Negotiations on NAMA have never received the kind of attention given to agriculture or services. How significant are NAMA negotiations in the current WTO negotiations? What are the potential gains and the costs for developing countries?
In aggregate terms, the estimated effects of global trade and welfare are similar in agricultural and non-agricultural products (including fish). This is somewhere in the region of US$ 70–100 billion in each case. Trade in services is potentially more important, particularly if there was new access in the temporary movement of labour from developing countries.
However, the distribution of those gains is different in each broad area. In NAMA, it is estimated that some of the biggest gains by developing countries would be in textiles, clothing and leather goods, with production gains of over 30% for some countries. However, we also estimate that there could be production and employment losses of a similar magnitude in some cases.
Of course, much depends on whether new anti-dumping safeguards or Technical Barriers to Trade/Sanitary and Phytosanitary (TBT/SPS) measures are applied to the liberalised products. Under various CGE (computable general equilibrium) modelling efforts, developing countries are expected to make huge long-term gains from the liberalisation of their own economies, but this does not take into account some potentially severe short-term adjustments and revenue losses, as well as undefined potential losses, as they forego the use of tariffs as one of the few tools left for industrial development.
There will also be some welfare losses, mainly among African, Caribbean and Pacific (ACP) countries, as preferences become less valuable, for example, Generalised System of Preferences (GSP), the Cotonou agreement, etc, as well as Regional Trading Agreements (RTAs).
Negotiations are stuck on the tariff reduction formula because almost all countries are focusing on the structure and not the numbers in the formula. However, the structures have no meaning without numbers, as the non-linear formula can lead to different reductions depending on the value of the coefficient. Why are countries hesitant to supply numbers to their formula? Is this an issue of who will blink first?
Although few recent formal proposals contain specific coefficients, there have been informal exchanges on the kind of numbers that proponents have in mind. In addition, there has been a lot of work at UNCTAD, the World Bank and the WTO on the implications of various proposals based on more or less realistic assumptions about what a package would look like.
However, it is fair to say that countries are reluctant to put hard numbers to the formulae while there are ongoing discussions on sectoral elimination and on flexibilities linked to possible exclusions, or the level at which unbound tariffs will become bound. All countries are in the process of balancing the accounts in NAMA, agriculture and services to try and see how they come out.
Part of the problem is that the Doha Ministerial Declaration, unlike the decisions to launch other recent rounds, does not contain any target for cutting rates by developed and developing countries, e.g. 36% by developed and 24% by developing countries, or similar targets. To some extent this has allowed developed countries to push for formulae that would result in deeper cuts by developing countries, while the Doha Declaration talks about ‘less than full reciprocity’ by developing countries.
In the view of some developed countries, deeper cuts would be ‘good policy’ for the developing countries – à la Washington consensus. Yet, recent work at the World Bank, UNCTAD and elsewhere shows that while some developing countries have done well under the extensive liberalisation they have undertaken unilaterally over the last 10–15 years, there is also concern about the failure of the unilateral reforms to deliver a similar response, especially in Africa.
The mood of the negotiations could be enhanced if there were some indications from developed country donors that they would be willing to help developing countries meet the costs of adjustment.
Is the Argentina, Brazil and India (ABI) proposal on tariff reduction, notwithstanding the support from the Caribbean countries, still alive especially after the flak it drew from developed and developing countries, including countries from the Asia Pacific region? Alternatively, is there a consensus emerging on the pure Swiss formula?
Until there is agreement on the whole package, everything is still on the table. The ABI proposal is, in effect, a rewrite of the earlier proposal by Ambassador Girard, the previous chair of the NAMA negotiating group. The Caribbean proposal is to allow for further modification by, for example, increasing the key coefficient to take account of preference losses and earlier unilateral liberalisation.
One key feature of the ABI proposal is that it takes as a starting point for each country its own average tariff, which then becomes the maximum rate for that country. It is a ‘harmonising’ formula within each country in that it reduces higher rates by a greater proportion than lower rates. However, the chair of the NAMA Group claims that there is an emerging consensus on a ‘simple Swiss’ approach, which would most likely have one coefficient for developed countries – for example, 6% - and another, much higher, coefficient for developing countries. Pakistan has suggested that this rate might be 30%. An important characteristic of a ‘simple Swiss’ approach is that it would tend to harmonise rates across countries irrespective of their initial tariff structures.
