Development opportunities & challenges in the WTO Industrial Tariff Negotiations Sam Laird UNCTAD...

Development opportunities & challenges in the WTO Industrial Tariff Negotiations

Sam Laird

UNCTAD

United Nations Conference on Trade and DevelopmentUnited Nations Conference on Trade and Development

Cape Town-South Africa

• Address tariff peaks, high tariffs, tariff escalation, non tariff barriers, especially on products of export interest to developing countries.

• Comprehensive product coverage

• Less than full reciprocity

Doha Declaration on market access for non-agricultural products (NAMA)

3United Nations Conference on Trade and DevelopmentUnited Nations Conference on Trade and DevelopmentDivision on Trade in Goods, Services and CommoditiesDivision on Trade in Goods, Services and Commodities

FACT: DEVELOPING COUNTRIES AND LDCs FACE HIGHER TARIFF RATES

Exporter

Developed Country Developing Country LDC

Importer

Developed Country 1.31 2.12 3.05

Developing Country 9.00 6.26 6.33

LDC 10.88 14.79 9.95

MFN Average Applied Tariff Rates by Country Grouping

Source: UNCTAD Computations WITS/TRAINS Database


CONTEXT: DEVELOPING COUNTRIES HAVE BEEN LOWERING THEIR TARIFFS ON INDUSTRIAL GOODS

0

10

20

30

40

50

60

70

80

90

1994 2004

%

Bangladesh

Brazil

Bulgaria

India

Malawi

Philippines

Zambia

Developing Countries

MFN Applied Rates of Selected Developing Countries

Source: WITS/TRAINS Developing Countries have done a lot of

autonomous liberalization


FACT: BINDING COVERAGE LOWER IN DEVELOPING COUNTRIES

77.5

43.9

98.6

0

10

20

30

40

50

60

70

80

90

100

%

Percentage of Bound Items



FACT: TARIFF ESCALATION INHIBITS EXPORTS OF PROCESSED GOODS

9.48

0.5

3.2

1.2

3.3

17.2

3.6

12

0

2

4

6

8

10

12

14

16

18

20

%

Primary Intermediate Final

Trade Weighted Averages



FACT: TARIFF PEAKS AFFECT DEVELOPING COUNTRIES EXPORTS

Number of Tariff Peaks Among Selected Developed Countries

0 50 100 150 200 250

Apparel, not knit

Apparel, knit

Textiles

Fish and Seafood Preparations

Footwear

Leather

Number of Tariff PeaksUSA Japan EU


Peaks:Tariffs above three

times national average


KEY ISSUES FOR AFRICA

15.9

42.742.445.2

0

5

10

15

20

25

30

35

40

45

50

LDC SouthAfrica

Malawi Zambia

%

Binding coverage:LDC 74%

South Africa 96%Malawi 19.93%

Zambia 4%


Initial TariffsTrade Weighted Averages

Bound Tariffs

7.9

12.813.5

12.6

0

2

4

6

8

10

12

14

LDC SouthAfrica

Malawi Zambia

%Applied tariffs

More ambitious proposals in NAMA usually imply:

• Greater exports and welfare gains

But:

• Greater imports, lower tariff revenues, reduced output in some sectors and labour market market adjustment

- May mean foregoing industrial policy options (« policy space »)

THE CHALLENGE OF DOHA

Gains and losses are not evenly spread across countries or sectorsGains and losses are not evenly spread across countries or sectors

• Positive linkage between trade and growth• BUT questions about relative importance of openness

and institutional factors

• Some highly protected sectors (agriculture/ textiles & clothing) v. important for developing countries and for poorest section of those societies

• Countries that have been able to diverify into manufactures do better than commodity-dependent countries

• Case for policy space (industrial development)

• Protection (and rules?) loaded against trade interests of developing countries

Trade and Development Issues

• Experience of adjustment to trade reforms in Africa• Mostly negative – job losses, reduced growth, social

problems• Case for moving carefully

• Examples: • Cashew processing industry in Mozambique• Textiles in Zambia

• Policies to mitigate the costs:• Phase-in policy changes so that labour and capital has more

time to adjust• Paying compensation to potential losers• Social policies and safety nets: education, health and

physical infrastructure

Adjustment Costs

Tariff reduction formula (cf request &

offer or zero for zero) Exceptions allowed for sensitive items Binding coverage to be increased Level for binding applied rates Sectoral elimination (voluntary?)

