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The World Trade Organization will have its fifth ministerial in Hong Kong in December 2005 and Hong Kong is reportedly gearing up to handle the expected influx of protestors. WTO negotiations and agreements invariably lead to protests, because of the perception that externally imposed multilateral agreements lead countries to adopt policies they would not have done on their own. The smaller the gap between domestic reform desires and WTO commitments, the lower the resentment. As international trade has become more complex, so have WTO agreements. Negotiations not only cover rules, some aspects of the environment, trade facilitation, ser-vices and intellectual property, but also the area of market access.
Market access is precisely what the phrase seems to suggest. It concerns opening up markets in trading partners and removing barriers to free trade. These barriers can be tariffs, as well as non-tariff barriers. This applies to agriculture, as well as manufactured goods. However, agricultural market access, which is an extremely contentious area and will probably break or make the Doha development agenda adopted in 2001, is covered by the agriculture agreement. For purposes of this article, let us stick to what is called non-agricultural market access, that is, market access in industrial or manufactured products. It is by no means obvious what one means by manufacturing, and there are differing definitions.
For WTO purposes, manufactured products are defined residually. Courtesy the Uruguay Round agreement, we have a definition of agriculture, defined through the harmonized system of classification. Everything else is manufacture and this includes fish and fish products. With import duties on manufactured products declining, the focus understandably shifts to reducing trade barriers through NTBs and there are several WTO agreements on specific NTBs. While NTBs remain an important issue, for non-agricultural market access negotiations, one primarily has in mind tariffs, and, despite reductions through successive GATT rounds, industrial tariffs continue to be high in selected countries and selected sectors. The background for non-agricultural market access negotiations continues to be Article XXVIII bis of the original 1947 GATT.
This states 'negotiations will be on a reciprocal and mutually advantageous basis', negotiations 'may be directed towards the reduction of duties, the binding of duties at then existing levels' and negotiations will take into account the needs of individual countries and less developed countries, including possible revenue losses. In addition, 'the binding against increase of low duties or of duty-free treatment shall, in principle, be recognized as a concession equivalent in value to the reduction of high duties'. Certain principles immediately follow.
First, the emphasis is on reciprocity. Protection through import duties may lead to deadweight welfare losses in the country concerned. However, GATT is not about that. GATT is about reducing duties only when trading partners agree to do so also. Second, there is the principle of less than full reciprocity for developing countries, call it differential treatment if you will. Third, we have the bindings, which set a ceiling to tariffs. Into this GATT framework, we now plug in the Doha ministerial declaration, which launched the DDA in November 2001.
On non-agricultural market access, the ministerial declaration has three relevant paragraphs, 16, 50 and 31, the last being about environmental goods and services. Paragraph 50 mentions special and differential treatment for developing and least developed countries. Paragraph 16 says, 'We agree to negotiations which shall aim, by modalities to be agreed, to reduce or as appropriate eliminate tariffs, including the reduction or elimination of tariff peaks, high tariffs, and tariff escalation, as well as non-tariff barriers, in particular on products of export interest to developing countries. Product coverage shall be comprehensive and without a priori exclusions. The negotiations shall take fully into account the special needs and interests of developing and least-developed country participants, including through less than full reciprocity in reduction commitments.'
These principles are non-negotiable, because the ministerial declaration is a fait accompli. Modalities have to be agreed. But tariff peaks, high tariffs, tariff escalation, NTBs will be addressed, without a priori exclusion of products and there will be an emphasis on products of export interest to developing countries. Plus less than full reciprocity.
The principles now need fleshing out, apart from modalities. Tariff escalation means a situation where there are low tariffs on raw materials, higher tariffs on intermediates and highest tariffs on finished products. Although this discourages value addition in exporting countries, most countries in the world follow such a three-tier tariff structure. High tariffs are more an across-the-board phenomenon, cutting across several tariff lines. Tariff peaks are for specific tariff lines and specific duties, as opposed to ad valorem ones, often lead to significantly high ad valorem equivalents. There are two more formal definitions of tariff peaks.
For developed countries, a tariff peak is a tariff more than 15 per cent. Across all countries, a tariff peak is one where the tariff is more than three times the country's average tariff. What is an average tariff' There are applied rates and bound rates, with the latter typically higher than the former. Take India as an example. During the Uruguay Round, India bound 69.8 per cent of all non-agricultural tariffs, not all tariffs were bound. Consumer goods, non-ferrous metals, petroleum products and some fertilizers were excluded. As per WTO computations, India's simple average bound rate is 34.3 per cent for non-agricultural products, the maximum ad valorem duty is 150 per cent and 0.2 per cent of non-agricultural products face the national peak duty. But India's simple average applied non-agricultural tariff is 27.7 per cent ( a 2002 figure), below 34.3 per cent. An average in the WTO means a simple unweighted average, there is no weighting involved.
This now takes one to WTO's tariff negotiations. Quite often, one presumes duties are reduced courtesy WTO. That was true of the historical GATT, but is not true of WTO. The WTO forces countries to bind duties and then reduce bound duties. However, especially for developing countries, there is a gap between bound rates and applied rates, applied rates being lower because of structural adjustment programmes and unilateral reform measures. Therefore, except instances where accession to the WTO is involved, the WTO has had precious little to do with applied duty reductions. Indeed, the gap between bound and applied rates is much more for other developing countries than for India.
We thus have a bit of a problem. Will the DDA address bound rates or applied rates' If it is the former, there will be little actual market access consequent to it. For most countries, the DDA's non-agricultural market access outcome will not bite. For reductions, does one adopt a formula that cuts across all tariff lines or does one single out specific products' Does one adopt a request-offer route, where a trading partner requests a tariff reduction for a specific tariff line and the responding country comes up with an offer' We have some sort of an answer in what was agreed to on August, 1, 2004. 'We recognize that a formula approach is key to reducing tariffs, and reducing or eliminating tariff peaks, high tariffs, and tariff escalation. We agree that the Negotiating Group should continue its work on a non-linear formula applied on a line-by-line basis which shall take fully into account the special needs and interests of developing and least-developed country participants, including through less than full reciprocity in reduction commitments.' A linear formula, which is what India wants, will have proportionate reductions in tariffs, regardless of the level of the tariff.
A non-linear formula, which most other countries want, will have a higher than proportionate reduction for higher tariffs. The obvious non-linear formula is the Swiss one and haggling is on about how this formula can be adjusted to ensure less than full reciprocity for developing countries. When there are no bindings, twice the applied rate in 2001 will be used as a base. LDCs will be exempted from reduction commitments, but will have to increase bindings. Finally, there will be haggling about another clause: 'We agree that developing-country participants shall have longer implementation periods for tariff reductions. In addition, they shall be given the following flexibility: a) applying less than formula cuts to up to  per cent of the tariff lines provided that the cuts are no less than half the formula cuts and that these tariff lines do not exceed  per cent of the total value of a Member's imports; or b) keeping, as an exception, tariff lines unbound, or not applying formula cuts for up to  per cent of tariff lines provided they do not exceed  per cent of the total value of a Member's imports.'
Under the presumption that India does not always want to reduce manufactured tariffs, this will be the escape clause.