WTO members still far apart on NAMA

Original Publication Date: 
24 September, 2005

A two-day meeting of the WTO's Negotiating Group on Market Access ended on 22 September after discussions focusing mainly on three issues -- the tariff reduction formula, treatment of unbound tariffs and flexibilities for developing countries.

According to trade diplomats, the meeting on non-agricultural market access (NAMA) did not seem to make progress towards convergence. Instead, the differences among members on these issues were as wide as before the WTO's summer break, with the countries reiterating their known positions.

Members are still far apart on an agreement on the formula and its elements, in particular how to establish the coefficient, or coefficients, and also how to apply the flexibilities for the developing countries.

Members were also divided on how to treat the three issues of formula, unbound tariffs and flexibilities. Many developing countries insisted that flexibilities were a right of developing countries and should be treated separately from the issue of the formula.

However, developed countries were equally adamant that the issues were linked, and that a formula with a coefficient that allows lower reduction rates for developing countries would mean that the latter would have to forfeit the flexibilities, or live with less flexibilities. The code term for this approach is the "integrated approach".

At the meeting, Mexico introduced a new proposal through a power-point presentation. Pakistan explained its proposal for two coefficients. Jamaica explained in greater detail the proposal by several Caribbean countries for multiple coefficients based on "development factors", while Barbados introduced the position of small economies.

Mexico explained that its proposal is based on built-in flexibilities in the formula by incorporating the provisions of paragraph 8 of the NAMA July framework (which deals with flexibilities for developing countries), as well as a "rational formula" to mark up unbound tariffs (with built-in flexibilities). There would be a different coefficient for developed countries.

It explained its principle behind the flexibilities as follows: Assume that after applying the Swiss formula, the tariff rate of products 1 to 5 results in 30% for each of them. Thus the average tariff rate is 30%.

Assuming a member chooses not to apply the formula to product 3, leaving its tariff at the base rate of 50%. To maintain the overall level of ambition while applying flexibility, the member would proportionately lower the tariffs of products 1, 2, 4 and 5. To keep the average tariff at 30%, the tariff for these four products would be 25% (while the tariff of product 3 is maintained at 50%).

For unbound tariffs, Mexico proposed the use of its "rational formula" to increase the applied rates by a mark-up, which is higher for the lowest applied rates. The base rates are then subject to the formula. Flexibilities may be built in for up to 5% of total unbound tariff lines (not exceeding 5% of imports of such tariff lines); and for such products the corresponding mark up cannot exceed 50% of their applied rate.

Pakistan explained its proposal, which mainly involves a simple Swiss formula with two coefficients, with values of 6% for developed countries and 30% for developing countries (these being around the present levels of the average bound tariffs for the countries respectively).

Ambassador Ransford Smith of Jamaica introduced a paper on behalf of Antigua and Barbuda, Barbados, St. Kitts and Nevis and Trinidad and Tobago and Jamaica, giving details of the rationale for their joint July paper on a "Development-oriented approach to tariff reduction" (JOB(05)/150.

The paper said the countries' political message is that for small open economies that are already contributing disproportionately and given their vulnerabilities, "we find the high level of ambition, and the low level of flexibility, that some proposals on the table suggest, inimical to our interests and thus extremely difficult to accept."

The countries "do not believe that equity and a balanced outcome could now require that they undertake further drastic reduction in their bound tariff rates." They have a preference for an overall average tariff-reduction approach along the lines used in the Uruguay Round.

"This would provide the flexibility required to enable developing country members to make choices appropriate to their circumstances, whilst at the same time ensuring multilateral commitment to tariff reduction. We would like to stress that one size does not fit all, especially since members find themselves in different circumstances and therefore require a mechanism that allows for those circumstances to be taken into account in the outcome."

They said the simple Swiss formula is inadequate to meet their development needs. Even if there are two coefficients, one for developed and one for developing countries, this would not be able to take care of the variations required because of the wide range of circumstances involved.

The solution is to have multiple coefficients that take into account the circumstances and needs of developing countries. Their proposal and formula are aimed at avoiding the one-size-fits-all approach, and enabling development factors to be taken into account. It allows for multiple coefficients, through a system of credits to be given to each country depending on its situation in relation to the development factors.