You have argued in your writings that a hard approach embodied in the pure Swiss formula would open the European Union, Japanese and US markets by twice as much. However, a Swiss approach for tariff reductions will perhaps not be acceptable to all developing countries. Given this scenario, is it pragmatic to negotiate for a dual approach of adopting a pure Swiss formula for developed countries and a modified Swiss for developing countries to cut industrial tariffs? What hurdles would such an approach face?
In my analysis prior to the start of the negotiations, I was comparing a simple Swiss formula with a linear cut. In our recent analysis of proposals that have come forward, it is now clear that, given the overall low average tariffs in the developed countries, the approach they adopt does not make a big difference, except for high rates on individual products. (This analysis also includes a differentiated linear cut supplemented by the constraint that no individual tariff should be more than three times the national average after the application of the formula).
The biggest differences in our estimated gains from the negotiations come from the degree of ambition (greater or less liberalisation, flexibilities, etc), and not from differences in the formulae. One key question is whether developed countries will try to seek exceptions - in textiles, for example - despite the mention in the Doha text that there are to be no ‘a priori exceptions’. If any such exceptions were sought at the last minute, this could impact severely on the overall results, and developing countries need to be watchful of their interests. On the other hand, perhaps importers are confident that anti-dumping and safeguard defence mechanisms will be sufficient to take the sting out of any challenge from developing country exports in sensitive areas.
The big issue in the current negotiations is what developing countries will have to do, and calculations based on most proposals show that they will have to make a higher percentage point reduction cut in their tariffs. This could be beneficial in the long term, but it could have serious short-term repercussions, especially for industrial policy, unless there is flexibility for developing countries as well as funds (preferably not more loans) to offset the costs of adjustment and to kickstart their economies – something that would need to be addressed outside the WTO. In this sense the G8 proposals are helpful.
Developing countries such as India argue that the modalities of tariff reductions need to be resolved before undertaking any negotiations on sectorals. Is this stand too rigid? Why can’t developing countries make a conditional offer on sectors of export interest to them by proposing to cut tariffs in these sectors more steeply than the sectors outside the sectoral approach, provided developed countries eliminate their tariffs on these sectors?
One problem is that estimates show that the sectoral negotiations may have a greater impact – positive and negative – on developing countries than any formula.
Another problem is that in some of the key sectors, developing countries also have important defensive interests both in terms of their own imports and in protecting preferences in other markets. Setting zero rates for these sectors may also increase tariff dispersion.
There is also some hesitancy about putting anything on the table until the shape of the overall package becomes clearer. In this respect it is also important to recall that the current negotiations have to be concluded as a ‘single undertaking whereby nothing is agreed until everything is agreed’. And given the lack of progress in services and the blockages in agriculture, one should not expect NAMA to forge ahead of the other areas of negotiations.
Having said that, there are sectoral negotiations underway on the basis of trying to form a ‘critical mass’ of traders that could agree on sectoral elimination, allowing others to become free riders. The size of the critical mass will depend on how many traders dominate trade flows in individual products.
Given the present deadlock on NAMA negotiations, is a deal still possible? What possible strategies could developing countries follow in the coming months to ensure maximum development gains for the NAMA negotiations?
Of course a deal is possible, but it is unlikely to happen in isolation. There has been a major effort to clarify technical issues, and there has also been a great deal of probing to try to determine where the ‘other side’ might be willing to show flexibility. That being said, the developed countries have pushed very hard, especially against the larger developing countries for which trade-offs in other areas of the negotiations are key.
The developing countries, which have many diverse interests even in NAMA, need to make their own calculations of how possible outcomes might affect them, and be prepared to defend their end. But they should also be seeking commitments on extended transition periods, and, as I said earlier, commitments by donors to help them through the pain of adjustment and ‘aid for trade’ to address supply-side issues.
Darlan Fonseca, an articulate campaigner on trade and development issues, speaks to Centad about NAMA negotiations
‘The current direction of NAMA negotiations is not good for developing countries’
Darlan Fonseca, an articulate campaigner on trade and development issues, is with the South Centre, Geneva, Switzerland. He speaks to Centad about the future of NAMA negotiations.
Given the fact that industrial tariffs are an important policy tool and also a major source of revenue for many developing and least developed countries (LDCs), will negotiations on Non Agricultural Market Access (NAMA) be detrimental to the developmental needs of these countries?
