Big losses projected for developing countries from WTO's NAMA proposals

Original Publication Date: 
19 February, 2006

Developing countries are projected to suffer significant "adjustment costs" as a result of reduction commitments in industrial tariffs under the Doha agenda. The costs, which will vary among different countries, include loss of output and jobs in some industrial sectors and loss of government revenue.

The seriousness of these costs was brought out in a presentation by Advisor to UNCTAD, Sam Laird, at the 10th session of the UNCTAD Commission on Trade in Goods and Services, and Commodities, on Friday (10 February).

Laird also warned that unlike developed countries, the developing countries were not prepared to deal with the adjustment costs as there was an absence of social policies and safety nets such as unemployment benefits or retraining for workers displaced by liberalization.

The power-point presentation by Laird (who explained that the views expressed were in his personal capacity) was made during a panel discussion on market access, market entry and competitiveness.

Laird said that the Doha agenda's outcome was projected to result in increased welfare and exports in the long term, but these long-term gains can only be realized by mitigating against the short-term risks facing devel oping countries from undertaking liberalization commitments.

One of the major risks is the loss in tariff revenue. The developing countries currently obtain $156 billion in tariff revenues. In projections made by Laird and other colleagues in UNCTAD, this base tariff revenue would fall by 41% in an "ambitious" scenario where non agriculture tariffs are cut under the "Swiss formula".

The Swiss formula, in which higher tariffs are cut by higher rates, has been agreed to by WTO members, as most recently confirmed at the WTO's Hong Kong Ministerial. In this formula, the cuts within all tariff lines will also be deeper if the coefficient is smaller, and all tariffs will have to fall below the number of the coefficient.

The US and the EU have suggested a coefficient of 10 for developing countries. This is considered an "ambitious" scenario for developing countries, as all their tariffs will have to fall to below 10% when the Swiss formula with this coefficient is applied to them.

In the projections presented by Laird, the tariff revenue of developing countries as a whole will fall from the base of $156 billion by 41% under an ambitious scenario, 29% under a "moderate scenario" and by 21% under a "flexible scenario", with a Swiss formula used under all the three scenarios.

Another major risk dealt with in the presentation was increased unemployment in various sectors in developing countries and regions.

If the Swiss formula is applied under the ambitious scenario, the projections show significant job losses, especially in the motor vehicles sector, which would be the main sector in which the developing world would suffer losses.

There would be reductions of labour usage in the motor vehicles sector in China by 10.4%, India by 5.6%, the rest of South Asia by 36.8%, South East Asia by 6.6%, Brazil by 4.3%, the Andean Pact countries by 9.6% and Central America and Caribbean by 2.1%.

In China, there would be job losses in the machinery and equipment sector (by 2.8%), non- ferrous metals (4.1%), motor vehicles (10.4%) and other manufacturing (0.2%), while there would be an employment gain of 6.7% in electronics.

In India, the projections show job losses in machinery and equipment (by 2.2%), non-ferrous metals (25.9%), other manufacturing (2.1%), motor vehicles (5.6%) and electronics (1%).

In the rest of South Asia, there would be job losses in machinery and equipment (by 8.7%), non-ferrous metals (13.4%), motor vehicles (36.8%), other manufacturing (7.3%) and electronics (14.9%).

In South East Asia, job losses are projected for non-ferrous metals (6.4%), other manufacturing (2.3%), motor vehicles (6.6%) and electronics (1.7%).

In Brazil, the job losses would be in machinery and equipment (by 5.2%), other manufacturing (2%), motor vehicles (4.3%) and electronics (1%), with a job gain in non-ferrous metals (3%).

In Argentina, Chile and Uruguay, job losses are projected for electronics (7.6%), other manufacturing (2%) and non-ferrous metals (1.4%), with job gains in motor vehicles (9.4%) and machinery and equipment (3.2%).

