Global Trends by Martin Khor

Monday 21 March 2005

Our industrial future hinges on WTO talks

Developing countries’ prospects for industrial development are now at stake in the present talks at the World Trade Organisation.  At last week’s WTO meetings, the developed countries proposed that developing countries slash their tariffs on industrial products through an aggressive formula.  This could threaten the share and survival of local manufacturing firms.


A battle is brewing in the World Trade Organisation about how steeply the tariffs on imported industrial products should be cut in developing countries.

The rich developed countries want these tariffs steeply slashed, and that the newly reduced tariff levels are “bound”, meaning that governments commit not to raise the duties above these rates in future. Their aim is to have their products enter and sell in the developing world.

Most developing countries do not mind cutting import duties moderately, or to bind the tariffs of many of their products.  But they are upset that the rich countries are going too far with their demands. 

And they are worried that if their tariffs are slashed too steeply and also bound in the WTO, this will hamper their ability to industrialise.  Indeed, there is real danger that some local industries will lose business or even close, as cheaper imports take over the local markets.

For the developing countries, the critical question is whether they will have enough “policy space” left to implement industrial development.  In the worst scenario, most of the industrial products they use will be imported in future, and the increasing population will not be able to find jobs as the local manufacturing sector shrinks.

The fight is taking place at the WTO’s negotiating group on “non-agriculture market access” (NAMA), which held its latest meeting last week in Geneva.

There were two main issues in last week’s talks.  Firstly, what formula should be used to reduce the tariffs?   Secondly, how should presently unbound tariffs be treated? 

Countries can maintain two types of tariffs.   The tariff that is currently applied to a product is known as the “applied tariff.”   A country can presently choose to have the tariff on a product “bound” at a certain level.  In this case, the country commits that the tariff cannot exceed that level in future, and this bound level can be higher than the applied rate, so that there is still some leeway to raise the applied tariff if there is a need to do so. 

Or the country can choose to leave the tariff on that product “unbound”, in which case there is no commitment to place a maximum cap on the tariff of that product.

On the first issue of formula, the United States and European Commission (EC) are leading the charge to have the WTO adopt a formula that would drastically cut the bound tariffs of developing countries.

They are proposing a “non-liner Swiss formula”, in which the higher the tariff, the steeper the cut.  This suits the rich countries since their average industrial tariff is about 4%, whereas the average tariffs are higher in most developing countries, and in some sectors the levels can be over 40% or even 100%.  

The reason is that developing countries’ industrial firms are much weaker and they need to be protected from cheaper imports, at least for some time, until they catch up.

The presently industrialized countries also developed their local industries behind high tariff walls when they were developing, and only reduced their import duties when their industries became efficient.

Even now, the developed countries have high tariffs to protect their agriculture (with tariffs of 200-400% for some products) as well as some industries, such as textiles.

In the so-called Swiss formula, there is a coefficient, and the number in that coefficient denotes the maximum level of tariff allowed after the tariff-reduction exercise is carried out.  The lower the coefficient, the lower will be the maximum tariff allowed.

In the original US proposal, all products will be subjected to the formula, with a coefficient of 8.  This means that all bound tariffs will be brought down to 8 or below.

And the higher the tariff the steeper will be the cut.

Fro example, a product having a tariff of 100-150% will have that tariff slashed to 8%.    Tariffs that are now in the range of 40-60%  will be slashed to about 7%.   Tariffs that are now in the 8-10 per cent range will be cut to about 4%.

Such an aggressive formula is not acceptable to many developing countries.  In last week’s talks, the US made a soft concession, that developed and developing countries can have different coefficients, with  developing countries having a higher coefficient, meaning that the maximum permitted level of tariffs will be higher for them.

However, the US says that the two coefficients must be “in sight of each other”, meaning that the developing countries’ maximum tariff will be allowed to be only a little higher.  than that of the developed countries’.  So this concession is minor. The EC was even more aggressive.  It wants only a single coefficient. 

The second issue, how to treat unbound tariffs, is also of great significance, because many countries have chosen not to “bind” the tariffs of products or sectors that are important for their local industrial development.

The developed countries want these unbound tariffs to now be bound at very low rates.  This would be done by taking the present applied tariff of the product, multiply that by two to obtain the “base level”, and then apply the Swiss formula to this, to result in the new bound level.

To understand this better, take the example of a presently “unbound” product with an applied tariff of 30%.   The rate will be multiplied by two to get a base level of 60%, and then if the US proposed formula is used, this will be reduced to 7.1% and bound at that level.   In future, the tariff for that product cannot be raised above 7.1%.

Such a method of treating unbound tariffs would result in drastic real cuts in the present tariffs of these products, many of which are sensitive and required for local industrial development.  

It would also go against the practice in the 58-year history of the multilateral trading system under which each country the right to choose whether or not to bind the tariff in each industrial product, and if the tariff is to be bound, then, at what rate to do so. 

At last week’s WTO meeting, Malaysia made some waves by proposing that unbound tariffs should be treated differently from already bound tariffs.

The Malaysian view was that a country deciding to bind the tariff of a previously unbound product is already making a contribution or commitment.  The country should be given the flexibility to choose at what rate to newly bind that tariff (subject to the condition that new bound tariffs should not exceed 40% and should have an average level of 25%).

Malaysia also proposed that there should also not be any tariff reduction imposed on the new tariff bindings. 

Of course, in this proposal, it does not mean that there will be no reductions in the existing applied tariffs, since some products with presently high tariffs will be affected by the proposed maximum level of 40% and other products’ tariffs may have to go down to achieve the average level of 25%.  

However, the proposal’s main merit is that the dreaded Swiss formula will not be applied to the unbound tariffs, and there is some flexibility given to the country to choose at which rates to bind the tariffs.

The Malaysian proposal received the support of the Philippines, Thailand and India.  The US and EC however expressed some opposition to it, as it would hinder their highly ambitious plan to bring the developing countries’ industrial tariffs down to very low levels.

What is happening in the WTO negotiations on industrial products is not widely known There is now an urgent need for policy-makers, parliamentarians, the business sector (particularly local industries) and NGOs to study the issues and get themselves involved in the process.

The WTO talks will have great and probably grave implications on the future of industrial development and the viability of local industries in Malaysia and other developing countries.