NAMA could certainly become a major threat to development. To begin with, it is worth recalling that the bulk of developing countries did not wish to start new negotiations for the reduction of their industrial tariffs. They agreed to these negotiations in the belief that the mandate contained in Paragraph 16 of the Doha Ministerial Declaration provided them with enough flexibility to accommodate their specific developmental needs and concerns. The fact now is that the mandate is indeed explicit in recognising these concerns, but developing countries are under enormous pressure to reduce tariffs.
Given the fact that a number of WTO agreements already restrict the use of certain policy tools that could be useful to promote industrial development in poor countries (such as the prohibition of certain subsidies and restrictions on performance requirements and investment measures), tariffs play an increasingly important role as a policy instrument. Tariffs are very easy to implement, hence they are particularly attractive for poor countries with limited administrative capacity. Moreover, for most developing countries, tariff is the only instrument available to implement industrial policies.
The industrialisation of developing countries has strategic importance; it stems from the urgency to generate employment and diversify their economies away from the production of primary commodities and low value-added goods. Therefore, industrialisation of developing countries would contribute considerably to poverty alleviation.
Last but not least, tariffs also play a fundamental role as a source of revenue for the government in many developing countries. The share of import duties out of total government tax revenue can be as high as 53% in developing countries. Even in countries where this share is much lower, say 10%, governments may find it extremely difficult to impose other taxes and replace this revenue.
Is the issue of tariff reduction formula the most ticklish of all the issues in the NAMA negotiations? Is there a possibility of having a common meeting ground on the formula issue especially after the flak that the tariff reduction proposal from Argentina, Brazil and India (ABI) drew from developed countries and some developing countries?
The modalities that will determine the approach to tariff reductions are obviously a very sensitive and fundamental issue in the NAMA negotiations. In the July framework, members agreed that they would use a formula to reduce tariffs. The members also agreed on some elements of such a formula. However, differences around the formula have increased over the past months, indicating that developing countries are definitely not comfortable with a formula that does not reflect their developmental concerns, including the right to use tariffs selectively.
In addition to the recent ABI proposal, two other proposals by developing countries were submitted. The first was submitted by a group of Caribbean states, and the second by Pakistan. Although both proposals use different approaches, what they reflect is a strong convergence among most developing countries that a simple Swiss formula with an arbitrary, low coefficient would be detrimental to their development. In fact, several developing countries have repeatedly said that special and differential treatment has to permeate all areas of NAMA negotiations.
Negotiations around the structure of the formula (that is, the type and approach of the formula) and the actual figures (the figures used in the coefficient that determines the steepness of the reductions) will continue to attract enormous attention in NAMA over the coming weeks. However, unless special and differential treatment and development are truly incorporated in the discussions, it is hard to see how the divergences will be bridged in the near future.
What kind of flexibilities do developing countries need to mitigate the harsh effects of the tariff reduction process? Are flexibilities such as having a longer implementation period and applying less than formula cuts to 10% of tariff lines, as given in paragraph eight of Annex B of the July package, sufficient for developing countries?
First of all, it is difficult to strike a balance between the formula and the flexibilities. However, the flexibilities alone (paragraph eight of Annex B) are unlikely to capture specific developmental concerns of all developing countries.
Industries in developing countries are very uneven. While some sectors in a few countries have reached a relative level of competitiveness, many industries are still incipient. This is not to mention the fact that several developing countries still rely largely on primary, unprocessed exports. Therefore, the formula and the flexibilities need to grant developing countries the right to protect specific sectors.
Whether the 10% exception in paragraph eight is enough or not is a question whose answer may vary from country to country. In any case, it is worthwhile mentioning that, in addition to limiting the number of tariff lines to be exempted from the formula to 10% of all tariff lines, the paragraph also says that the exempted lines must not exceed 10% of members’ imports. Finally, the paragraph also says that at least half of the formula cuts will have to be applied to the exempted lines, which may be difficult for countries where low tariffs already apply to the sensitive sectors to be protected.
Finally, once the modalities are adopted, significant implementation periods, related to the administrative and economic realities of developing countries, will also be extremely important.
How just is the demand of developed countries that developing countries should increase their tariff-binding coverage on industrial goods to 100%? Should any proposal on tariff-binding coverage not take into account the existing coverage of different countries?
Although exempting developing countries whose binding coverage is less than 35% from applying the formula is certainly fair, the effort that is being required from these countries is disproportionate.
