Mary Lou Malig*
THE trading superpowers have been in a mad rush to meet the deadlines they set for themselves at the 6th Ministerial of the World Trade Organization (WTO) in Hong Kong last December. Since then, they have been meeting in various formations in different locations and under different labels. There was NAMA week from 27 February – 3 March, held at the same time as the G6 senior officials (1) meeting in Paris. (NAMA stands for non-agricultural market access and covers all "non-agricultural" products.) Then there was the G6 meeting in London on 10-11 March and another full NAMA week 20-24 March. Despite all these meetings, it looks as if the negotiators will miss the 30 April deadline for concluding full modalities for negotiations in both agriculture and NAMA. Even WTO Director General Pascal Lamy is worried. In his speech in Brussels to the Committee on International Trade on Friday 24 March, he stressed the urgency of meeting the April deadline and the dire consequences if missed, "We have no more time to lose. The possibility of closing a deal- deciding on whether to succeed or to fail in the negotiations started over four years ago now – will be decided in the coming 40 days." (2)
However, this dire situation does not mean that developed countries will pull back from their current proposals in NAMA which, if successful, would lead not merely to the cutting of industrial tariffs of developing countries but to the slashing and burning of industries in the South.
A SWISS FORMULA
The major accomplishment of developed countries in Hong Kong was securing the Swiss formula with coefficients for reducing industrial tariffs (3). Many developing countries had pushed for a "Swiss-type" formula that would cut tariffs less drastically. In addition to the harsh Swiss formula, the powerful countries had already gained agreement in the July framework that reductions would be on a line-by-line basis, which means that all products will be cut instead of the more flexible average cuts (4) which allows for countries to decide which product lines to cut and which to maintain or even increase.
Furthermore, developed countries were able to slip in the non-linear mark up approach for unbound tariffs, which essentially means that unbound tariffs will be bound using the applied tariffs as the basis. Applied tariffs will be marked up and then bound and then cut following the agreed Swiss formula. How high the applied tariffs will be marked up is still under discussion. This is a significant concession from developing countries because in the interest of development policies, many of their tariffs have been left unbound and the ones that are bound are bound at a high level so as to give them the space to adjust their tariffs according to the needs of the economy. Usually applied tariffs are low so as to encourage imports in that sector but if the situation changes, governments can then move it up, using the bound tariff as the ceiling. Now, however, if unbound tariffs are bound using applied tariffs as the basis, the end result will most likely be low tariffs which will then be further cut by the agreed Swiss formula, leaving developing countries with the very raw end of a deal.
The significance of all this is the loss of policy space for developing countries and the likely devastation of their industries. This drastic approach to reducing tariffs is a first, as developing countries have never been required to cut all products on a line-by-line basis. And the binding of all tariffs prevents governments from adjusting tariff lines in the future for industrialization or development purposes.
THE NAMA RUSH
However, the job was not finished in Hong Kong and since the goal is to conclude the round at the end of 2006, the trading superpowers set 30 April as the deadline for concluding full modalities for agriculture and NAMA. Full modalities are generally understood to mean all the elements of the agreement, i.e. numbers and methodology. For NAMA, this includes a long list of items from the coefficients that will be used through to preference erosion and non-tariff barriers (NTBs). (5) But Ambassador Donald Stephenson of Canada, the new Chairman of the NAMA negotiations, seems to have a different understanding of things. He has declared that, for 30 April, only three things matter:
– coefficients for the Swiss formula
– paragraph 8 flexibilities, and
– treatment of unbound tariffs
All the rest, most of which are crucial to developing and least developed countries (LDCs), such as treatment of unbound tariffs for "paragraph 6" countries, treatment of small and vulnerable economies (SVEs), preference erosion and NTBs, can all wait until later. According to the Chair, these three elements will make up the "core modalities" and should be finalized by 30 April. In his roadmap for agreeing on modalities for NAMA though, the Chair targets 30 April for all modalities but later on states that the non-core modalities can wait until 30 July.
The first element, the coefficients for the Swiss formula, is crucial because it determines the tariff reductions. The lower the coefficient, the steeper the cuts. Developing countries have proposed a coefficient of 30 but in the London talks developed countries demanded a coefficient of 10, with a maximum 15, for developing countries. And there has even been talk of reducing from applied tariffs rather than from bound tariffs as originally stated in the July framework. (6)
The paragraph 8 flexibilities refer to the flexibilities that Paragraph 8 of Annex B of the July Framework gives to developing countries. (7) These flexibilities include: longer implementation period for tariff reductions, applying less than formula cuts to up to 10 percent (8) of tariff lines and keeping some tariff lines unbound or not applying formula cuts to up to 5 percent of tariff lines (9).