For the Andean Pact countries, job losses would be in machinery and equipment (by 4.7%), other manufacturing (2.9%), motor vehicles (9.6%), and electronics (10.7%) with job gains in non-ferrous metals (6.4%).

For Central America and Caribbean region, the job losses are in machinery and equipment (by 6.3%), non-ferrous metals (8.2%), motor vehicles (2.3%), other manufacturing (6.2%) and electronics (6.8%).

For Sub-Saharan Africa, job losses are projected for machinery and equipment (0.6%), electronics (3.5%) and other manufacturing (0.5%), with a job gain of 8% in non-ferrous metals and 0.6% in motor vehicles.

In the Middle East and North Africa region, the projections show job gains in electronics (5.1%), motor vehicles (1.9%), and non-ferrous metals (5.8%), with job loss in other manufacturing (1.5%).

Referring to case studies done by UNCTAD of the experiences of adjustment to trade reforms in 8 countries (Bangladesh, Brazil, Bulgaria, India, Jamaica, Malawi, Philippines and Zambia), Laird said there were one or two positive cases but in many other cases the countries suffered important job losses and reduced growth rates, as a result of trade liberalization.

He added that a recent World Bank publication on globalization and workers in developing countries also found that after trade reforms, there was lower growth and negative effects on jobs.

Laird said that the UNCTAD-managed studies found that in Zambia and Malawi there had been no pick-up yet in growth for 15 years after the reforms: there was a downturn in these countries and no recovery.

In his power-point presentation, Laird identified two broad categories of trade-related adjustment costs: costs borne by the private sector and those borne by the public sector.

Under the private sector, the costs are borne by labour (in the form of increased unemployment, lower wage levels, retraining costs and personal costs such as psychological suffering), and by owners of capital (opportunity cost of temporarily unemployed capital, cost of capital rendered obsolete, and transition costs in shifting capital from one activity to another).

Under the public sector, the costs are mainly fiscal and economic (loss in tax revenue, erosion of benefits from preferential agreements, efforts to ensure macroeconomic stability, unemployment benefits and retraining programmes, implementation costs of trade-related reforms and costs of programmes to improve industry competitiveness). There are also costs related to non-trade concerns (food security, support to rural areas and environmental concerns).

Laird's presentation also briefly discussed policies to cope with adjustment. These include the gradual phasing in of policy changes so that labour and capital have more time to adjust, as well as time to implement tax reforms to make up revenue losses.

There could also be payment of compensation to potential losers such as those losing from preference erosion.

Another category of coping policies are social policies and safety nets, including unemployment benefits and retraining of displaced workers.

Laird remarked that social safety nets were found to be absent in developing countries. Yet they are being asked to take on new obligations, he said.

During question time, a participant commented that if the UNCTAD studies find countries not having recovered from a downturn even 15 years after trade reforms, then the adjustment costs in such cases cannot be termed "short term". It was also possible that the process taking place was not a transition or an adjustment to higher growth but could be leading to a new equilibrium at lower levels of output and employment.

He expressed concern that the projections showed that applying a Swiss formula with low coefficients in the ambitious scenario, as being proposed by the EU and US in the WTO negotiations on NAMA, would lead to such significant losses of government revenues and of jobs in developing countries.

Especially since there were no social safety nets, and no guarantee that the adjustment would be short term or temporary, it was more important to get the design of the NAMA agreement correct, rather than have one which results in losses for developing countries.

Laird responded that the revenue loss was potentially serious for some developing countries, as tariff revenue constitute up to 40% of total government revenue and they will face problems. While the IMF is giving support for some countries to shift to other taxes, there is no agreement on how easy it is to do so. Even some developed countries have had problems in this area.

The shift to other forms of government revenue requires time, expertise and resources, so there is a case for time and support to be given to developing countries, he said. As for job losses, this was a very difficult problem to address. Some workers who are displaced would not be able to fit into new jobs.

The biggest problem, added Laird, was how to stimulate supply-side response. It is an "incredibly difficult problem", and there is no magic wand to solve it, he said.