The countries concerned by this option (paragraph six of the Annex) are very poor, mostly African, developing countries. Some of these countries have bound as little as 0.1% of their tariff lines in the WTO and increasing their binding coverage to 100% would mean increasing their commitments by a huge proportion.
Even more worrisome is the fact that a maximum ceiling has been established for their new tariff bindings (at 27.5%), which means that these countries will not be free to bind tariffs at any level. Moreover, this ceiling could also require tariff reductions where a tariff is currently set above that level.
Many LDCs are concerned over the erosion of preferences because of tariff liberalisation. What could be the possible methodologies for LDCs to deal with the issue of eroding preferences?
LDCs were exempted from undertaking mandatory reductions through the formula but are also affected by reductions in two ways. The first is that the modalities agreed to in the current round are likely to create a precedent that will be used in the future. The second serious implication for LDCs is that when other countries that grant LDCs more favourable tariff treatment reduce their tariffs, they reduce the difference between the tariffs applied to preference-receiver LDCs and those applied to all other countries. The reduction of that tariff gap will ‘erode’ the competitiveness of goods from LDCs vis-à-vis goods produced elsewhere.
The erosion of preferences is a serious threat because many LDCs rely largely on preferential treatment for their exports. Many African and Asian countries took advantage of preferences to start diversifying and industrialising their economies. There is no doubt that these countries will face higher adjustment costs as a result of the NAMA negotiations.
To mitigate these costs in these countries, a panoply of measures will be needed. These include targeted technical and financial assistance to help modernise sectors, to convert redundant capital into productive capital and to take advantage of new market access opportunities. These countries may also face an increase in unemployment, and will need the financial resources to, for instance, retrain their workers. Moreover, countries that currently do not grant preferential access to LDCs may wish to improve market access conditions for LDC exports so as to compensate, at least partly, for the erosion of preferences in other markets.
The notifications stage in Non Tariff Barriers (NTBs) negotiations in NAMA is over. However, there is no consensus on the direction or modalities for future negotiations; request/offer, multilateral/ plurilateral, vertical/horizontal, etc. Further, a well-directed proposal is yet to be submitted. What strategy should developing countries adopt in NTB negotiations to ensure optimum gains?
Developing countries are very interested in negotiating the reduction or removal of non-tariff measures that hinder their exports, particularly to the developed countries. Although each WTO member applies standards, in principle, for legitimate reasons such as human health and safety, sometimes these standards are overly stringent and clearly used for protectionist purposes. Such measures include abuse of anti-dumping and safeguard measures, abusive use of technical barriers and sanitary and phyto-sanitary measures and abuse of administrative requirements (such as licensing).
Nonetheless, non-tariff barriers are very difficult to negotiate. Only a total harmonisation, or mutual recognition, of all standards of all members could actually avoid these difficulties. That is unlikely to happen and would not even be desirable given the WTO trade mandate.
Developing countries can continue with the identification of the hurdles they face so that the scope and measurement of the costs of NTBs are better known. Developing countries can also seek an improvement of the relevant WTO agreements, to avoid too much discretion where that is leading to abuses. Finally, developing countries can also use the mandate to negotiate NTBs to establish funds for compliance with specific NTBs.
Developing countries have been able to form effective coalitions in agriculture such as the G20 and G33. Why have they been unable to do this in NAMA negotiations? What strategy should developing countries follow in NAMA negotiations in the coming months before the Hong Kong ministerial meeting?
NAMA negotiations have been very atypical in the sense that no major coalition of developing countries has emerged. The African, the Caribbean and some Latin American countries have adopted common positions and the G90 countries are also united in some respects. However, there is indeed no cross-cutting, all-encompassing coalition of developing countries.
One of the reasons for this is that developing countries’ interests in NAMA are very diverse. While some seek to remove the tariffs peaks and escalation that their exports face in developed countries, others struggle to maintain their trade preferences. While some are seeking greater market access not just in developed countries but also in developing countries, some wish to protect sensitive industries and their right to develop.
Another reason is that the modalities are structured in a way that has divided developing countries into many groups. They grant flexibilities to some, even greater flexibilities to a few, and none to the rest of the developing countries. The developed countries are well aware of the divisions among developing countries and have been exploring them very efficiently to avoid their uniting behind common positions.
Despite this, more developing countries do realise the benefits of strategising and adopting common positions. As can be seen in the differences around the choice of a formula, developmental concerns are surfacing more strongly. Developing countries are realising that despite their differences, the current direction of NAMA negotiations is not really good for any of them. |