Although these flexibilities are minimal considering the harshness of the formula for reducing tariffs, they are still being contested by the developed countries. Reports from the recently concluded G6 meeting in London indicate that developed countries argued against the 5 percent exemption of products from formula cuts or being bound. Furthermore, developed countries with a few of their developing country friends, continued with their insistence that these flexibilities be linked to the formula whereas many of the developing countries have long stated that the paragraph 8 flexibilities should be treated as a stand alone provision and not linked to the negotiations on the formula which has the danger of watering them down. Mexico and Chile have even gone so far as to offer credits or concessions in exchange for the rest of the developing countries foregoing the paragraph 8 flexibilities.
The discussions on the treatment of unbound tariffs on the other hand, has not shown much progress.
SIMULATIONS OF A DISASTER
In order to get a clearer picture of these tariff reductions, the US was tasked to run simulations for ten countries: the G6 and four others: Canada, Egypt, Norway and Malaysia. The simulations were on the basis of the agreed Swiss formula with four coefficients (2, 5, 10 and 15) for developed countries and six coefficients (15, 20, 25, 30, 35 and 40) for developing countries. The simulations also tested the ABI (10) formula and, for developing countries, showed the variations when paragraph 8 flexibilities were applied.
The simulation results could not have been any clearer. For example, even with a coefficient of 40, using the Swiss formula and applying paragraph 8 flexibilities, Brazil and India would still have to reduce their bound tariffs by an average of 39.58% and 46.37% respectively while the EU and US with a coefficient of 10 will only reduce by an average of 23.36% and 21.22% respectively. (11) This goes against the "less than full reciprocity" clause in the agreement, which states that developing countries should take lower percentage reductions than their industrial counterparts.
And if the London talks are any indication, developed countries want developing countries to accept a coefficient as low as 10 and will only agree to a maximum of 15. This will not only be unfair to developing countries, disrespecting the less than full reciprocity principle, it will spell disaster to its industries. In a presentation to the UNCTAD Commission on Trade in Goods and Services and Commodities, Sam Laird, an advisor to UNCTAD, warned of the negative consequences for developing countries.
Using the developed country proposal of a coefficient of 10 for developing countries, Laird computed that developing countries could lose as much as 41 percent in tariff revenues, a critical source of government income. Furthermore, Laird warns of the risk of increased unemployment in various sectors. "The projections show significant job losses, especially in the motor vehicles sector, with job losses 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% and Central America and Caribbean by 2.1%." (12)
TOO LATE THE HERO?
Fighting back the aggression of the developed countries, a grouping of developing countries called the NAMA 11 issued a hard-hitting statement on 20 March. The NAMA 11, actually composed of 10 countries, Argentina, Brazil, Egypt, India, Indonesia, Namibia, Philippines, South Africa, Tunisia and Venezuela, called for "fair, balanced and development friendly modalities in NAMA" and accused developed countries’ proposals of threatening "to create an imbalanced and anti-developmental outcome." (13)
Pushed to a wall, the NAMA 11 lashed out at developed countries with the battle cry of "real development". Their demands include:
– policy space of developing countries should be respected and their development should be at the centre of negotiations, referring to the "disproportionate" demands of developed countries
– real market access for developing countries by eliminating tariff peaks, high tariffs and tariff escalation in developed countries, saying that "The coefficients being proposed by the developed countries for themselves will retain a large number of tariff peaks and the consequent tariff escalation, and thus negate the Doha mandate." (14)
– less than full reciprocity and special and differential treatment should be upheld
– tariffs must be reduced from bound rates and not applied rates. The proposal from developed countries to reduce from applied rates instead of bound is "not acceptable" according to the NAMA 11.
– flexibilities must be maintained, referring to the paragraph 8 and paragraph 6 flexibilities
– comparably high levels of ambition in both NAMA and agriculture, referring to paragraph 24 of the Hong Kong Ministerial Declaration
– all developing countries should gain from a development round
Of all the issues they’ve raised, the two that stand out the most are the issue of "less than full reciprocity" and Paragraph 24 of the Hong Kong Ministerial Declaration.