Electronics & electricals; fish & products; stones, gems & precious metals;clothing; footwear; leather goods; motor vehicle parts)

What are key elements of WTO NAMA negotiations?


CURRENT STATE OF PLAY OF NAMA NEGOTIATIONS: “JULY PACKAGE”

In July 2004, negotiators reached an agreement that re-vitalized WTO negotiations

The Framework contains for NAMA:

Initial elements for future work on modalities Formula-based approach, but options for other modalities kept open Non linear formula applied on a line-by-line basis Softer language on sectoral elimination as a “key” element Increase binding: [two] times the MFN applied rate Proposal for credit for autonomous liberalization by developing countries

since the conclusion of the Uruguay Round Some flexibilities for developing countries

However, many issues are still unresolved such as timing, extent of tariff reductions and the specific formula to be used


STATE OF PLAY OF NAMA NEGOTIATIONS

Commentary by NAMA Chairman:

“ We have reached an impasse in the NAMA negotiations on the most fundamental element, the formula.”

What are the proposals/positions on the table? US and EU would agree to differentiated coefficients “Swiss Formula” APEC Swiss type formula with coefficients to be negotiated Chile, Costa Rica, Mexico and South Korea simple Swiss type formula Argentina, Brazil and India (ABI) which claims that a country’s existing average tariff be factored into the formula.Caribbean a new reduction formula for developing countries, ABI plus other relevant factors that are important for developing countries Pakistan Swiss with two differentiated coefficients DG 30% DC 6% Most Developing Countries have serious reservations about the fairness of a simple Swiss type formula

Linear and Swiss Tariff CutsComparison of Linear Cut and Swiss Forumula

(Tariffs for 0% to 50%)

0

5

10

15

20

25

30

35

40

0 2.5 5 7.5 10 12.5 15 17.5 20 22.5 25 27.5 30 32.5 35 37.5 40 42.5 45 47.5 50

Initial Rate (%)

Fina

l Rat

e (%

)

Swiss 8

Swiss 12

Swiss 20

Linear 40%

Linear 30%


OTHER ISSUES - BINDINGS

• Binding coverage & level (Paras 5 & 6)• Reduction from [2] times MFN applied, except if current coverage less than [35]%, then bind

[100]% of lines at average developing country (12 weighted or 28 simple)

• Flexibility (Para 8)• Less than formula to [10]% if not less than half formula and exclusion not more than [10]% of

imports OR• Exempt [5]% of lines if not more than [5]% of imports

• LDCs «to substantially increase their level of binding commitment »


OTHER ISSUES – SECTORAL INITIATIVES & SUPPLEMENTARY APPROACHES

• Elimination tariffs on some sectors (Para 7)• Girard text mentioned electronics and electrical goods, fish and fish products, textiles,

clothing, footwear, leather goods, motor vehicle, parts and components, stones, gems and precious metals

• Not listed in July package (except through cross reference to Girard in Para 3) • Some discussion of new range of sectors for zero-for-zero liberalisation

• Cuts agreed under formula & sectoral initiatives tro be supplemented by request and offer, zero-for zero, and sectoral negotiations. (Para 12)

• Elimination of low duties (Para 13)


OTHER ISSUES

• Non-tariff barriers (Para 14) – little progress• Account to be taken of preferences and tariff revenues (Para 16)• Less than full reciprocity? (Para 2)• No target –just modalities (Para 3)

• What is the level of ambition and for whom?


Purpose: To determine the implications for developing countries of various NAMA liberalization

scenarios based on the current state of play of negotiations

Methodology: Develop NAMA scenarios of possible outcomes based on the current state of play Use of UNCTAD’s Database to determine tariff shocks Use Computable General Equilibrium modeling: GTAP (Global Trade Analysis Project)

Key Assumptions and Limitations: Perfect competition and constant returns to scale assumptions underestimate

gains/losses from trade Real wages of unskilled labour in developing countries are fixed and the quantity of

labour flexible Ad-valorem equivalents for developed countries bound and applied specific tariffs Capital Account adjusts to equate Trade Balance (I-S=X-M), Static analysis Armington assumption for bilateral trade that differentiates imports by source Does not take all non tariff barriers fully into account Market entry is not assured if policy barriers are eliminated

SCENARIO ANALYSIS: OVERVIEW


DRAFTING THE SCENARIOS

Three different non-linear formulae are considered

Swiss WTO Capping1

AmbitiousAmbitious

ModerateModerate

FlexibleFlexible

2 For each formula, three different cases are considered based on the other elements that are currently under negotiation

2

In addition, a free trade scenario is consideredIn addition, a free trade scenario is considered


DRAFTING THE SCENARIOS: FORMULAE

Swiss WTO Capping

T1 = (a x T0)

Capping mechanism of three times the average national applied rate.

