Global Trends by Martin Khor

Monday 14 July 2008

Tough fight ahead at WTO Ministerial

Last week, new texts on modalities for liberalising trade in agriculture and industrial goods were issued at the World Trade Organisation, ahead of the mini-Ministerial meeting next week.  The papers contain biases against developing countries, and many of them fear for the future of their local industries.


A week from today, Ministers of Trade of some 30 to 40 countries will gather at the World Trade Organisation for a final try to finalise the main parameters or “modalities” for liberalisation of trade in agricultural and industrial goods under the Doha Round.  

To prepare for that, two revised texts on agriculture and industrial tariffs or non-agricultural market access (NAMA) were issued last week by the chairs of the respective negotiating groups on the two issues, Ambassador Crawford Falconer and Ambassador Don Stephenson.

The texts retain most of the same key figures as the earlier versions, in particular the percentages for reducing domestic support (mainly subsidies) in agriculture, and the formula and coefficients for cutting tariffs in industrial goods.

Thus, the critique made by many developing countries and independent analysts that the “deal” as contained in the two texts is fundamentally imbalanced remains as true today as in the past year when the main contours of the modalities emerged.

The main criticism is that in industrial goods, developing countries are asked to cut their tariffs by too much, in fact by even more than developed countries.  This is coupled by the imbalance between NAMA and agriculture, i.e. that the degree of commitments asked of developing countries in NAMA (in cutting tariffs) is higher than the degree of commitment asked of developed countries in agriculture (especially in terms of cutting subsidies). 

Many developing countries are afraid that the tariff bindings and cuts they are asked to make in NAMA will lead to their local industries losing ground to cheaper imports, with some local firms having to close or to retrench workers.  

They are also disappointed that the United States and European countries will not have to cut their actual level of domestic farm subsidies, and thus they can continue to export their artificially cheapened farm products, which has displaced or suppressed farming activities in the developing countries.

The most contentious NAMA issues is the extent to which countries have to cut their industrial tariffs (according to a formula and its coefficients), and the flexibilities developing countries will have to deviate from the drastic formula cuts. 

The new paper retains the coefficient range of 7-9 for developed countries and the middle ranges for developing countries of 21-23 coefficient and flexibility of 10% of tariff lines that are allowed up to 50% leniency from the full cut or 5% of lines that can be exempt from any cut.

This implies that the major developed countries would have to reduce their tariffs by an average of less than 30%, while major developing countries that have to apply the formula would have to cut their tariffs on average by around 60%, before counting the effects of the flexibilities (which are limited).

The extent to which developing countries can have more lenient treatment from the formula cuts is already meagre (5% or 10% of products, as explained above).  But on top of this, they face two conditions.  First, the products for this lenient treatment cannot exceed 5 or 10 per cent of the country’s total value of imports of industrial products.

Second, the products must be chosen so that a whole sector cannot be exempted from the lenient treatment.  Recently, developed countries demanded even more strict conditions, that lenient treatment cannot be applied to 50% or more of tariff lines within a sector. 

The aim of this “anti-concentration clause” is to ensure that developing countries do not shield key sectors like motorcar production, garments or chemicals from the full blast of tariff cuts.  The flip side of the coin is that there will be more risks for local firms in these sectors.

Thus, the NAMA blueprint is bad news for developing countries intending to develop their industrial sector, as their policy space to plan their manufacturing development is severely eroded.

In the agriculture text, perhaps the most politically important figures are those for the allowable overall trade-distorting domestic support (OTDS) for the United States. The text continues to allow the U.S. to have an OTDS level somewhere in the range of  US$13 -16.4 billion a year.

Next week’s meeting will have to decide which figure to pick, either within that range or outside it.  Even an offer of $13 billion by the US may not be enough to satisfy some countries, since in 2007 the actual level of OTDS had dropped to US$7 billion. 

Choosing an allowable level of $13-14 billion would allow the US to double its current actual subsidies.  India’s Commerce Minister has thus asked for the US to cut its OTDS level to $7 billion minus one dollar, to symbolize a real cut.  The U.S. is unlikely to agree.

While the deal will thus not result in real cuts in domestic subsidies by the major developed countries, developing countries meanwhile also have to cut their agricultural tariffs.

They will thus continue to face stiff and unfair competition from these subsidised and artificially cheapened imports.  For example, cheap subsidised chickens imported from Europe have overwhelmed the chicken industry in many African countries, just as subsidised rice from the United States has displaced farmers in many developing countries.  

The continuing subsidies will remain a major factor why many developing countries cannot develop a competitive food producing sector  

Most developing countries have been fighting for more lenient treatment in cutting their farm tariffs for “special products” that are important for food security and farmers’ livelihoods, and for a “special safeguard” allowing higher duties when there is an import surge or when import prices fall below a certain level.

The new agriculture text has disappointed these countries, especially since the safeguard mechanism proposed is very weak in terms of the additional duty that is allowed to be placed in the event of import surges or import price declines.

With many countries unhappy with what the texts gives them or do not give them, a tough fight is on the cards when the mini-Ministerial meeting takes place at the WTO, starting 21 July.