In pushing for less than full reciprocity, the NAMA 11 challenges the current framework of negotiations, which has been focused on finding coefficients for the Swiss formula. Numbers such as 10, 15, 30 are tossed around with many developing country ministers and diplomats not knowing what those figures will mean in reality. It is only now that the simulations results have come out, that many realize the devastation a coefficient of 10 would inflict and how developing countries are likely to bear the brunt of the cuts. To address this problem, the NAMA 11 has proposed to turn the system around and talk about percentage cuts rather than coefficients to make it clear that developed countries are taking the larger cuts rather than the developing countries. "What needs to be evaluated is the percentage reduction that developed countries undertake, which has to be greater than the percentage reduction that developing countries undertake." (15)
The second issue, Paragraph 24, is being used by the NAMA 11 to call the developed countries to task. Paragraph 24 states,
"We recognize that it is important to advance the development objectives of this Round through enhanced market access for developing countries in both Agriculture and NAMA. To that end, we instruct our negotiators to ensure that there is a comparably high level of ambition in market access for Agriculture and NAMA. This ambition is to be achieved in a balanced and proportionate manner consistent with the principle of special and differential treatment."(16)
The NAMA 11 is now using this paragraph to demand that developed countries offer in agriculture what they demand in NAMA. Argentina, a member of the NAMA 11, submitted a paper on this topic to both the agriculture and NAMA working groups, entitled "Implementing Paragraph 24 of the Hong Kong Ministerial Declaration." (17) In this document, Argentina argues that comparisons can me made between the negotiations in agriculture and NAMA around four central elements:
– cutting formulas
– flexibilities and sensitive products
– maximum tariffs and the relationship between bound and applied tariffs
– tariff simplification
Argentina’s main argument is that developed countries have been using a double standard for agriculture and NAMA, because as they demand a slashing of industrial tariffs from developing countries, they offer almost nothing in agriculture. The paper illustrates this by applying the proposed cuts in NAMA to agricultural tariffs and vice versa. The results are quite stark. "In Agriculture, the EU’s proposal for the same 35 percent tariff would give a new tariff of 19.25 percent on the basis of its proposed 45 percent linear cut. This linear cut is equivalent to what would be obtained by applying a Swiss formula with a coefficient of 42.78." (18)
The same observation is true for the flexibilities. While developed countries find endless ways of denying developing countries the paragraph 8 flexibilities in NAMA, it seems okay for the EU to maintain 8 percent of its tariff lines as "sensitive", effectively protecting it from cuts. And if computed, this 8 percent would "shield a higher share of agricultural tariff lines and import value from cuts than what was available to developing countries in the NAMA negotiations." (19)
REGRET ONLY COMES IN THE END
It seems that developing countries have realized – perhaps too late – what they gave away in Hong Kong and are fighting to reverse their losses.
Now they are crying foul and demanding less than full reciprocity. However, if they were thinking clearly in the first place, they should not have agreed to a Swiss formula for cutting tariffs. The basic principle of a Swiss formula is that higher tariffs are cut deeper and since, on average, developing countries have higher tariffs than developed countries, then obviously, developing countries will be the ones to bear the brunt of the cuts. One can only surmise that some developing countries agreed to the formula thinking that 1) that they were getting a good enough gain in agriculture to trade industries off or 2) that they could push for a good coefficient for themselves or 3) they had industries strong enough to withstand the cuts or they could be protected using the flexibilities.
On all counts, they bet wrong. On the first, it is now clear that the developed countries did not give real offers in agriculture. The subsidies will be maintained and they will still have their sensitive products. And for this, developing countries are paying a hefty price. On the second, even though the EU proposed dual coefficients, one for developed and one for developing, there was never any intention of giving real ground to the developing countries. There was a caveat to these dual coefficients; developed countries wanted them "within sight" of each other. And if the simulations results are any indication, coefficients "within sight" of each other will have developing countries slashing a greater percentage of tariffs than the industrialized countries. The only way these dual coefficients will work is if they are far away from each other or, to follow their terminology, "out of sight." As trade analyst Martin Khor of Third World Network illustrates, "A coefficient of 10 for the EU would mean that the developing country would need a coefficient of at least 120 in order that the less than full reciprocity principle is met." (20)
On the third, either scenario doesn’t work. Bigger developing countries which were confident that their industries could take the cuts did not expect developed countries to push for coefficients of 10-15 or that cuts be made from applied tariffs. And for those developing countries counting on using the paragraph 8 flexibilities to protect their sensitive sectors, that option is in danger of disappearing or being rendered useless.
Backed into a corner, developing countries are now realizing what a bad deal they agreed to in Hong Kong and that if the negotiations in NAMA continue in the direction that the developed countries are pushing them, there will be no development in this so called development round.
