US zero-tariff proposal gets tepid to negative reactions

A US proposal to abolish all tariffs on industrial products has been viewed as ambitious but lacking in realism by developing countries, for which import duties are an important revenue source as well as development policy tool.

by Chakravarthi Raghavan

GENEVA: Developing countries, with varying nuances, rejected on 2 December the United States’ proposal for zero tariffs on non-agricultural products, characterizing it as “ambitious but not realistic”, and faulting it for not incorporating the concept of “less than full reciprocity” for developing countries and ignoring the role of tariffs and customs receipts in raising revenues to meet social service expenditures and in infant-industry protection.

The US on 2 December formally introduced at the WTO its proposal for zero tariffs in world trade in industrial products by 2015. The reactions of WTO members in their preliminary comments ranged from downright rejection to some backhanded compliments about its “boldness, but lacking in realism”, and brought forth questions as to why such zero tariffs should apply only to industrial products and not agriculture.

Missing elements

At the WTO negotiating group on market access for non-agricultural products, there were presentations of three papers and proposals on modalities: the US proposal, a second by Switzerland and a third by Chile.

In introducing its paper, the US said that it did not exclude from the tariff treatment any non-agricultural product. The proposal calls for a two-phase reduction process: in the first phase, industrial tariffs of 5% or less are to be eliminated, while higher tariffs will be brought down to a maximum of 8%, by 2010. From 2010, these remaining duties will then be reduced annually until they reach zero in 2015.

In some preliminary comments, most developing countries reserved their positions pending detailed study of the proposal in their capitals, but pointed out one major missing element in the US paper, namely, the concept of “less than full reciprocity” for developing countries.

India, which set off the round of comments, noted that the US paper (as the EC paper on the table or the Japanese paper) did not address the issue of peak tariffs. Also not addressed or provided for was the built-in concept of “less than full reciprocity”, namely, that in such negotiations, the developing countries will not be expected to undertake full reciprocity.

The US proposal, Indian ambassador KM Chandrasekhar said, had also not dealt with the issue of special and differential treatment for developing countries.

Tariffs, he noted, were vital for many developing-country governments to raise revenues. A  zero-tariff regime would thus become a “development-unfriendly” proposal and thus unfair. It did not take into account the development and fiscal needs  of  developing countries. While revenue from customs accounted for  only  1%  of total government revenues in the US, and less than 3% in others, it amounted to 30-40% in some developing countries. By moving to zero tariffs, the developed countries will lose less than half of their incomes, whereas fiscal deficits in the developing world will escalate. Unless flexibilities are built in, it would not be possible for developing countries  to  accept such proposals.

If the tariffs were to be bound and could not be varied to raise revenues, this would deprive countries of finances for social services.

New Zealand  suggested the proposal was realistic if the tariffs were to be phased out  over time. Also, in New Zealand’s view, most of  the barriers to trade of developing  countries lay in other developing countries, hence the need for developing countries to cut their tariffs.

Uruguay said that the US proposal was in line with the high ambitions of the Doha Development Agenda, and the world economic situation demanded further efforts at liberalization. However, complained Uruguay, the levels of ambition in the industrial sector were not matched in the agricultural sector, where the average tariffs were 12 times bigger. The proposal did not also provide adequate support to the concept of special and differential treatment.

Singapore viewed the proposal as positive and ambitious and welcomed that no product or sector had been excluded.

Korea said that without some flexibility in applying the formula, the US proposal, bold and with high levels of ambition, would not be seen as serious. Industrial and developing countries each had some sectors with different levels of sensitivity, and it would not be possible to eliminate all the tariffs. The burden of tariff reduction for the developing countries would be much higher than for the industrialized countries.

Hong Kong China did not see the proposal as unrealistic and was encouraged by the level of ambition and the non-exclusion of any sector. However, it was not clear how it would address the question of special and differential treatment and the concept of “less than full reciprocity” expected from developing countries.

Mexico viewed the proposal as very ambitious but consistent with the US proposals in other areas.

Malaysia underscored the issue of “sensitive” sectors and products, and the fact of tariffs being used for revenue purposes for the development needs of developing countries. The proposal was highly ambitious, but ambition had to be combined with realism as well. There was also a need to reflect special and differential treatment in the proposal, and incorporate the concept of “less than full reciprocity” for developing countries.

Malaysia had the ambition of becoming a developed country one day, and there was a need to provide tariff protection for some of its industries. Malaysia relied on customs revenues to meet some social purposes. “As a consequence, we are unable to join this high level of ambition. We need tariff cuts in all markets, but we need to give flexibility to developing countries to pursue their goals.”

Japan viewed the US proposal as “idealistic” and called for realism and flexibility.

Pakistan saw the proposal as very ambitious and thought many developing countries would be unable to go along with it. There was a need to be realistic and not idealistic.”We won’t be able to achieve zero tariffs in our lifetimes,” the Pakistan representative added.

Norway also saw a high level of ambition in the US proposal but understood that it would be difficult for developing countries to achieve.

Brazil said the special-and-differential-treatment component and the concept of “less than full reciprocity” were lacking. Giving a longer transitional period did not go to the heart of the matter. The Brazilian representative posed the question of whether it was desirable to have similar tariff structures for all countries.

Different tariff structures reflected the different circumstances and levels of development of countries. Harmonization of tariffs was not part of the Doha Development Agenda. Brazil remained to be convinced on the proposal for zero tariffs on industrial products, when it will leave in place other restrictions like high levels of support and tariffs on agriculture and the various rules.

Kenya said that the current trade regime had left developing countries with very limited options to address their development needs and these realities had to be taken into account. One of these realities was the need for developing countries to give protection to their infant industries, and this had become more necessary now than ever before. (SUNS5248)                                            

From Third World Economics No. 296 (1-15 January 2002)