T1 = (a x T0) (a + T0)

Where a is a maximum coefficient

T1 = (B x ta x T0) (B x ta +

T0)

Where B is a coefficient that can be varied to reflect different initial tariff levels. Where ta is a national bound average of the base rates.

T1 = 0

All tariffs and other barriers to trade are eliminated

Free Trade


DRAFTING THE SCENARIOS: FORMULA COEFFIENCIENTS

AmbitiousAmbitious

ModerateModerate

FlexibleFlexible

Average weighted industrial tariff by country grouping Developed = 3.4%Developing = 12.5%

Twice above

Swiss WTO Capping

B = 1

Developed B = 0.5

Developing B = 3

Developed B = 0.5

Developing B = 5

Developed 50% cut

Developing 33% cut


DRAFTING THE SCENARIOS: OTHER ELEMENTS UNDER NEGOTIATION

BindingCoverage

Sectoral Elimination

EliminationOf

Low Tariffs

100% for all countries DC and DG = 2 x applied rateLDC = simple average of bound tariffs developing countries (29.4%)

DC = 100% at 2 x applied rate

DG and “Paragraph 6” countries = 95% at 2 x applied rate or 2 x simple average of bound tariffs for developing countries (29.4% x 2 = 58.8%)

DC = 100% at 2 x applied rate

DG and “Paragraph 6” countries = 90% at same as above

Yes

Developed: yes

Developing

: no

No

All tariffs below 2% reduced to zero

Developed countries

only

None

AmbitiousAmbitious

ModerateModerate

FlexibleFlexible


NAMA LIBERALIZATION CAN INCREASE WELFARE AND EXPORTS IN THE LONG RUN

Ambitious Moderate Flexible

(1) India, China and Brazil

Swiss

WTO Cap

616469

63

54 5450

4149

0

10

20

30

40

50

60

70

80$B

Sum of Additional Welfare in $B

These long term gains can only be realized by mitigating against the short term risks

These long term gains can only be realized by mitigating against the short term risks

3.73.94.3

3.5

2.8 2.82.52.1

2.5

0

1

2

3

4

5

6%

Swiss WTO Cap

Percentage Increase of Exports

Developing Countries


KEY ISSUES FOR AFRICA - WELFARE


Swiss

WTO Cap

2.82.9 2.9

1.71.7

2.2

1.6 1.6

2.0

0

0.5

1

1.5

2

2.5

3$B

Sum of Additional Welfare in $B

0.10.10.1

00 00 00

0

0.1

$ B

Swiss WTO Cap

Sub-Saharan Africa Malawi


KEY ISSUES FOR AFRICA - EXPORTS


Swiss

WTO Cap

3.63.93.9

2.4

1.61.6

1.8

1.21.4

0

1

2

3

4

5%

6.56.56.6

5.4

3.73.1

4.2

2.53.2

0

1

2

3

4

5

6

7%

Swiss WTO Cap

Percentage Increase of Exports

Sub-Saharan Africa Malawi


RISKS: DECLINE IN TARIFF REVENUE AMONG DEVELOPING COUNTRIES

% Change in Tariff Revenue Relative to Base for Developing Countries

Base Revenues: $156 b

-36-32

-41

-29

-14 -15

-21

-12-12

-50

-40

-30

-20

-10

0

10

%

Swiss WTO Cap



RISKS: DECLINE IN TARIFF REVENUE FOR AFRICA % Change in Tariff Revenue Relative to Base