The value of credits would be added on (as an extra C coefficient) to the B coefficient. The formula also takes into account the present level of bound tariffs of each country.

The paper explained that the coefficient 'C' will vary from developing member to developing member and will represent the sum of 'credit' accumulated for the various factors. It elaborated on the "development factors" to be taken into account for credits to be summed up in the coefficient C.

First, developing country Members which have bound a substantial percentage of their tariff lines. These countries have already to a significant extent autonomously liberalised and contributed to the predictability of the trading system. This contribution should be taken account of.

Second, developing country Members that have undertaken autonomous liberalization. By having previously already undergone liberalisation, these countries have made contributions while at the same time it should be recognised that their ability to contribute further may now be constrained.

Third, members dependent on customs and other border taxes which constitute an important portion of government revenue. For many countries, customs and border taxes represent a large part of government revenue. Tariff reduction will correspondingly reduce government revenue. This will affect the ability of government to maintain its budget, including for infrastructure and social development. Time is required for adjustment for example to other sources of revenue. The greater the revenue dependence on customs related taxes, the greater the adjustment required.

Fourth, developing countries with incipient industries will require the continued use of tariffs to ensure the continued and increased viability of local industrial enterprises and to significantly increase or at least maintain industrial jobs and employment.

In developing countries, the local industries and enterprises are smaller and weaker (technologically and financially). The application of steep tariff reduction would adversely affect these industries. Therefore, the vulnerability of domestic industrial enterprises have to be taken into account when assigning a coefficient.

Fifth, developing countries need to maintain or expand their national policy space so as to be able to adopt measures that lead to successful industrial development. There should thus be flexibility in the use of tariffs to enable potential industries to develop.

This factor is to take account of the need for nascent or potential industries to develop in developing countries. For example, a country in the first phases of industrialization may be producing a finished consumer product and importing inputs and machinery. To lower costs, the imported parts may have low or no tariff.

In a more advanced phase of industrialization, the country may want to locally produce the inputs and machinery. Thus, it would not be prudent or farsighted to presently bind the tariffs of products that are not locally produced today at low levels or at zero. This requirement for policy space for potential industries should be taken into account.

Sixth, developing countries also need to have the flexibility and policy space to vary their tariff levels in line with developments and needs such as changes in economic priorities or circumstances.

Seventh, developing countries facing the challenge of preference erosion should also be accorded additional policy space to help address the adjustment costs resulting from this new trading environment.

"Preference-receiving countries are finding difficulty in coping with erosion or loss of preference margins," said the paper. "This problem is expected to become more serious with the multilateral commitments to liberalise under the Doha programme.

"Such countries are facing adjustment problems which are expected to worsen. An important part of adjustment is for countries to expand production in existing or new areas to make up for the shortfall caused to certain sectors resulting from preference erosion. Thus, they require more space to develop their industries."

Eighth, the degree of openness of the economy of the developing country Member to trade. Relative openness to trade is one reflection of autonomous liberalisation, and this should be taken account of. It carries with it vulnerability to external developments and shocks, and is an indicator as well as of a high level of existing market openness.

Ninth, the economic vulnerabilities of developing countries. "Besides vulnerability to trade shocks, some developing countries are also vulnerable to other factors, which increase economic vulnerability, and require flexibility in approaching tariff reduction."

The Caribbean countries said that the flexibilities in Paragraph 8 of Annex B of the General Council Decision of 1 August 2004 are not affected by the application of the proposed formula.

"We are of the view that the flexibilities in para 8 are to be treated as stand-alone SDT rights of developing countries, and are not to be used for 'trading off' in relation to the formula or other factors. We would also stress that the flexibilities in para 8 are to be further negotiated. We find them inadequate and too restrictive."

Barbados, speaking on behalf of small economies, said that the small economies cannot overemphasize the high importance of flexibility in the NAMA negotiations for countries with an insignificant share of world trade, a small production and export base and little or no comparative or competitive advantage.

"Tariffs are a primary means of ensuring the viability of our vulnerable domestic industries, achieving sustainable levels of development and maintaining revenues. We urge that the tariff reduction approach used in negotiations be development-oriented and suited to developing countries' trade profiles and their ability to offer and sustain concessions.

