New Zealand, EC aim at developing countries on industrial tariffs

Recent preliminary proposals unveiled in the WTO by New Zealand and the EC call for drastic cuts in tariffs on non-agricultural products - and developing countries could well find themselves on the receiving end.

by Chakravarthi Raghavan

GENEVA: A two-day meeting of the WTO negotiating group on market access in non-agricultural products got what were described by sponsors as “ambitious” proposals, ranging from “scrapping” all tariffs on non-agricultural goods to steep reductions and elimination of tariffs above an agreed percentage to be negotiated, and formula approaches to tariff cuts and harmonization of tariffs taking the “applied tariffs” as a starting point.

These proposals were presented as initial views to be developed and presented as formal proposals, among others by New Zealand and the European Communities.

These and other proposals are being promoted on the basis that the markets for developing countries are in other developing countries, and therefore that an outcome which reduces the “high tariffs” in developing countries will benefit all developing countries and thus serve to achieve the development objective of the Doha Development Agenda.

The negotiating group is at present engaged in the task of formulating modalities for the negotiations, and the stage for actual proposals will come after the modalities are agreed upon.

Perhaps the intention of the sponsors is to ‘breathe some life’ into the Doha work programme, which everyone is describing as a “development round” of negotiations but which - in the face of the EC stance and recent EC decisions on reform of its Common Agricultural Policy, and the US’ own expanded regime for agricultural support and its stances in the negotiations for a Free Trade Area of the Americas - may be in need of some ‘resurrection’.

Questionable claims

At the negotiating group, in unveiling its ideas, New Zealand is reported to have claimed that if its proposals are accepted, it could add up to $620 billion in global income, with one-third accruing to the developing world.

Trade officials who briefed the media could provide no details, though the New Zealand minister had spoken about it in Auckland.

But there is no reason to believe that any of these claims and projections, whether New Zealand’s now, or the Michigan University academic’s projections which were cited before Doha by the US Trade Representative Robert Zoellick or the then WTO Director-General Mike Moore, would turn out to be any different from the fanciful claims that were dangled by the OECD, World Bank and the then GATT Secretariat during the Uruguay Round.

These proposals and the claims which are made at closed-door meetings of the WTO trade negotiators - most of whom from the developing countries are ill-equipped even to assess them - come when there are a number of published studies from mainstream economists that point to some contrary conclusions.

Some of these academic studies challenge the view that lowering tariffs or zero-tariff free trade promotes growth and industrial development in developing countries (Geste Dijkestra, “Trade Liberalization and Industrial Development in Latin America”, World Development, Vol. 28 No. 9). Another just-published study by a US academic researcher (Andrew K Rose, NBER Working Paper No. 9273), after an extensive research, concludes that there is little evidence that countries joining or belonging to the GATT/WTO have different trade patterns than outsiders, or that the GATT and the WTO by their successive rounds of tariff cuts and liberalization actually were responsible for the expansion of world trade over five decades or that GATT/WTO actually encouraged more trade.

It was not clear whether New Zealand, in unveiling its proposals for ending all tariffs in non-agricultural sectors and airing some econometric projections of global welfare gains, made any references to its own experience. New Zealand unilaterally applied all the prescriptions of liberalization, cutting tariffs and ending ‘protection’. According to theory, countries undertaking even unilateral liberalization gain in efficiency and welfare. However, at the end of this period, New Zealand, which had been at the top of the OECD table of per capita incomes, found itself at the bottom, and it has not had any rapid rebound either. During this experiment, Mike Moore was trade minister and then Prime Minister, before the electorate turned him out of office in a general election. (He subsequently got ‘elected’ for a split three-year term as WTO Director-General that ended in August this year.)

The New Zealand proposal for removing all tariffs on all non-agricultural products is yet to be formally put forward, and New Zealand acknowledged that the stage for proposals would be after agreeing on modalities.

EC proposals

The EC said that it would formalize its proposals later, but that its paper set out some broad ideas, and suggested that it would broadly meet the demands of developing countries for eliminating high tariffs on the so-called “sensitive sectors” in the industrialized countries, the labour-intensive manufactures such as textiles and clothing, footwear, etc.

However, at a briefing on 6 November, Peter Carl, the director-general of the trade directorate at the European Commission, made clear that this proposal would be dependent on others also doing so, including the US as well as the developing countries themselves.

[The briefing by Carl was on a 5-6 November meeting of senior officials of invited countries convened by the EC, which discussed the issues of TRIPS and public health and special and differential (S&D) treatment. There is a 31 December deadline to carry out the mandate given at the Doha Ministerial Conference on these two subjects. On the S&D issue, from Carl’s briefing, it was clear that even by the yearend deadline (the Doha Ministerial deadline set was in fact 31 July but this was missed and had to be extended), the work will not be completed. The US and EC, as well as other industrialized countries, are in effect trying to rewrite the Doha Declaration and mandate, and bring in the concepts of “graduation” and “differentiation” among groups of developing countries, with talk of achieving the “deliverables” by 31 December and others on which agreement cannot be reached, by the Cancun Ministerial (September 2003) or as part of the final outcome of the Doha negotiating round.]

The EC also has suggested what it calls the compression mechanism: that all countries agree to “compress” all their tariffs into flatter ranges - tariffs of 50% or above to be reduced to 25%; tariffs between 15-50% to be reduced to between 10-25%; and those between 0-15% to 0.7 percent. All the countries, developed or developing, should remove all tariffs against exports from the least developed countries.

The EC proposals for compression of tariffs - and the zero-zero tariff proposals of the US in specified and agreed sectors, or the New Zealand one for removing all tariffs - are not only on the basis of high tariffs in developing countries (as against the average tariffs of about 7% in the developed countries), but also on the thesis that the high tariffs are protectionist, and that the industrialized countries have been able to develop because of their lower tariffs and the resulting efficiency in allocation of resources. In support, the Bretton Woods institutions and others suggest that today’s developed countries industrialized and traded more behind tariff walls of 11-30%, while developing countries now have far higher tariffs.

However, as Cambridge University economist Ha-Joon Chang points out in his book Kicking Away the Ladder, if the costs of transportation of goods in the 19th century as well as the relative levels of productivity of developing-country products are taken into account, the tariff levels even in some of the high-tariff developing countries are much less than those that prevailed in the current developed world at a comparative stage of their industrialization and development. (See “’Kicking away the ladder’ to prevent others climbing up”, TWE #285.)

In some initial comments, the New Zealand proposals were seen as unrealistic by most other participants. The US also entered some reservations over the EC proposals for removal of tariffs or drastic cuts in tariffs on labour-intensive sectors like textiles and clothing, footwear, etc.

On “environmental goods”, the EC proposals for definition of such products were seen by a number of developing countries as bringing in under another name the concept of “production and process methods” which they had rejected. The developing countries insisted that only classification could be on the basis of end-use.

The Japanese attempt to put forward a list of environmental goods, based on the OECD list, but with some products added and others subtracted, or the APEC list, was in effect rejected by several developing countries who said they could not take as a basis any list or classification drawn up elsewhere in a process where they had not participated. The EC’s “eco-labelling” proposal was also rejected by New Zealand because of its potential as an instrument of protectionism. Developing countries have also turned down the idea.

The next meeting of the negotiating group is in December. The deadline for drawing up modalities is 31 March 2003. (SUNS5229)                                       

From Third World Economics No. 294 (1-15 December 2002)