Base Revenues: $10.6 bTariff revenues as % Tax Revenues: No data

-16

-13

-16

-8

-3-2

-5

-2-2

-20

-15

-10

-5

0

%

% Change in Tariff Revenue Relative to Base Base Revenues: $0.1 b

Tariff revenues as % Tax Revenues: 16.3%

5 55 5

3

2

3

22

0

1

2

3

4

5

6

7%

Swiss WTO Cap Swiss WTO Cap

MalawiSub-Saharan Africa


RISKS: EMPLOYMENT LOSSES IN CERTAIN SECTORS

Machinery and

Equipment

Non Ferrous Metals

Other Manufacturing

Motor Vehicles Electronics

China -2.8 -4.1 -0.2 -10.4 6.7India -2.2 -25.9 -2.1 -5.6 -1Rest of South Asia -8.7 -13.4 -7.3 -36.8 -14.9South East Asia 0.2 -6.4 -2.3 -6.6 -1.7Brazil -5.2 3.2 -2 -4.3 -1Central America and Caribbean -6.3 -8.2 -6.2 -2.1 -6.8Andean Pact -4.7 6.4 -2.9 -9.6 -10.7Argentina, Chile & Uruguay 3.2 -1.4 -2 9.3 -7.6Middle East and North Africa 0.2 5.8 -1.5 1.9 5.1Sub Saharan Africa -0.6 8 -0.5 0.6 -3.5

Asia

Africa and Middle East

Americas

Percent Changes in Labour Usage Relate to Base, by SectorSwiss Formula, Ambitious Scenario


CHANGES IN EMPLOYMENT FOR AFRICA

WTO Scenarios

2.6

0.3

1.5 1.31.5

0.10.7 0.7

1.3

0.10.6 0.7

0

1

2

3

Malawi Zambia Sub SaharanAfrica

All Other Regions



CHANGES IN EMPLOYMENT BY SECTOR FOR MALAWI

12.1

27.9

-6.1-11.8-14.6-8.3-9.6

42.7

-6.9 -11.4-5.4-5-8.6-3.9-3.2-4.9 -7.6

1.3 -3.8-3.3-5.3-2.2-1.7-1.2-2.8 -5.3

-15

-5

5

15

25

35 90.9

Swiss Ambitious

WTO Moderate

Capped Flexible


CHANGES IN EMPLOYMENT BY SECTORFOR SUB-SAHARAN AFRICA

4.1

11.2

30.6

2.1 1.4

4.2

01.5 1.6 2.5-12.8

-6.1 -1.5

2.6-6.72.3

-3.9

-15

-10

-5

0

5

10

15

Textile Waringapparel

Leather Iron and steel Non ferrousmetals

Motorvehicule

%

Sw iss Ambitious WTO Moderate Capped Flexible


KEY ISSUE: EMPLOYMENT FOR AFRICA - ZAMBIA

Changes in unskilled labor used by sectors

-9.7

-6.9

6

1.1

-4.2

-6.3

1.3

4.2

-2.6-3.8

1

4.8

-12

-10

-8

-6

-4

-2

0

2

4

6

8

Textile Leather Machinery andEquipment

Motor vehicules

%

Swiss Ambitious WTO Moderate Capped Flexible


CURRENT NEGOTIATIONS REPRESENT AN OPPORTUNITY TO ADDREES TRADE BARRIERS THAT REMAIN

1. Developed countries tariffs on developing countries exports are twice the rate imposed on developing countries. Focus should be on tariff peaks, high tariffs and escalation not on averages

2. Both “capping” and “swiss-style” formulae can achieve the same degree of trade liberalization, but “capping” formulae have the added benefit of transparency

3. Including sectoral elimination as a modality has a greater impact on the final outcome than the choice of formula

4. Allowing countries to bind at twice the simple average of bound tariffs (29.4% x 2) for developing countries provides greater flexibility for sensitive products

5. Developing countries may achieve some important trade and welfare gains, but these gains come at cost – lower tariff revenues, and reductions in output and employment in some sectors

Liberalization should be accompanied

by provision intended to facilitate adjustment


CONCLUSION

Benefits in the long run, but adjustment costs in the short run

The challenge for developing countries is to determine the special and differential treatment they require

Therefore a cautious or measured approach may be preferable, as is recognized in the Doha Declaration which calls for non-full reciprocity

Gains will only be possible through a development-centred agreement and strategies to reduce the adjustment costs

Developing Countries need coherent trade policies

and NAMA negotiating strategies

Development opportunities & challenges in the WTO Industrial Tariff Negotiations Sam Laird UNCTAD...

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