non-ad valorem duties were highest in the case of the US, and the South Asian countries have low prevalence of NAVs in their bound and applied duties. It makes the tariff line very transparent and easy to reduce while the NAV duties in some of the advanced countries are not transparent and less likely to get reduced.

The high level of protection in South Asian countries by virtue of high bound tariffs does not necessarily indicate that all tariffs lines are exorbitantly high. Nor does the low level of tariff in advanced countries necessarily indicate that they have all lines at very low levels. It is intriguing to note that the average bound agricultural tariff of some countries like the US and Canada are kept low, but they still maintain some very high bound duties above 200 per cent. The least maximum tariff was reported from Bangladesh followed by Nepal with 80 per cent as the highest tariff on agricultural imports.

Maximum ad valorem duties in South Asia and Quad countries

Another interesting revelation is that the average level of the maximum applied tariffs across South Asia is much less than the average maximum tariffs applied in agriculture by the Quad countries. These findings illustrate that bindings and reduction is a concealed format and countries can maintain double standards, showing a very low level of tariff at one end and at the same time maintaining exorbitantly high tariff lines.

A look at the national peaks - which are tariff lines at least three times the average tariff lines of the country - shows that the extent of peaks in South Asian countries are less than the levels of Quad countries in both bound and applied levels. This is more out of necessity in protecting domestic producers who constitute a major chunk of their national work force and cause huge loss in terms of GDP of their country, but as compared to some countries like the EU, Japan and Canada, the impact on GDP will be marginal.

National peaks in South Asia and Quad Countries (per cent)

Another important market access commitment agreed upon multilaterally is minimum market accession. This has been done in the format of two quotas giving minimum market concession; over and above the minimum access there is a higher duty. India had not initially designed quotas, but with better foreign exchange reserves and keeping the interests of consumers in mind, it offered during negotiations to give access on some lines of agricultural products.

References

Peters, Ralf and Vanzetti, David (2004), ‘Shifting Sands: Searching for a compromise in the WTO Negotiations on Agriculture’, Study Series No-23 Div on ITGS&C, UNCTAD, 2004.

UNCTAD, 2003, Back to Basics: Market Access Issues in the Doha Agenda. DIGS&C.

Paul Gibson, John Wainio, Daniel Whitley, and Mary Bohman, ‘Profiles of Tariffs in Global Agricultural Markets’, Market and Trade Economic Division, ERS USDA Report No: 796, (2001) at page1.

WTO (2005) ‘Agricultural Trade Performance By Developing Countries 1990-2003’, Committee on Agriculture Special Session Document No: TN/AG/S/19.

HAC Prasad, ‘Market access for exports from India Issues for post Cancun WTO negotiations in Industrial and Service Sectors’, Academy of Business Studies, New Delhi.

David W. Skully, ‘Economics of Tariff Rate Quota Administration’, Market and Trade Economic Division, Economics Research Service USDA Technical Bulletin No 1893, April 2001.