IT’S NOT OVER YET
This current situation is not entirely unexpected. Trade analysts and civil society organizations had been warning developing countries of the dangers of NAMA even before the July Framework was signed in 2004. The statement of NAMA 11 carries many of the warnings and demands of civil society groups when NAMA was being negotiated.
It is now incumbent upon these developing country governments to go back to their national constituents and listen to what these groups have been saying since the beginning. At the same time, unions, national coalitions and other sectors should heighten the pressure in the capitals and demand that their governments defend their interests. It is not too late to stop these negotiations from being concluded and prevent the bad deal from being implemented.
If developing countries stick to their position of refusing the demands of the developed countries, then there is a greater possibility that the modalities for NAMA will not be concluded by 30 April. If this deadline is missed, it will be more difficult for the rest of the deadlines to be met and for the Round to be concluded by end of 2006. And after 2006, it will be nearly impossible to conclude the Round. As Lamy explains, "This is not a date that our membership has picked out of the blue; it is not a date that has fallen out of a hat. Rather, it is a date that corresponds to the expiry of the Trade Promotion Authority of the United States." (21) What Lamy means is that the expiry of "fast track" authority means that this deal will not so easily pass through the increasingly protectionist US Congress.
Lamy, together with developed countries and some of his friends in the developing world, would have the rest of the developing countries think that the Round not concluding would be a disaster for all. But with the way this Round has gone from bad to worse, there is no indication that this deal will ever be about development. Developing countries have to wake up and see the truth: that the real disaster is for this anti-development Round to be concluded.
* Mary Lou Malig coordinates the Focus on the Global South trade campaign.
1. G6 is composed of the US, EU, Brazil, India, Australia and Japan
2. Director General Pascal Lamy speech, "Negotiations on the Doha Development Agenda: We Approach the Moment of Truth" 23 March 2006
3. A Swiss formula is a harmonizing formula that brings all tariffs closer to the same level, which means steeper cuts on higher tariffs. Developed countries’ average tariff is relatively low while developing countries’ are relatively high and are used to protect their industries and earn revenue.
4. This is known as "spreading" the cut, which means that developing countries have the flexibility to choose which products to cut, maintain or increase, so long as they meet the average tariff. This allows them to respond to developmental priorities in their country.
5. Preference erosion is one of the issues that developing countries want addressed in the NAMA negotiations. Trade preference programmes have allowed some WTO developed Members to provide preferential access to certain developing countries, particularly the G90 (African and LDCs). This margin of preference will be eroded with the liberalization of Most Favoured Nation tariffs.
6. Paragraph 5 of Annex B of the July Framework states, "tariff reductions or elimination shall commence from the bound rates after full implementation of current concessions"
7. Paragraph 8 flexibilities will only apply to developing countries that have more than 35 percent of their tariff lines currently bound in the WTO.
8. In the July framework, the number 10 is in brackets, indicating no agreement on this number.
9. The figure 5 is also in square brackets
10. ABI refers to the Argentina-Brazil-India proposal for reducing tariffs. This used a Swiss type formula with multiple coefficients and was considered a less ambitious formula.
11. JOB (06)/57 Negotiating Group on Market Access NAMA Simulations 17 March 2006. These NAMA simulation results can be downloaded from the Institute for Agriculture and Trade Policy (IATP) website http://www.tradeobservatory.org/library.cfm?refid=78854
12. Khor, Martin. "Big losses projected for Developing Countries from WTO’s NAMA proposals." TWN Info Service on WTO and Trade Issues 20 February 2006
13. Room Document, Submission by NAMA 11 group of developing countries to the WTO Negotiating Group on Non-Agricultural Market Access 20 March 2006
14. ibid, p.3
15. ibid, p.4
16. WT/MIN(05)/DEC Doha Work Programme Ministerial Declaration Adopted on 18 December 2005. The Hong Kong Ministerial Declaration can be found on the WTO website: www.wto.org
17. This communication from Argentina can be downloaded from the IATP website: http://www.tradeobservatory.org/library.cfm?refid=80370
18. ibid, p.2
19. BRIDGES Weekly Trade News Digest – New Paper on Comparing AG, NAMA ambition stirs controversy in both negotiating groups – Vol. 10. Number 10, 22 March 2006.
20. Khor, Martin "Plenty of questions as WTO’s NAMA negotiations resume" TWN Info Service on WTO and Trade Issues 8 March 2006
21. Director General Pascal Lamy speech, "Negotiations on the Doha Development Agenda: We Approach the Moment of Truth" 23 March 2006