"We regard paragraph 8 as the 'ground floor' on which additional measures to provide flexibilities should be built. In other words, the S&D flexibilities in the final modalities should be augmented from the current paragraph 8. To make S&D conditional is contrary to the spirit of both paragraph 16 and the DDA."

The statement added that small economies would like the following outcome: a minimum level of tariff reduction by small economies, which in no way impacts on our current applied rates; no tariff reduction commitments by small economies on products which have strategic value for our economic development; longer implementation periods for small economies; tangible recognition for those small economies which have a substantial percentage of tariff binding coverage; the elimination of NTBs on products of export interest to small economies.

In the discussions, several developed countries stuck to positions stressing the need for an approach that results in developing countries having to cut their present applied tariffs.

Trade diplomats said that the developed countries wanted to link the issue of the formula with the issue of flexibilities. For them, flexibilities (such as exemptions for a number of products from binding, or from the full formula cut) would be provided only if developing countries are subjected to steep tariff cuts represented by a low coefficient in the proposed Swiss formula.

Should developing countries be allowed a lower rate of tariff reduction (from a higher coefficient in the formula), then they should not be allowed to enjoy the flexibilities, according to this line of thinking.

At the meeting, the US said it could not agree to the 30 coefficient for developing countries (proposed by Pakistan) as this would not sufficiently affect the tariffs of important developing country markets that have high bound rates. It said that the flexibilities in para 8 are not a "given" but had been proposed in the context of a single coefficient. It suggested that if there were two coefficients, there should not be para 8 flexibilities.

Canada agreed with the US that a coefficient of 30 for developing countries would not produce results. Meanwhile, the EU retained its position that there should be a single coefficient, with flexibilities in paragraph 8.

However, several developing countries, including India, Malaysia, Philippines, Argentina, Thailand, Indonesia and several Caribbean countries, insisted that the flexibilities in paragraph 8 were independent from consideration of the formula or its coefficients, and some said it was "not negotiable."

Indonesia said that the issue of formula in relation to flexibility has been discussed at length but there had been no agreement. Seven proposals have been on the table, but most of them do not seem to satisfy the interests of all members. Indonesia proposed differentiated coefficients as part of the principle of "less than full reciprocity."

Stating that the flexibilities are "non negotiable", Indonesia added that flexibilities are essential for developing countries as they provide some policy space to respond to industrial development needs in future. Thus, developing countries should get substantially higher coefficients than developed countries to enable them to maintain adequate policy space.

On treatment of unbound tariffs, Indonesia said for many developing countries the currently unbound tariffs are sensitive for their industrial development needs. The flexibilities in paragraph 8 should not be set aside. Special treatment should be granted, especially for low unbound tariffs (which should be treated more favourably than high unbound tariffs).

According to trade officials, Brazil and Argentina emphasized that the concessions that they are ready to make in NAMA will depend on what they get in other areas of the negotiations, especially in agriculture.

Meanwhile, several informal meetings were taking place on a "sectoral approach," with groups discussing accelerated tariff elimination on a sectoral basis.

The Group discussed 4 new proposals on tariff elimination - Japan, Singapore, and Chinese Taipei on sports equipment; Japan Singapore, Chinese Taipei and Thailand on bicycles and its parts; Hong Kong, Japan, Chinese Taipei, Singapore, Thailand, and the US on gems and jewellery sector; by APEC countries on three new IT products (multi-chip integrated circuits, modems and digital multi-function machines) not covered in the IT Agreement.

The Chair of the NAMA negotiations also provided details on his consultations on the conversion of non-ad valorem duties to ad valorem equivalents. He said that members can put this matter behind them since the group has accepted the methodology that has been developed in the agriculture talks. Some members have already started the conversions and could complete them by end of September.

Discussions on non-tariff barriers have also been taking place. The EC said that it was in favour of complete elimination of export taxes. Argentina defended the use of export taxes as a legitimate policy instrument for developing countries. Argentina said that it was against the debate on export taxes, as such a sensitive issue would require a negotiating mandate and this group does not have a mandate to discuss this issue.

The next meeting of the Negotiating Group will be on the week starting 10 October. The chair of the Group indicated that he would conduct consultations before that.

(*With inputs from Goh Chien Yen and Kanaga Raja.)