Where are the World Trade Organization negotiations headed' No one, least of all Pascal Lamy, wants to give up the Doha Work Programme as a lost cause. But for all practical purposes, the December 2006 deadline is now impossible. Not unless there is a dilution of the agricultural reform agenda, and Brazil and India agree to push less aggressively on agriculture and simultaneously yield on non-agricultural market access (NAMA). This is what developed countries effectively mean by a shallow and low-ambition round. Go easy on agriculture and go heavy on manufactured products. After all, India's manufactured tariffs are already low. The applied rates are considerably lower than the bound rates. Bindings are maximum ceilings given as commitments to WTO. So, if there is already this gap between applied and bound rates, India clearly has no problems in reducing duties on manufactured products. Why not formalize this by yielding more on NAMA'
The answer is obvious. Multi-lateral negotiations involve a quid pro quo, a give and take. If you yield, you get nothing in return from developed countries. There is no earthly reason why India should agree to this demand, not even for the sake of salvaging the DWP. With hindsight, a link between agriculture and NAMA, established in the Hong Kong ministerial declaration of December 18, 2005, is probably going to have a much more significant effect than the one then anticipated.
This is paragraph 24 of the ministerial declaration. '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.'
This establishes a link between agriculture and NAMA. Without agriculture, we cannot have NAMA. Stated differently and more colourfully, India and Brazil can argue that the DWP is fundamentally about agriculture, and that NAMA should be renamed 'no agreement minus agriculture'. If you don't agree to liberalize agriculture, especially on domestic support and export competition, we will call your bluff and let us postpone the DWP till 2010, 2013 or whenever.
Going back to industrial products, there are several elements in NAMA negotiations, all feeding into one another. One can find them in Annex B of the framework accepted by the General Council on August 1, 2004, and in paragraphs 13 to 23 of the Hong Kong ministerial declaration of December 18, 2005. There is, of course, the general issue of addressing tariff peaks, high tariffs and tariff escalation, particularly on products of export interest to developing countries. These terms require some explanation. Tariff escalation has low tariffs on raw materials, higher tariffs on intermediate products and highest tariffs on finished goods.
Tariff escalation, in developed countries, discourages value-addition in developing countries, apart from distorting effective rates of protection and resource allocation. What is the difference between high tariffs and tariff peaks' Difficult to pin down, since there is no consensus definition. However, high tariffs tend to be across a range of items, while tariff peaks are for specific tariff lines ' where, say, the tariff is more than 15 per cent. Other than these general objectives, there are eight different issues specific to NAMA, and ostensibly, these are supposed to be sorted out by July 2006.
First, non-tariff barriers ' because with tariffs disciplined, protectionism will surface through other means. This is referred to as policy substitution. But NTBs are difficult to measure, quantify and police. Second, preference erosion, that is, should there be some compensatory mechanism for countries that now benefit from preferential duty access' These are typically the least developed countries, and if duties are reduced, the relative value of their preferences declines. The politically incorrect position would be to say, so what' Third, since GATT/WTO reduction commitments operate on a base of bound rates, what happens to unbound tariff lines' Not all countries, certainly not developing countries, have bound tariffs for manufactured products. For instance, India has no bindings on consumer goods. Increasing the coverage of bindings is thus a concession, over and above the concession of tariff reductions.
Fourth, what will be the formula for tariff reduction' What has now been accepted more or less is a Swiss formula, which is a non- linear formula that depends on the base level of tariffs and on a coefficient.
Without getting into the algebra, this formula (because it is non-linear) has the property that the higher the base level of tariffs, the higher the proportionate cut, which, on the face of it, seems like a desirable property to have. The higher the coefficient, the lower the cut, and the simple Swiss formula also has the property that the coefficient is the final value of tariffs, after all cuts have taken place. Clearly, one can't have the same coefficient for developed and developing countries. Developed countries generally want a coefficient of 5 for developed countries and one of 10 for developing countries. Barring the caveats mentioned later, this will mean that the maximum tariff (after cuts) in a developing country will be 10 per cent, and that in a developed country will be 5 per cent. Developing countries generally want a coefficient of 8 for developed countries and one of 24 for developing countries. Other suggestions involve 2 for developed countries and 20 for developing countries and still other suggestions attempt to link the coefficient itself to the base level of tariff.
This is much more complicated than the Uruguay Round (1986-94) attempt. During the Uruguay Round, what had happened was something like the following. Developed countries agreed to cut tariffs by an average of 40 per cent and given this, developing countries agreed to cut tariffs by a figure less than this. There is a related point that should be flagged. Reduction commitments apply to bound tariffs and in developing countries, there is a gap between applied and bound tariffs. Thus, it is possible that if the developing-country coefficient is too high, no actual tariff-reductions will take place. Consequently, there is an attempt to make the base for reductions not bound tariffs, but applied tariffs. This is not a suggestion that should be taken seriously, because it throws all GATT/WTO principles overboard.
Fifth, how does one handle less than full reciprocity for developing countries' For instance, if one accepts the coefficients suggested by developed countries, developing countries will end up slashing tariffs by proportionally more than developed countries do. This becomes special and differential treatment for developed countries, throwing overboard another GATT/WTO principle. This is a point that the new NAMA group of 11 countries repeatedly makes.
Sixth, how does one integrate sectoral zero-for-zero initiatives into all this' This is a suggestion that in some sectors, tariffs should be reduced to zero. Conceptually, any such attempt distorts resource allocation across sectors and is arbitrary. Seventh, what kind of credit can be given to developing countries that have unilaterally liberalized'
Eighth, the August 1, 2004, framework has paragraph 8 on flexibilities to developing countries through less-than-formula cuts for some tariff lines (up to 10 per cent of tariff lines) or keeping some tariff lines unbound (up to 5 per cent of tariff lines) or not applying formula cuts to some tariff lines (up to 5 per cent of tariff lines), reiterated indirectly in paragraph 24 quoted above. How will this work'
Hence, there is more to NAMA than a simple matter of working out the coefficients of a Swiss formula. Nevertheless, these disagreements over NAMA wouldn't have derailed the DWP. Earlier GATT rounds have hammered out consensus over greater disagreements. If the DWP is now postponed to beyond 2006, perhaps to 2010 or even beyond 2013, the blame lies with agriculture. And with developed countries.